Monthly Income Plans vs SWPs for NRIs- Which Should You Choose?

Everyone, whether it is an Indian resident or an NRI, dreams of generating a substantial monthly income to substitute for or support a salary or other income. This dream can only be fulfilled when earning a meaningful return through a significant corpus for lump sum investment. 

Considering this, the financial services industry provides two main routes in this, i.e., monthly income plans (MIPs) and systematic withdrawal plans (SWPs). At first glance, both look the same but are different. Further, to provide you better idea, we have compared the monthly income plan vs SWPs and which is the better option for NRIs. So read on and gather all the information about it, and make the right investment decision. 

What Are Monthly Income Plans for NRIs?

Monthly Income Plan, popularly known as MIP, is a type of mutual fund that offers regular income to investors by primarily investing in debt instruments with a small portion given to equities. MIPs are like Time Deposits or Fixed Deposits (FDs), where an investor needs to invest in lump sum. However, unlike FDs, where you have to wait for the completion of the minimum duration to receive the interest payment, in MIP, the payment of the interest is done monthly.

Additionally, as MIPs are mutual funds so they do not provide a guarantee of monthly returns and have the risk of investment. It is because when the principal amount is reinvested at the end of the existing MIP, the interest rate may change. Further, as MIPs are not linked to the market, the principal invested amount does not fluctuate.

According to SEBI guidelines, MIPS are denoted as conservative hybrid funds. They generally invest in:

• 70-90% in debt instruments, including government securities, bonds, and debentures.
• 10-25% in equities, i.e., stocks for that extra alpha.

Here, the debt portion aims for stability, and equity tries to increase the returns. Further, like a monthly salary, MIP offers a feeling of regular income, which people are used to. These are suitable options for conservative investors and NRIs looking for moderate returns with fewer risks compared to pure equity funds.

This was all about monthly income plans for NRIs. Moving ahead, now let's know what SWPs are.

What Are SWPs for NRIs?

Systematic Withdrawal Plan (SWP), also known as SWP. It is a type of plan that allows you to withdraw incremental or fixed amounts at chosen regular intervals, i.e., quarterly, monthly, or annually, while investing in mutual funds. The SWP is used to create a regular income flow from investments. Further, to generate the desired cash flow, at the selected intervals, you will be redeeming units of the mutual fund.

Further, let's know which mutual funds are the best for SWPs.

• Balanced Advantage Funds: Based on valuation, dynamic equity-debt allocation.
• Multi-Asset Funds: Spread across debt, equity, and gold.
• Hybrid Funds: Conservative hybrid and aggressive hybrid.
• Debt Funds: Dynamic bond funds and corporate bond funds.

Using NRE or NRO Accounts, NRIs can invest in all these categories of mutual funds as per their financial goals, subject to scheme-specific restrictions. Also, NRI investing through SWPs should comply with:

• FATCA declaration
• Redemption rules under NRE/NRO accounts
• Restrictions for NRIs from the US/Canada by some AMC.

This was all about SWPs for NRIs. Now that you have an understanding of both monthly income plans and SWPs, let's look at the key difference between the plans.

Key Difference Between Monthly Income Plans and SWPs

Here is the key difference between monthly income plans and SWPs:

So, from the above monthly income plans vs SWPs, compared to MIP, SWP provides more benefits to NRIs. However, for NRIs who are looking for a basic income option with variable payouts, the MIP is a good investment option. Whereas, for NRIs seeking customizable, consistent, and tax-efficient income, no doubt SWP is the right option to choose.

Moving ahead, let's look at the tax perspective of both investments for NRIs. 

Tax Perspective for NRIs

Here is how monthly income plans and SWPs of NRIs are taxed in India.

MIP Dividends

Before April 2020, for investors, there was no taxation imposed on MIP dividends. However, fund houses were liable to pay the Dividend Distribution Tax (DDT) of ~29%. Further, since April 2020, dividends have been added to income, and now they are taxed according to the income slab rate of the individuals. Considering this, for NRIs:

• On dividend income, TDS of 20% (plus surcharge and cess) is deducted.
• If your slab rate is higher than the basic tax exemption limit, you need to fill out the ITR in India and pay additional tax.
• The entire dividend income is taxed under the head of "income from other sources."
• No indexation benefits.

Tax on SWP for NRIs

The tax on SWP for NRIs depends on the capital gains received by the individual. In this, the best thing is that tax is imposed on the capital gains portion of your withdrawal, not on the complete amount. Confused, let's understand this with an example. 

For instance, you have invested INR 10,00,000 in a debt fund, and after 2 years, the value of it is INR 11,05,000. Now, from that amount, you withdraw INR 50,000. Here, your withdrawal has two components:

• Capital Return: (INR 10,00,000 / INR 11,05,000) * INR 50,000 = INR 43,478 (no tax will be imposed on it).
• Capital Gain: INR 50,000 - INR 43,478 = INR 6,522 (this amount is taxable).

Further, let's know the NRI taxation on mutual funds:

• If equity funds are:
  • Held for more than 12 months, long-term capital gain (LTCG): 12.5% on capital gains if the amount is more than INR 1,25,000.
  • Held for less than 12 months, short-term capital gain (STCG): 20% on capital gains.
• Debt funds are taxed at up to a 30% slab rate, irrespective of the holding period of the investment.

TDS Complications for NRIs on MIP and SWP

On MIP and SWP, the TDS rules for NRIs differ significantly:

• On MIP Dividends:
  • TDS is 20% plus applicable surcharge and cess.
  • It is deducted immediately after the payment.
  • To claim tax refunds, NRIs need to file an annual ITR.
• On SWP Redemptions
  • For equity funds: On STCG, 20% TDS is imposed, on LTCG it is 12.5%, only on capital gains, not on the whole withdrawal amount.
  • For debt funds: Irrespective of the holding period, the slab rate is up to 30%.
  • If doing fund repartition using an NRO account and the amount is more than INR 10,00,000, you need to submit Form 15CA/ 15CB.

This is how NRIs pay taxes on MIP and SWP in India. Here, the difference between the two income plans is that, on SWPs, TDS is imposed on the gains amount. Additionally, under this, NRIs can more effectively use the DTAA benefits.

Now, moving further, let's know in the monthly income plan vs SWPs, which plan should NRIs choose?

Which Option Should NRIs Choose?

Opting between the monthly income plans for NRIs and SWPs for NRIs is not about which investment product is good universally. It is about which investment plans match your financial goals, tax profile, and risk appetite. Considering this, let's make this deed simple:

Final Thoughts

Lastly, between monthly income plans vs SWPs, it is clear that SWPs are a better regular income plan compared to MIPs for NRIs. It is because although MIPs offer a monthly income, but do not guarantee it. However, SWPs, on the other hand, provide NRIs with the predictability, tax efficiency, and control of the withdrawal amount. Further, your investment decision totally depends on your financial goals, life stage, and risk tolerance.

Need assistance in choosing the right investment option in India for NRIs? Connect with Savetaxs. We have a team of financial experts who guide you in opting for the right investment as per your financial goals and tax profile in India.