SBI Mutual Fund Bandhan SWP: Income solutions for the family

SBI Mutual Fund’s Bandhan SWP, on the face of it, is a plain vanilla Systematic Withdrawal Plan (SWP), but it has a beneficiary feature which makes it a unique investment solution for families. Using Bandhan SWP, you can create an income stream for your family members. Taking care of the needs of family members is the most important task in Indian culture. In most mutual fund products, the beneficiary is the investor or the co-investor (in case of joint accounts) or nominees of the investor (if the investor passes away).

In SBI Mutual Fund’s Bandhan SWP, you can have any immediate family member as the beneficiary of the SWP. Bandhan SWP is also tax friendly investment solution (we will discuss in more details later).

How to start Bandhan SWP?

If you are an existing SBI Mutual Fund investor, you can start SBI Mutual Fund’s Bandhan SWP from your existing investment in any open ended mutual fund scheme of SBI Mutual Fund. If you do not have investments in SBI Mutual Fund then you first need to invest in growth option of any open ended mutual fund scheme to avail of Bandhan SWP. Please note that, Bandhan SWP can be done only from growth option of a scheme. If you have invested in dividend or dividend re-investment options, you should switch over to the growth option by filling out the transaction slip available on SBI Mutual Fund’s website and submitting to the AMC or the RTA.

To initiate SBI Mutual Fund’s Bandhan SWP, you should specify beneficiary details, withdrawal amount and duration of SWP. The beneficiary should be your family member. Eligible beneficiaries include child / sibling aged 15 years and above, spouse and parents of the investor. The beneficiary availing the facility should be a resident Indian. The minimum monthly withdrawal amount is Rs 5,000 and minimum duration is 12 months.

The investor needs to submit the KYC documents of the beneficiary. If the beneficiary is KYC compliant, then only the acknowledgement copy is required. Else the investor must submit proof of identity and proof of address documents. Since the Bandhan SWP facility is available only for family members, proof of relationship between investor and beneficiary needs to be submitted. Passport, PAN card, Marriage Certificate etc. where the name of the beneficiary is mentioned can be submitted as proof of relationship. For crediting SWP payments to the beneficiary’s bank account, cancelled cheque leaf of the Bank account or Copy of Bank Statement/Passbook of the beneficiary family member needs to be submitted.

Investors should get written consent from the beneficiary family members for sharing the pay-out through SWP and it shall be deemed that the investors have obtained such consent. In case of any objection received by the AMC from the beneficiary family member on the SWP mandate being credited to his / her Bank account under the facility, the investor will have to produce the written consent from the beneficiary family member within 30 days, failing which the facility shall be discontinued with immediate effect.

Taxation of Bandhan SWP

If you are starting SBI Mutual Fund’s Bandhan SWP from an equity fund, then withdrawals made within the first year of investment will be subject to short term capital gains tax. 15% short term capital gains tax plus cess will be levied on the profits made in the units redeemed for SWP. Withdrawals made after 1 year of investment will be subject to long term capital gains (LTCG) tax. Long term capital gains (LTCG) of up to Rs 1 lakh will be tax free. Long term capital gains above Rs 1 lakh, will be subject to 10% tax plus cess.

If you are starting Bandhan SWP from a debt fund, then withdrawals made within the three years of investment will be subject to short term gains tax. Profits made in the units redeemed for SWP in the first three years will be taxed as per the income tax rate of the investor. Withdrawals made after 3 years of investment will be subject to long term capital gains (LTCG) tax. Long term capital gains will be taxed at 20% plus cess after allowing for indexation benefits. Capital gains tax arising out of Bandhan SWP will be payable by the investor.

The money transferred to your beneficiary family member is treated as gift. Under current tax laws, there is no gift tax if the beneficiary receives the gift from a relative. However, if the money transferred to your beneficiary family member earns interest, then the interest will be taxable as per the income tax rate of the beneficiary.

SWP, whether from equity funds or debt funds, is more tax efficient than dividends. Debt fund dividends are subject to 28.8% dividend distribution tax, whereas long term capital gains are subject to 20% tax after allowing for indexation benefits. Therefore, in debt funds SWP enjoys a substantial tax advantage over dividends. In the 2018 Budget 10% dividend distribution tax has been introduced for equity funds. However, even in equity funds, SWP enjoys a tax advantage over dividends because up to Rs 1 lakh of long term capital gains is tax free. Further, in SBI Mutual Fund’s Bandhan SWP the money in the hands of your beneficiary family member is tax free.

Bandhan SWP can create cash-flows for your family and also create wealth for you

Let us see how SWP can create both cash-flows and wealth for investors. In this example, we started an SWP with an initial investment of Rs 10 lakhs in SBI Magnum Balanced Fund 10 years back. The monthly SWP amount was Rs 5,000. The chart below shows the cumulative money drawn through SWP and the value of the investment.

Source: Advisorkhoj SWP calculator

In total we drew Rs 6 lakhs over 10 years from our investment of Rs 10 lakhs, yet our investment grew to Rs 15 lakhs as on Feb 2, 2018.

Conclusion

In this post, we discussed about SBI Mutual Fund’s Bandhan SWP. Investors who want to provide cash-flows to their family members and also invest for their own financial objectives can opt for Bandhan SWP. Investors who are approaching retirement and have dependent parents may find Bandhan SWP useful. Investors should consult with their financial advisors, if Bandhan SWP is suitable for their investment needs.