Which is the best for NRIs: SIP, SWP, or STP?

For Non-Resident Indians (NRIs) looking to invest in India, understanding various investment strategies is crucial to make informed financial decisions. Among the most popular options are Systematic Investment Plans (SIP), Systematic Withdrawal Plan (SWP), and Systematic Transfer Plan (STP)

SIPs are suitable for regular investing, where you can invest a fixed amount at regular intervals. STPs allow you to move your funds slowly from one mutual fund scheme to another. SWPs enable you to generate a regular cash flow stream by withdrawing a predetermined amount from your investments at regular intervals.

In this blog, we will learn more about these three investment plans and how they are different. Additionally, we will also discuss which one is the best choice for NRIs.

What is SIP for NRIs?

SIP stands for Systematic Investment Plan, which allows investors to invest a fixed amount in mutual funds at regular intervals. You can invest either weekly, monthly, or quarterly. SIPs are a widely chosen method of investing in equity and debt mutual funds because of their affordability and disciplined approach. One key benefit of an SIP is the benefit of rupee cost averaging. Furthermore:

• Every SIP installment is considered a separate investment with its own holding period for taxation since you buy new units each time.
• Generally, SIPs are used in equity or hybrid funds to benefit from rupee-cost averaging and long-term compounding.

Now, let's discuss the tax angle. So, for NRIs, capital gains on mutual funds are subject to taxation in India, depending on the type of fund, i.e.equity vs debt and holding period.

When you redeem the funds, the AMC (Asset Management Company) or RTA (Register and Share Transfer Agent) will deduct TDS (Tax Deducted at Source).

Since each SIP has a separate lot, some units may attract short-term tax, and others may attract long-term tax when you sell. The FIFO (first-in-first-out) concept is used to calculate gains. You can select a day, and the AMC will credit the amount to your bank account.

What is SWP for NRIs?

Just as you can make regular, systematic contributions to a mutual fund or investment portfolio like SIP, you can also set up a structured way to withdraw money from that fund. This is commonly referred to as a Systematic Withdrawal Plan (SWP).

SWP is a mutual fund investment plan that permits you to withdraw a specific amount at regular intervals, be it monthly, quarterly, or yearly. Additionally, withdrawing won't affect the remaining corpus, as it remains invested and continues to grow. Here is how it's treated:

• Each SWP instalment is treated as a partial redemption. Instead of the principal amount, only the gain portion set in the sold units is taxed.
• SWP is often used as a monthly income plan from an exisitng corpus, mainly in retirement or when an NRI seeks regular rupee cash flow. 

Talking about the tax angle for NRIs. Each SWP withdrawal can attract capital gains tax for NRIs based on whether the redeemed units are short-term or long-term, again using FIFO.

TDS is deducted on Capital Gains for NRIs by the AMCs at applicable rates. Additionally, if the actual slab/DTAA is lower, you can claim a refund using your NRI ITR (Income Tax Returns).

What is STP for NRIs?

STP stands for Systematic Transfer Plan provides you with the option to transfer your investments from one mutual fund scheme to another. It is allowed for schemes of the same fund house. You can set up an STP for the amount that you wish and set a period.

You can park a lump sum amount in a low-risk liquid/debt fund. After that, you can systematically transfer that amount to an equity fund over several months, minimizing timing risk. You can also use it in reverse (equity to debt) to gradually de-risk while you approach a goal.

For NRIs, every transfer from the source scheme is treated as a redemption from that scheme. It means it creates taxable capital gains or losses at every step.

TDS applies to those capital gains according to the nature of the source fund (equity/debt) and holding period, which makes tracking more specific and detailed.

What are the Key Differences Between SIP vs SWP, vs STP for NRIs?

Consider the table below to understand the key differences between SIP vs SWP, vs STP for NRIs:

Which is the Best Among these for NRIs?

As an NRI, choosing between SIP, SWP, or STP depends on your life stage, cash flow pattern, and tax position. Here is when you should choose between these three investment options:

Choose SIP if you:

• Aim for wealth accumulation and long-term financial security.
• Receive a fixed monthly income and can invest with consistency over time.
• Wish to build a substantial corpus but prefer low initial investments.
• Want to take advantage of rupee cost averaging and minimize market timing risks.
• Comfortable with market-linked returns and can stay invested for a longer duration of time.

Choose STP if you:

• Have a lump sum but fear market volatility and wish to invest in a systematic manner.
• Want to shift funds strategically from debt to equity without investing all at once.
• Wish to earn interest on idle funds before shifting to high-growth investments.
• You are someone who seeks better returns with lower risk by using a phased approach.
• Choose maintaining liquidity in debt funds while slowly enhancing equity exposure.

Choose SWP if you:

• Want to generate stable returns to sustain financial stability with capital preservation.
• Require a steady income flow for monthly expenses or post-retirement needs.
• Choose to maintain financial independence without consuming savings too quickly.
• Look for a tax-efficient withdrawal strategy compared to fixed deposits.
• Want periodic payouts while you are in the withdrawal phase of the investment.

Final Thoughts

An NRI needs to understand the difference between SIP, SWP, and STP to maximize their investment potential in India. Each plan offers a different purpose and has its own advantages and tax implications. SIP is ideal if your financial goal is to build wealth for short, mid-, or long-term goals. SWPs are for those who seek to generate a regular income, and STPs are ideal for those looking to gain market exposure by transferring funds from a debt scheme to an equity scheme or managing risk.

To make well-informed decisions when you have no basic knowledge of the investment sector, consider consulting an expert at Savetaxs. We have a team of experts who have been helping NRIs across 90+ countries in building their investment portfolios in India. They can guide you in choosing the right investment plan for you based on your financial goals. Additionally, they will also help you understand your tax obligations based on the investment choice you make.

Contact us right away as we are working 24*7 across all time zones.