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Systematic Withdrawal Plan - Smart Income Option

Investors looking for a steady income from their investments are increasingly relying upon debt funds. The popularity of guaranteed return funds like Monthly Income Plan of UTI and the growing acceptance of open-ended income funds is enough proof. However, the Budget '99 clamped a 11% tax (10% tax and 1% surchage) on dividend from all funds barring open-end equity funds, though all dividends from mutual funds has become tax-free in the hands of investor.

Because of this change, all non-tax payee investors like trusts and retired persons, the traditional investors in Monthly Income Plans stand to lose out returns on account of this dividend tax of 11%. For the non-tax payer the systematic withdrawal plan of open-ended debt funds proves to be a smart way of reducing his tax outflow. In a systematic withdrawal plan an investor can invest a lumpsum amount and give the fund a standing instruction to redeem a fixed amount worth of units at defined periodicity, say monthly, or quarterly. The following illustration shows the result of systematic withdrawal plan on growth plan of Birla Income Plus, the largest private sector open-end income fund.

In case you chose the systematic withdrawal plan and you do not fall in any tax bracket, your tax liability will be nothing. In case you fall in the 30% tax bracket, you would have paid only Rs 210 as tax on your income by way of short-term capital gain. Systematic withdrawal plan is an ideal way to meet your regular income needs with greater tax efficiency. Moreover, withdrawal after a year will be eligible for indexation benefit, which will attract long-term capital gains at 20% and will reduce the tax outgo.

Besides their tax efficiency, these funds are also suited for the convenience and ease of investment they provide being available throughout the year. With a choice of monthly, Bi-monthly and quarterly withdrawal options, no dividend tax, and easy liquidity of principle, as there is no-lock-in period they are a suitable investment option for investors looking a steady income stream from their investments.

Smart Income Returns
Date	NAV	Amount	Value of	Tax
		Withdrawan	Balance	@30% Tax Rate
		(per-month)	Investment	(Rs)
01/01/1998	13.45	0	100000	--
02/01/1998	13.56	1000	99818	2.43
03/01/1998	13.68	1000	99701	5.04
04/01/1998	13.82	1000	99722	8.03
05/01/1998	13.98	1000	99876	11.37
06/01/1998	14.10	1000	99733	13.83
07/01/1998	14.23	1000	99653	16.44
08/01/1998	14.37	1000	99633	19.21
09/01/1998	14.50	1000	99535	21.72
10/01/1998	14.63	1000	99427	24.20
11/01/1998	14.77	1000	99378	26.81
12/01/1998	14.92	1000	99388	29.56
01/01/1999	15.06	1000	99320	32.07
02/01/1999	15.19	1000	99178	22.91
03/01/1999	15.38	1000	99418	25.10

Mutual Funds

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