A ₹4.5 crore retirement corpus invested in a fixed deposit at 7% interest rate earns approximately ₹37.33 lakh in interest annually. However, according to an Economic Times report, this approach pushes income into the 30% tax slab, attracting around ₹7 lakh in taxes under the new tax regime, leaving the retiree with roughly ₹30.33 lakh annually. The report suggests that investing in mutual funds and setting up a systematic withdrawal plan (SWP) reduces tax burden and creates steady income, with the added benefit of withdrawing both principal and gains while paying income tax only on gains.
The mutual fund approach offers significant tax benefits compared to fixed deposits. As reported by Economic Times, long-term capital gains on equities are exempt up to ₹1.25 lakh in a given year, and gains above this threshold are taxed at a much lower rate of 12.5%. The report notes that the higher the investment in equity instruments with a long-term horizon, the lower the tax outgo, making equity mutual funds tax-efficient for large corpus investments. For years four to seven, retirees need to pay LTCG on income from equity savings and aggressive hybrid funds, but they will also get the tax exemption on LTCG of ₹1.25 lakh every financial year.
Financial experts recommend a systematic approach involving five distinct investment buckets for optimal retirement income generation. According to the Economic Times report, the allocation includes ₹30 lakh in liquid funds for immediate needs (Year 1) with 5% return assumption, ₹60 lakh in debt funds for short-term requirements (Years 2-3) with 7% annualized returns, ₹80 lakh in equity savings funds for medium-term needs (Years 4-5) with 7.50% returns, ₹45 lakh in aggressive hybrid funds for long-term withdrawals (Years 6-7) with 10% returns, and ₹2.35 crore in pure equity funds for sustained growth (Year 8 onwards) with 12% returns. The asset allocation has been chosen to minimize risk and make it tax-efficient in the short as well as long term.
The proposed bucket strategy segments investments into distinct time-based buckets designed to minimize risk while maximizing tax efficiency across both short- and long-term horizons. As reported by Economic Times, this approach targets significant capital growth over time by retaining substantial portions in equities, though financial experts caution that this strategy is exclusively suited for investors with strong risk appetite for equity market volatility. The method ensures absolute safety for immediate withdrawal needs while gradually increasing risk exposure to capture higher potential growth over the retirement period. Many experts suggest keeping the withdrawal rate as conservative as possible, with most suggesting a 4% withdrawal rate of ₹1.5 lakh monthly on a ₹4.5 crore corpus, especially for conservative investors. The strategy can help earn an increased amount every year to take care of inflation while minimizing risk and leaving retirees with a higher amount for the next seven-year cycle.
