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Dilshad Billimoria of Dilzer Consultants
shows you how SWP can help your clients to obtain that optimum amount of income
in their retirement years without the burden of tax eating into their nest
egg.
 Retirement planning is
one of the most important activities of an advisor. The ‘accumulation’ stage while
building up a retirement corpus is the period when savings are directed towards
various instruments, which may include a combination of mutual funds, equity,
FDs, rental income, pension, EPF, PPF, policies, post-office savings, tax-free
bonds and dividend income.
These instruments
should provide for:
- Inflation-adjusted monthly
income at retirement.
- Tax-free or tax-efficient
monthly income at retirement.
Keep in mind that most
people ignore the ‘distribution phase’ or the period when one relies on the
most tax-efficient distribution of accumulated corpus to receive a monthly
income.
Your objective should
be to provide for the optimum amount of income that a client can receive without
having the burden of tax eating into the real return needed for his golden
years. Recommending a Systematic Withdrawal Plan (SWP) is a great option for a
tax-efficient monthly inflow.
An SWP option is set
up in a corpus, after mentioning the amount of monthly withdrawal needed and
the duration of need of the monthly withdrawal amount. Since the withdrawal is
made every month/quarter, it results in the sale of a certain number of units.
This would attract capital gains tax due to the withdrawal made.
Withdrawals made
before one year lead to short term capital gains tax as per the tax slab for
debt instruments and 15% (plus surcharge) capital gains tax on equity
instruments.
An example below shows
how this option can be utilised in a fund.
Let us say, on 1 Jan
2012, your client invests Rs 10,00,000 in a debt fund at an NAV of Rs 10.
The requirement is a
fixed monthly income of Rs 10,000 or Rs 1,20,000 per annum. The withdrawal made
per month results in the sale of some units every month.
Consider that the unit
price has increased by 10% at the end of the first year (i.e., Rs 10 has moved
to Rs 11 and average selling price for each withdrawal made in the year was Rs
10.50).
In the whole year, the
investor would have sold 11,428 units/shares (Rs 1,20,000/10.50).
Capital gains is Rs 5,715
(0.50 per unit*11,428 units).
The capital gains tax
is Rs 1,714.50 (assuming highest tax bracket of 30% minus surcharge).
Total withdrawals made
were Rs 1,20,000 and tax paid is only Rs 1,714.50 for the whole year.
This rate will further
drop after one year when the capital gains tax on equity falls to nil and on
debt at 10% flat or 20% after indexation.
In the second
illustration, let’s say the investment is Rs 10,00,000 in a debt fund at Rs 10
per unit giving the investor 1,00,000 units.
Assuming your client
needs the same Rs 10,000 per month or Rs 1,20,000 per annum growing by 5% per
year, and the balance corpus grows at a modest 5% per annum after withdrawals,
and there is a tax of 10% on the capital gains made every year (30% in the first
year), from the withdrawal of certain number of units, the corpus will last
more than 27 years and the IRR is 8% post-tax!
This is a tax-efficient
method of withdrawing from a corpus and providing for a balance available for estate
planning also.
(Dilshad Billimoria is a BBM, LUTCF CFPCM,
Certified Financial Planner and Investment Advisor)
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