Meet financial needs of your loved ones in a systematic manner

Recently one of my friends shared his agony, that how he missed his loved ones, who stay far away in his home town, especially during festivals like Diwali. He further added how he felt miserable for not being able to take care of his parents and siblings in time of their need, owing to paucity of time given the hectic work schedule.

Sympathising with him, I explained that it's impossible to replace personal presence and time in someone's life, but as far as needs are concerned, there are ways to meet them. I told him, how he could take the Systematic Withdrawal Plan (SWP) route offered by mutual funds to meet the financial needs of his loved ones effectively.

How to gift through MFs

Set aside a lumpsum amount as an investment in select mutual fund scheme. For instance, you could consider investing in growth option of an open-ended scheme of any mutual fund and set an SWP in the same, in order, to provide regular income for your loved ones.

How does SWP work

SWP enables direct regular payout in your beneficiary's (loved ones) registered bank account – it can be either your child, sibling, spouse or a parent, by just giving one-time instruction to the mutual fund.

In order to avail the facility you either need to have an investment in growth option of an open-ended scheme of a MF or start a fresh investment in the same. Sign up for the SWP facility, specifying beneficiary details, withdrawal amount, tenure, etc. Submit the form along with the beneficiary's Know Your Customer (KYC) – establishing the relationship status and bank account proof. Post which the payouts will be directly credited to the beneficiary's bank account at the monthly frequency.

This way you not only commit to the financial independence of your immediate family members by ensuring fund inflows in a time-bound manner, but also give them a sense of financial liberty and confidence to handle finances more efficiently.

Taxation

Your loved ones need not worry about the taxation either, as the money transferred to the beneficiary account is treated as Gift. Under the current tax laws, there is no Gift tax if the beneficiary and payee are related. However, the interest earned on the money transferred would be taxable to the beneficiary as per Income Tax laws.

This does not mean that there are no taxes at all on such investments. You as an investor will be bound to pay taxes as follows. In case of investments made in equity-oriented schemes, for withdrawals made in the first 12 months of investments, short-term capital gains tax @ 15% would be applicable, for withdrawals after the first 12 months, long-term capital gains tax @ 10%, over and above Rs 1 lakh capital gains per financial year would be applicable.

In case the investments are parked in debt-oriented schemes, then withdrawals made within the first three years will be subject to short-term capital gains tax, wherein you will have to pay tax as per your income bracket. In case of withdrawals, made after three years of investment, long-term capital gains tax would be applicable at 20% after allowing indexation benefits. Indexation is a process, which allows you to adjust the cost of inflation for the given period. For instance, let's assume that you invested Rs 10 lakh in a debt-oriented scheme and opted for an SWP of Rs 10,000 per month, you will be liable to pay tax on only the gain part, that is, amount withdrawn less principal amount (actual cost of the redeemed units). This ensures your withdrawals are planned tax-efficiently.

Make a difference in the lives of your loved ones by gifting them a financial investment that they can cherish month-after-month.

The writer is ED & CMO (Domestic Business) of SBI Mutual Fund