Rs 2Cr retirement corpus: Should I live off FD interest or use a mutual fund SWP?

Question

I am helping my father plan his retirement income with a Rs 2Cr corpus.

He wants to put the entire amount in a Fixed Deposit and live off the monthly interest.

I suggested a SWP from a balanced mutual fund instead.

He is worried about the tax implications of selling mutual fund units every month.

Which option is actually more tax-efficient for generating a monthly income over a 20yr horizon?

Mohan Gupta · Accepted Answer

An SWP from equity or hybrid mutual funds is significantly more tax-efficient for long-term retirees than relying on Fixed Deposit interest. When calculating your net-in-hand income for retirement taxation is a crucial factor that can eat into your lifestyle. If you rely on FD interest for your retirement income the entire interest amount is taxed according to your income tax slab. If you fall in a higher tax bracket a massive chunk of your monthly income goes straight to taxes. With an SWP you do not pay tax on your entire corpus or the total withdrawal amount. You only pay tax on the capital gains realized from the specific units you sell that month. For equity-oriented funds the first Rs 1.25L of long-term capital gains every year is completely tax-free. Any gains above that threshold are taxed at just 12.5%. Because you are only selling a small fraction of your portfolio each month the actual taxable gain is usually very small in the early years. This structure allows your principal to continue compounding while you draw a highly tax-efficient monthly income. Disclaimer: All information shared above are strictly for educational and informational purposes only. It should not be construed as financial or investment advice.

Rs 2Cr retirement corpus: Should I live off FD interest or use a mutual fund SWP?

More from Mohan Gupta