SWP is more tax efficient than dividends - Part I

If you have already invested in the dividend payment option for regular income mutual funds, you should reconsider your investment as the dividend option may no longer be attractive  due to the proposed changes  in the 2020 budget. Currently, a 10% Dividend Distribution Tax (DDT) is levied on mutual equity-oriented funds and dividends are tax-free in the hands of investors. Budget 2020 (effective  April 1, 2020)  abolished DDT and instead made dividends taxable in the hands of the investor.So if you have a tax flat rate of more than 10%, you should now decide on the growth plans and use the systematic pension plan (SWP) to generate regular income. SWP is more tax efficient as profits are taxed at 10% (assuming a capital gains tax rate) compared to dividend option (taxed at your slab rate). In SWP, when you receive the amount, it consists of both appreciation and capital. There are no taxes on the return of capital, so there will always be less tax debt.From a purely tax perspective, investors with a tax bracket below 10% may appear to benefit from remaining in the dividend plan. claimed after submission of the return. This makes filing the tax return cumbersome. As LTCG is only charged on profits over INR 1 lakh annually regardless of tax plate, you may not have to pay  tax on your withdrawals under the SWP vs plate rate in diSo even if you're in a lower tax bracket, it makes sense to switch your investments from the dividend plan to the growth plan.

Many investors within the past, especially senior citizens wont to believe open-end fund dividends along side bank interest for his or her regular cash-flows. However, with change in dividend taxation it's now become tax inefficient. Though the govt has abolished Dividend Distribution Tax (DDT), dividends are going to be taxed as income in your hands; open-end fund dividends or IDCW payments are going to be added to your income and taxed as per your tax rate. Systematic Withdrawal Plan (SWP) is far more tax efficient way of getting regular cash-flows from your open-end fund investments. SWP generates cash-flows for investors by redeeming units of open-end fund scheme at specified intervals. the amount of units redeemed to get cash-flows in an SWP depends on the SWP amount and therefore the scheme Net Asset Values (NAV) on the withdrawal dates. Each SWP payment will attract short term or future capital gains tax counting on the date of investment and date of SWP payment. For long SWP tenures, you'll avail future capital gains taxation benefits.