A ₹4.5 crore retirement corpus invested in a fixed deposit (FD) at a 7% interest rate earns about ₹37.33 lakh in interest over a year. However, it also 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 a year.
But there is a way to get better post-tax returns that also increase each year to keep up with inflation — mutual funds.
According to an Economic Times (ET) report, investing the corpus in a and setting up a systematic withdrawal plan (SWP) reduces the tax burden and creates a steady income.
Another plus of this approach is that you can withdraw both the principal and the gains, but you pay only on the gains, not on the principal.
The report noted that long-term capital gains on equities are also exempt up to ₹1.25 lakh in a given year, and gains above it are taxed at a much lower rate of 12.5%.
The higher your investment in equity instruments with a long-term horizon, the lower your tax outgo, ET said. Therefore, tax liability for equity MFs remains much lower compared to FDs if you are investing ₹4.5 crore.
What is the tax-efficient way to invest ₹4.5 crore?
If you hold a ₹4.5 crore corpus and possess the risk appetite for growth assets like equities, setting up a Systematic Withdrawal Plan (SWP) through mutual funds is a highly effective way to generate regular monthly income.
However, rather than parking your entire wealth into a single fund, strategic diversification is critical. A more prudent, risk-adjusted approach involves dividing your corpus across five distinct investment buckets:
- Liquid Funds
- Equity Savings Funds
- Aggressive Hybrid Funds
- Pure Equity Funds
While wealth management strategies can vary based on individual financial goals, below is one structured allocation blueprint for effectively distributing a ₹4.5 crore portfolio:
| Investment bucket | Withdrawal duration | Return assumption | Allocation |
|---|---|---|---|
| Liquid Fund | Year 1 | 5% | ₹30 lakh |
| Debt Fund | Years 2–3 | 7% | ₹60 lakh |
| Equity Savings Fund | Years 4–5 | 7.50% | ₹80 lakh |
| Aggressive Hybrid Fund | Years 6–7 | 10% | ₹45 lakh |
| Equity Fund | Year 8 onwards | 12% | ₹2.35 cr |
| Total corpus | — | — | ₹4.50 cr |
Decoding the ‘Bucket Strategy’ for regular income
The proposed asset allocation relies on a strategic “bucket” approach, carefully structured to minimise risk while maximising tax efficiency across both short- and long-term horizons.
This method segments your investments into distinct time-based buckets, each designed to generate regular income for specific years. By retaining a substantial portion in equities, the strategy targets significant capital growth over time.
However, financial experts have cautioned that this approach is exclusively suited for investors with a strong risk appetite for equity market volatility.
Here is how the bucket allocation breaks down across different time horizons:
- Immediate Needs (Year 1) – Liquid Funds: For your first year of withdrawals, allocate the required capital into liquid funds. While expected returns are modest at around 5%, this bucket prioritises absolute safety, ensuring your immediate withdrawals remain stable and entirely insulated from market shocks.
- Short-Term (Years 2–3) – Debt Funds: For income required in the second and third years, the capital shifts to debt funds. These carry a moderate risk profile but offer slightly better growth to the corpus, with annualised returns typically hovering around 7%.
- Medium-Term (Years 4–5) – Equity Savings Funds: This bucket steps up the risk profile to capture higher potential growth. Equity savings funds mandate a minimum allocation of 65% to equity (and equity-related instruments), with at least 10% in debt.
Crucially, they benefit from equity taxation: Short-Term Capital Gains (STCG) on units held for less than 12 months are taxed at 20%, while Long-Term Capital Gains (LTCG) for holdings over a year are taxed at 12.5%, following an annual ₹1.25 lakh exemption.
- Long-Term (Years 6–7) – Aggressive Hybrid Funds: Designed to fund withdrawals in the sixth and seventh years, these funds invest 65% to 80% in equities, balanced by 20% to 35% in debt instruments. This structure captures aggressive long-term market growth while the debt component provides a necessary stabilising cushion. Like the medium-term bucket, these funds are taxed the same as pure equity funds.