Two ways of getting income from an MIP(Monthly Income Plan)
We will see two different ways of generating monthly/quarterly income through MIP’s Monthly. One is the regular way of choosing dividend option and the option one is starting Systematic Withdrawal Plan from MIP after an year of buying it . Lets look at both and its pros and cons …
1. Choose dividend option
The good point in this option is that you will start getting the income immediately as company starts declaring the dividends, and you don’t have to take care of taxation issues. However the bad side is that eventually 14% dividend distribution tax would be paid by company and the stability of income will depend on how often dividends are declared by company. If they skip the dividend you will not be getting the income for that month/quarter .
2. Choosing growth option and start SWP (Systematic Withdrawal Plan)
If you use a bit of strategy, you can create a more stable and more tax efficient income by this method. You can choose growth option in MIP and after 1 yr you can start a SWP (systematic withdrawal plan , opposite of SIP) from your MIP to your bank account . What will happen with this option is that you will not have to depend on companies dividend announcement , as its your decision to liquidate a fixed part of your MIP’s, sell it and get the money in you bank account . Also as you are doing it after 1 yr, there wont be any exit load and the profits you get out of it would be Long term capital gains , so you only pay 10% on the profits (assuming you don’t want indexation benefits) , which is 4% lesser than the dividend distribution tax . If you have a large amount of investments in MIPs, then this option can save some tax for you, but if your investments aren’t significant enough, it’s not worth the hassle .
My choice would be to go with option 2 Growth option and start a Systematic Withdrawal Plan after 1 year.
Reference:
http://www.jagoinvestor.com/2011/01/monthly-income-plans.html
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