Get Regular Income For Child’s College Tuition With SWPs
Author: Sanjay Sharma
Lump sum and regular expenses In case of child’s higher education, one category of expenses is lump sum expenses that you incur upfront. These expenses are typically met at the time of admission. At the same time, you also need to meet regular expenses such as those related to tuition charges, hostel fees, books and stationery and so on.
How systematic withdrawal plans (SWP) help When planning for your child’s higher education, you need to also plan for a regular income to meet this important category of expenses during your child’s college life. This is where systematic mutual funds (SWPs) offered by mutual funds can be of great help. With the SWP facility, units of any mutual fund scheme regularly sold to generate regular income for the investor and meet regular expenses in retirement.
Why you need a debt fund SWP While you can have a SWP from an equity fund or a debt fund scheme, in this case, it is a debt fund SWP that you need. The reason for this is that you would like a high degree of stability for the regular income during the child’s college years. The likelihood of this happening is much higher with lower risk debt funds.
How to use SWP Approximately 3 years before you need the money, gradually move the savings made for child’s higher education in high growth investments like equities and equity funds to debt funds. As a result, you will receive two advantages.
First, the move will secure the long term gains made in growth investments like equities and equity funds. Second, planning can be done to get the debt fund SWP facility kick in from the time your child is expected to incur regular expenses.
Tax planning is the key To get the most out of debt fund SWPs, one needs to ensure that the when the money is needed, debt fund units of more than three years, are sold in order to create regular income. This is because for debt fund units that are more than 3 years old, long term capital gains tax becomes applicable. This means that the inflation indexation benefits are available where the cost of acquiring the debt fund units get enhanced after factoring in the impact of inflation during the period of investment. This, in effect, reduces the taxable capital gains.
Also, you pay 20% long term capital gains tax. This is much lower than tax paid by those in the highest 30% tax slab for fully taxable income like that from interest. Of course, capital gains from units that are less than three years old get taxed according to the income tax slab.
Clearly, SWPs provide you with the facility to smoothly ride out the last mile of meeting an important need during child’s higher education. They ensure that your hard earned savings for your child’s higher education meet the regular expenses that are as important as the large and lump sum expenses.
