Iyer Business Sale and Disabled Child Trust
Mr. and Mrs. Iyer, aged 58 and 56, own a precision-components business. They expect to sell the business in two years for about ₹4 crore, structured as a share sale with long-term capital gains. Their personal retirement savings are modest: ₹35 lakh in PPF and ₹15 lakh in bank deposits. They also own a commercial property worth ₹1.5 crore with an unrealised gain of ₹40 lakh. They want ₹1.5 lakh a month after tax in retirement, indexed at 5%, and to provide lifetime support for their 30-year-old son, who has a disability and is financially dependent. They are risk-averse and have no experience managing a large portfolio. For this question assume the share sale qualifies for long-term capital gains tax at 20% after indexation and that section 54EC bonds are available with a 5-year lock-in.
1. Identify the main retirement risks in this plan and recommend a sequencing plan for the sale proceeds.
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The dominant risks are concentration, timing, tax, longevity, inflation, and dependency risk. Almost all their wealth is in an illiquid business whose value can fall before sale. They also face a large one-time tax and must fund a dependent son for decades.
Sequencing:
- Before sale: separate personal assets from business assets, document the son's support needs, and build a 24-month expense reserve outside the business.
- At sale: set aside the estimated capital gains tax and transaction costs first. Do not reinvest the gross proceeds.
- Dependency layer: fund a trust or separate portfolio for the son before retirement spending. Use professional trustees and a clear letter of wishes.
- Income layer: invest the balance in a diversified, low-cost portfolio with a 3-year cash ladder. Stagger reinvestment over 6–12 months to reduce timing risk.
- Later: consider a partial annuity for essential expenses only after the trust and liquidity are secure.
This order protects the vulnerable dependant and avoids locking all proceeds into illiquid products.
2. How should they use section 54EC or other provisions to manage tax on the share sale and property?
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Do not assume 54EC covers the share sale. Section 54EC is available only for long-term gains on land or building, so the ₹40 lakh gain on the commercial property can potentially be deferred by investing in eligible bonds within the time limit, subject to the ₹50 lakh annual cap. The share sale gain does not qualify for 54EC.
For the share sale, possible reliefs include section 54F if they reinvest net consideration in one residential house and meet the ownership conditions. That is a judgement call: it converts liquid financial assets into a house, which may not suit their income needs or the son's trust. Paying the 20% tax and keeping diversification may be better.
For the property, compare 54EC deferral with paying tax. 54EC locks money for five years and the interest is taxable; it suits money not needed for the trust. Get transaction-specific tax advice before signing, because the form and timing of the sale can change the result.
3. Evaluate an immediate annuity versus a systematic withdrawal plan for their income need.
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Their target is ₹1.5 lakh a month, or ₹18 lakh a year, indexed at 5%. On ₹4 crore, that is a 4.5% initial withdrawal rate before tax, so the portfolio must work hard.
Immediate annuity: provides a guaranteed lifetime income and removes investment decisions, which suits their risk aversion. But a level annuity loses purchasing power, is taxable as pension income, and is inflexible. It also cannot be used to fund the son's trust after purchase.
SWP from a balanced portfolio: retains liquidity, can be increased with inflation, and can be segregated into a trust for the son. It carries market and withdrawal-rate risk.
A blended approach is usually better: use an annuity or laddered bonds for essential household expenses, and an SWP for discretionary spending and the son's trust. Keep at least two years of expenses in cash and avoid annuitising the entire ₹4 crore at one rate.