The reverse of a systematic investment plan (SIP) is a systematic withdrawal plan (SWP). The SIP entails regular investment in an equity fund or a debt fund so that you get the maximum benefit of rupee cost averaging. Let us conversely imagine a scenario wherein a retired government official has received a retirement corpus of Rs.10 lakhs. He can invest in an equity fund and withdraw Rs.20,000 every quarter which he requires for his personal expenses. Alternatively he can invest the corpus of Rs.10 lakhs in a debt fund and withdraw Rs.20,000 each quarter. If he wants more safety, he can invest the entire corpus in a bank FD which pays Rs.20,000 as interest each quarter at the rate of 8% interest annually. Let us first look at the equity SWP option. Then we shall compare the debt fund SWP with the bank FD and evaluate the relative merits.
For that we need to understand SWP tax implications vis-à-vis bank FDs. The tax implications on SWP are actually more efficient as we will see later through a live example. The key here is to design a tax efficient systematic withdrawal plan. But first let us, for hypothetical purposes, look at a structure where we design an SWP on an equity fund.

SWP on an equity fund..
Let us assume that to be more efficient, the retiree invests Rs.9,20,000 in an equity fund and Rs. 80,000 in a liquid fund. For the first year, the retiree withdraws Rs.20,000 each quarter from the liquid fund. At the end of the first year, the equity fund becomes long term capital gains and hence regular withdrawals will neither attract capital gains tax nor will it attract any exit loads. But the real challenge arises due to the volatility in equity funds.

Remember, there is no assurance that equities will go up. For example if you invest your money at the peak of the market, as we saw in 2008, your equity corpus could depreciate substantially over the next one year. With negative returns on equities you will end up withdrawing and depleting your principal. That is not a wise thing to do. Additionally, it will be a long term capital loss and you cannot even get a tax credit against that as long term gains on equity is tax free. That is why SWPs are rarely structured on equities. The volatility is the key issue and defeats the entire purpose of regular and assured returns on the corpus.

Quarterly payouts on a bank FD..
Before understanding the tax implications of SWP on a debt fund, let us look at a similarly quarterly payout on a bank FD. Bank FDs typically pay around 8% interest annually. So the deposit of Rs.10 lakhs can be structured so as to yield Rs.20,000 each quarter. What about taxes? The table below captures the tax implications of the bank FD with quarterly payouts..

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