TAX CORNER OF SYSTEMATIC WITHDRAWALS PLANS

TAX CORNER OF SYSTEMATIC WITHDRAWALS PLANS




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SYSTEMATIC WITHDRAWALS PLANS

Query 1]

I purchased a flat in Raipur in the year 2009. I filed IT return for F.Y.

2009-10 & F.Y. 2010-11 but did not claim exemption for Registry and stamp

Duty of Rs. 1,50,000/- as I was ignorant about the exemption/rebate of

this expenditures in Income Tax. I request you to please advise whether I can submit revised IT Return for the FY 2009-2010 in which I incurred this expenditure?  I came to know only through your column published in Hitavada news paper. [bltiwari@gmail.com]

Opinion:

  1. An assessee has an option to file the revised return u/s 139(5) of the Income Tax Act – 1961. Revised return can be filed any time within one year from the end of the relevant assessment year or before the completion of assessment whichever is earlier. The only condition is that the original return should have been filed within the due date of filing the return of income.
  2. The F.Y. 2010-11 is the current running year, the return for which can be filed after 31.03.2011 only. Probably, you are mentioning Assessment year in the query and not the financial year. Also, the month in the year 2009 is also not mentioned in the query. If it is purchased in between April-2008 to March-2009 (i.e., A.Y. 2009-10), the revised return can be filed before 31.03.2011. If the same is purchased between April-2009 to March-2010 (i.e., A.Y. 2010-11), the revised return can be filed before 31.03.2012. You are advised to file the revised return by claiming above expenditure as deduction immediately before the completion of assessment.
  3. It may be noted that the overall deduction u/s 80C is restricted to a maximum of Rs. 1 Lacs.
Query 2]
  1. Sir, I have Rs. 10 Lacs. I want to invest this money in Mutual Funds.  For living, I want to draw Rs. 20,000/- per month from the fund (via Systematic Withdrawal Plan).  If I do so for say 10 years and after 10 years even after withdrawing monthly amount, if the fund value is say 15 lacks and if I withdraw this at that point; what will be the tax liability at that point?  Will there be any tax implication on this 20,000/- per month withdrawal?  I have Rs. 10,000/- per month as my other source of income. Kindly reply to my query. [shashikantpisar@gmail.com]
  2. From tax saving perspective, whether SWP would be better than Dividend option of mutual fund? Please advise. [K. Ansari]

Opinion:

  1. The tax treatment of systematic withdrawal plan depends on the way you take out the money.
    a] If you opt for the Dividend plan, then the amount of dividend would be exempt in the hands of receiver.
    b] If you opt for the growth plan, the withdrawals would have its tax impact depending upon the nature of fund (i.e., whether debt fund or equity fund) as under:
    i) Debt Fund:
    a] For Withdrawals (i.e., units redeemed) done within one year, the difference between the N.A.V of the units would be taxable as Short Term Capital Gain in the hands of Investor.
    a] For Withdrawals (i.e., units redeemed) done after one year, the difference between the N.A.V of the units would be taxable as Long Term Capital Gain in the hands of Investor. LTCG would be taxed at a rate which is lower of the following two:
    – 10% without indexation or
    – 20% with indexation benefit
  2. ii) Equity Fund:
    a] For Withdrawals (i.e., units redeemed) done within one year, the difference between the N.A.V of the units would be taxable as Short Term Capital Gain in the hands of Investor. The amount would be taxable @ 15% u/s 111A of the I.T. Act-1961.
    a] For Withdrawals (i.e., units redeemed) done after one year, the difference between the N.A.V of the units would be treated as Long Term Capital Gain in the hands of Investor. Long term capital gain in such cases would be exempt from tax u/s 10(38).
    With above broad position of law for Taxing SWP, you can decide the taxability of withdrawals in your hands depending upon your plan/options your are exercising while investing.

  1. In case of Debt Mutual Fund, in general, we find Systematic Withdrawals plan as a better option for taking out the money as compared to the Dividend Option.

    Reason: Though, Investor doesn’t have to pay any Income tax on the Dividend received from any mutual fund, mutual fund has to pay a Dividend Distribution Tax (DDT) on the Dividend paid from Debt based Fund. This DDT burden is passed on to the investor by compulsorily deducting the amount from the Fund’s NAV only. Effectively, the so called “TAX FREE” dividend comes to the investor after deduction of DDT. The advantage in SWP is the lower tax rate after a holding period of one year.

SYSTEMATIC WITHDRAWALS PLANS

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