Dividend plans vs. SWPs, which one to choose for regular income?

Dividend plans vs. SWPs for regular income. Which one out of these two options will fetch you regular income, and what are the conditions associated with each of them?

systematic withdrawal plan

You get two options to generate cash flow to derive income; dividend and systematic withdrawal plan (SWP). A common question is whether retired persons should invest in dividend plans for regular income. Dividend plans allow you to get dividends from the profits. SWPs will enable you to withdraw specific amounts systematically and regularly. Here are a few points you should consider before deciding which option to choose; let's dive in!

Also Read: A guide to SWPs.

Guarantee of Income Flow

Many believe they will receive dividends regularly or at fixed intervals, so they choose a dividend plan. However, a mutual fund providing dividends to its investors is never guaranteed, even if its history suggests. Even though a fund can be one that pays dividends, the amount and timing are at the fund house's discretion. Hence, the quantum and frequency of dividends are not fixed and not guaranteed. If you want regular income to meet expenses, an SWP (systematic withdrawal plan) is a more lucrative option. You get a fixed amount of money every month once you provide instruction with SWPs. For instance, if you set up a standing instruction to receive Rs. 50k every month on the 3rd, you will receive it regularly. It would mean a regular and steady inflow of income to meet expenses. 

Flexibility

An investor gets no flexibility in the case of a dividend as the fund house decides the payout frequency and amount. If an investor requires more money for any reason every month for a whole year, the dividend plan might not be able to provide that unless you make a redemption request manually. However, if you choose an SWP with a growth plan, you can define the frequency and amount of withdrawal. You can tell the fund house that you want to receive a higher monthly credit for the next year, which would be on autopilot. For instance, if you withdraw a sum of Rs. 50k monthly and want to increase it to Rs. 70k, you can do so with SWPs but not with dividend plans. 

Also Read: How is dividend income taxed?

Taxation

Dividends you get in a mutual fund's dividend option are taxed according to your tax slab. If you have no other income and the total income you have, including capital gains or dividends, is less than the minimum tax threshold, then there is not much difference between SWP and the dividend option. However, if you have other income and come under the 20-30% tax bracket, there will be a difference. The dividend will get added to your income under a dividend plan, and it does not matter if it is equity or non-equity fund. If you come in the highest tax slab, the income will draw 30% tax. So, for instance, if you get Rs. 10,000 as your dividend income, your tax liability will be Rs. 3,000. 

If you go for an SWP under a growth plan, your tax will be calculated when you redeem any units. Investing in equity funds can have two scenarios for taxation: 

  • You shall be liable for 15% tax if you hold it for less than one year
  • You shall be liable for 10% above and beyond Rs. 1 lakh if you hold it for over one year. 

In both cases, the person has to pay less than the 30% that they would under a dividend plan. If a person sells units in a non-equity fund after three years, they will have to pay 20% tax after the indexation. 

Also Read: Best dividend-paying stocks in India in 2022

It depends on your goals, investment plans, and what you expect from your investments. Choosing either of the two can be just a little easier now that you have the correct information. You must understand the differences and what each offers before deciding which way to go. 

You get two options to generate cash flow to derive income; dividend and systematic withdrawal plan (SWP). A common question is whether retired persons should invest in dividend plans for regular income. Dividend plans allow you to get dividends from the profits. SWPs will enable you to withdraw specific amounts systematically and regularly. Here are a few points you should consider before deciding which option to choose; let's dive in!

Also Read: A guide to SWPs.

Guarantee of Income Flow

Many believe they will receive dividends regularly or at fixed intervals, so they choose a dividend plan. However, a mutual fund providing dividends to its investors is never guaranteed, even if its history suggests. Even though a fund can be one that pays dividends, the amount and timing are at the fund house's discretion. Hence, the quantum and frequency of dividends are not fixed and not guaranteed. If you want regular income to meet expenses, an SWP (systematic withdrawal plan) is a more lucrative option. You get a fixed amount of money every month once you provide instruction with SWPs. For instance, if you set up a standing instruction to receive Rs. 50k every month on the 3rd, you will receive it regularly. It would mean a regular and steady inflow of income to meet expenses. 

Flexibility

An investor gets no flexibility in the case of a dividend as the fund house decides the payout frequency and amount. If an investor requires more money for any reason every month for a whole year, the dividend plan might not be able to provide that unless you make a redemption request manually. However, if you choose an SWP with a growth plan, you can define the frequency and amount of withdrawal. You can tell the fund house that you want to receive a higher monthly credit for the next year, which would be on autopilot. For instance, if you withdraw a sum of Rs. 50k monthly and want to increase it to Rs. 70k, you can do so with SWPs but not with dividend plans. 

Also Read: How is dividend income taxed?

Taxation

Dividends you get in a mutual fund's dividend option are taxed according to your tax slab. If you have no other income and the total income you have, including capital gains or dividends, is less than the minimum tax threshold, then there is not much difference between SWP and the dividend option. However, if you have other income and come under the 20-30% tax bracket, there will be a difference. The dividend will get added to your income under a dividend plan, and it does not matter if it is equity or non-equity fund. If you come in the highest tax slab, the income will draw 30% tax. So, for instance, if you get Rs. 10,000 as your dividend income, your tax liability will be Rs. 3,000. 

If you go for an SWP under a growth plan, your tax will be calculated when you redeem any units. Investing in equity funds can have two scenarios for taxation: 

  • You shall be liable for 15% tax if you hold it for less than one year
  • You shall be liable for 10% above and beyond Rs. 1 lakh if you hold it for over one year. 

In both cases, the person has to pay less than the 30% that they would under a dividend plan. If a person sells units in a non-equity fund after three years, they will have to pay 20% tax after the indexation. 

Also Read: Best dividend-paying stocks in India in 2022

It depends on your goals, investment plans, and what you expect from your investments. Choosing either of the two can be just a little easier now that you have the correct information. You must understand the differences and what each offers before deciding which way to go. 

Expert Article block example

NEWSLETTER

Related Article

Premium Articles