Rs 4.5 crore retirement corpus: Can you get Rs 4 lakh monthly income without losing your corpus?

If someone retires with a Rs 4.5 crore corpus and invests that amount in a fixed deposit (FD) at a 7% growth rate, their interest in one year can be approximately Rs 37.33 lakh. Such a high interest income can put them in a 30% income tax slab, and if there is no other income, the investor will end up paying around Rs 7 lakh as income tax under the new tax regime. So, the net income after tax in one year will be around Rs 30.33 lakh.

Is there a way you can get better post-tax returns that rise every year to take care of inflation? Yes, there is an alternative system to cut the tax bill where you can invest the corpus in a mutual fund and start a systematic withdrawal plan (SWP) to get a regular income. The benefit of doing so is that you withdraw both the principal and gains, but you need to pay income tax only on gains and not on the principal amount.

Moreover, long-term capital gains on equities are exempt up to Rs 1.25 lakh in a given year and gains above it are taxed at a much lower rate of 12.5%. Higher is your investment in equity instruments with a long-term horizon, the lower your tax outgo. As a result, your tax liability remains much lower if invested in equity MFs when compared to FD, if the amount you invested is Rs 4.5 crore.


How to invest Rs 4.5 crore in tax-efficient way

If you have a Rs 4.5 crore corpus, you can invest the amount in a mutual fund and start an SWP for monthly withdrawals, but only if you have the desired risk appetite to invest in growth assets like equities. Rather than investing the entire sum in one fund, it is better to diversify and invest the corpus in five buckets of liquid, debt, equity savings, aggressive hybrid and equity mutual funds. While there could be many ways to diversify your investment, here we give one such allocation of a Rs 4.5 crore corpus.

Asset allocation of Rs 4.5 crore investment for retirement

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

The asset allocation in the given table has been chosen to minimise risk and make it tax-efficient in the short term as well as long term. You can follow the bucket strategy where investments are made in various buckets with the target of generating regular income for each specific year, along with a substantial part invested in equities to give higher growth to capital. This strategy is suited only to those investors who have the desired risk appetite to invest in equities.

When it comes to asset allocation, for immediate needs during the first year, you can invest the desired amount in liquid funds, from where the expected returns may be just 5%, but it is safe and helps you make a stable withdrawal.

For income required in 2-3 years, the desired amount can be invested in debt funds, which carry moderate risk, but they can give annualised returns of 7%, providing slightly more growth to the corpus.

For the fourth and fifth years, you can allocate your investment in an equity savings fund. Such funds need to maintain at least 65% of their allocation in equity and equity-related instruments and at least 10% in debt. While they carry higher risk than debt funds, they may deliver higher growth in four to five years. Their taxation is also as per equity funds, where units held for less than 12 months are taxed as short-term capital gains (STCG) at a 20% rate and those held for 12 months and above are taxed as long-term capital gains (LTCG) at 12.5% after a Rs 1.25 lakh tax exemption on gains every financial year.

For the sixth and seventh year withdrawals, you can go for aggressive hybrid funds which need to have 65% to 80% allocation in equity and equity-related instruments and 20%-35% in debt instruments. While such a combination is likely to provide growth in the long term, the debt portion will provide some stability. Taxation of aggressive hybrid funds is similar to equity funds.

How the bucket strategy will work for Rs 4.5 crore corpus

If you go for a higher withdrawal amount your corpus will erode early. If you go for monthly withdrawal of Rs 4 lakh, which is Rs 48 lakh annually, it needs a return of 10.66% every year to sustain, which is very challenging. If you go for risky assets and it faces headwind in initial years you may end up losing a substantial part of your corpus.

Many experts suggest keeping your withdrawal rate as conservative as possible. Most of the experts suggest a 4% withdrawal rate, which is Rs 1.5 lakh monthly income on Rs 4.5 crore corpus, especially when you are a conservative investor. Our example shows that Rs 2.5 lakh monthly income can be sustained if assumptions about returns hold and it is suitable for investors with a higher risk appetite.

In the first year, we will withdraw an amount of Rs 2.5 lakh/month from liquid funds. The withdrawal amount will be increased by 5% every year. Once the liquid fund bucket is empty, the withdrawal will begin from Bucket 2 (debt fund) for expenses required in the second and third years. For the fourth and fifth years, the withdrawal will be from equity savings fund and in the sixth and seventh years, the withdrawal will be from the aggressive hybrid fund. Allocation in equity won’t be touched for seven years, as it will be used for investment and generating income for the next cycle of seven years.

Such a strategy may help one earn an increased amount every year to take care of inflation, minimise the risk and leave them with a higher amount for the next seven-year cycle while also optimising income tax.

In the illustration, you can see that the total corpus at the beginning of the first year is Rs 4.5 crore, but even after withdrawing nearly Rs 2.44 crore in the seven years, the closing balance is Rs 5.73 crore.

How bucket strategy can help save income tax

As per the strategy, the retiree’s earnings in the first two years will be taxed at slab rates. If no other income other than withdrawn amount and you opt for the new tax regime, you may not have to pay tax at all in the first two years. The reason is that, in either case, your income is likely to be much lower than the Rs 12 lakh tax-free income limit in the new tax regime.

For years four to seven, the retiree needs to pay LTCG on income from equity savings and aggressive hybrid funds. However, in both cases, they will also get the tax exemption on LTCG of Rs 1.25 lakh every financial year.

Though they need to pay a 12.5% tax on any gains above the Rs 1.25 lakh limit, the withdrawn amount will still include a large portion of principal, which is likely to keep tax liability much lower than FDs.