March 18, 2002

Systematic Withdrawal Advantage Plan (SWAP) – FAQs

Background

At present, dividend income from units of mutual funds is exempt from tax in the hands of the Unit holders. The mutual funds are required to pay a distribution tax at 10.2% on the amount distributed. (except equity oriented funds)

As per the Finance Bill 2002, it is proposed to revert to the earlier system of taxing such income. As a result the incidence of tax will now shift to the Unit holder receiving such income. Further, the Mutual Fund in case of resident Indians will be required to deduct tax at source at 10% (plus applicable surcharge) on income distributed and in case of non-residents, at the rate of 20% (plus applicable surcharge). The new provision will be applicable with effect from April 01, 2002 and the Tax Deduction at Source (TDS) clause with effect from June 01, 2002. This is subject to the passing of the Finance Bill, 2002.

Systematic Withdrawal Advantage Plan.

FAQ

Q. What is SWAP?

A. Systematic Withdrawal Advantage Plan is a plan, wherein Unit holders of income schemes can automatically withdraw at monthly / quarterly / half yearly intervals a fixed amount or a variable amount. The amount withdrawn under SWAP by redemption shall be converted into the specific Scheme / Plan Units at the Applicable NAV as on the 1^st or the 25^th of a month and such Units will be subtracted from the Unit Balance of the Unit holders. In case these dates fall on a holiday or falls during a book closure period the next Business day will be considered for this purpose.

SWAP will terminate automatically if all units are liquidated or withdrawn from the account or upon receipt of notification of death of the Unit holder.

Q. What are the advantages of SWAP?

A.

• A simple way of planning your finances through systematic withdrawals in a tax efficient manner.
• Monthly or quarterly or half-yearly withdrawals as specified by you, based on your needs and investment goals.
• No Tax Deducted at Source – residents only.
• Choice of two unique options. In SWAP the investor decides the amount of withdrawals he needs and the frequency. As against the dividend option where the fund house decides the amount.
• Direct Credit Facility with select banks
• No entry or exit load.

Q. How is SWAP more tax efficient than the dividend option?

A The SWAP Plan is based on the principle of Capital gains tax. Tax will be paid on that part of capital gains (i.e. difference between the NAV of Units redeemed and the proportionate costs thereof) which are embedded in the NAV of Units redeemed and not on the whole of the amount received unlike in the case of receipt of income distributed under the Dividend Plan.

SWAP example in the HDFC Income Fund – Growth Option. Assuming that the investor falls in the highest tax bracket

on January 1, 2001

Note : Tax calculations in all the examples are based on tax rates proposed in the Finance Bill, 2002

Example in the HDFC Income Fund – Dividend Option Assuming that the investor falls in the highest tax bracket and the dividend is taxable in the hands of the Unit holder

on January 1, 2001

In the above example the investor gets Rs. 900 more in the SWAP Option

Q. Who should choose the SWAP option ?

A. Category of investors who require regular finance to meet their day-to-day needs.

Q. Am I taking out money from the principal amount?

A. There are two options for the investor.

Variable Plan

• The Investor redeems only the incremental amount i.e. appreciation of his original investment. For example, if the appreciation is Rs. 3500 in the first quarter and Rs. 3000 in the second quarter. The investor will receive only the appreciation i.e. Rs. 3500 in the first quarter and Rs. 3000 in the second quarter. However the monthly option is not available to the investor in this plan.

Fixed Plan

• The investor redeems a pre-determined amount from the unit balance. For example the investor decides to withdraw Rs.3000 every quarter and the appreciation is Rs.2500, then the mutual fund would redeem Rs.500 from the investor’s principal amount to give the investor Rs. 3000.

17. What is the Direct Credit Facility and is it available in SWAP?

• Unit holders having a bank account with certain banks with whom the Mutual Fund would have an arrangement from time to time may avail the facility of Direct Credit to their account for repurchase of the Units of the respective Plans.

17.  
18. What’s the frequency of withdrawal

A. Unit holders of income schemes can automatically withdraw at monthly / quarterly / half yearly intervals a fixed amount. The amount withdrawn under SWAP by redemption shall be converted into the specific Scheme / Plan Units at the Applicable NAV as on the 1^st or the 25^th of a month and such Units will be subtracted from the Unit Balance of the Unit holders. In case this dates falls on a holiday or falls during a book closure period the next Business day will be considered for this purpose.

The following example illustrates how the SWAP Option in the HDFC Income Fund – Growth Plan, is more tax efficient as compared to the HDFC Income Fund – Dividend Plan.

Calculation for an investor who invests Rs. 100000 (1^st October 2000) in the HDFC Income Fund Dividend Option . Assuming that the investor falls in the highest tax bracket.

Note: Calculation is made with the assumption that the Dividend is taxable in the hands of the Unit holder from March 1, 2001.

Calculation for an investor who invests Rs. 100000 (1^st October 2000) in the HDFC Income Fund Growth Option & opts for the Systematic Withdrawal Advantage Plan (Quarterly Option). Assuming that the investor falls in the highest tax bracket.

Note : Post 1 Yr. All gains will qualify for Long Term Capital Gain Tax, which will be 10.5% irrespective of the Tax slab of the investor

LTCG : Long Term Capital Gains
STCG : Short Term Capital Gain

In the above example you will note that the investor has paid only Rs. 338 as tax as against Rs. 4725 in the dividend option of HDFC Income Fund.

(Extracts from HDFC MF)

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