26 Apr 2023

A tracker for short-term mutual fund savings

Jupiter Pots is a service I use for my short-term savings. I also use mutual funds for short-term savings. I thought it’ll be nice if Jupiter Pots supported mutual funds too. Sayan Sircar of Arthgyaan is the kind of person who will inspire you to solve your problems yourself. He gave subtle hints while we were talking that it’s not hard to build something like Jupiter Pots if one wanted. That was enough motivation for me to try making a spreadsheet that does what Jupiter Pots does. Of course the spreadsheet gives a less polished UX (user experience), but it gives us much greater flexibility and control.

After I created the spreadsheet, I humble-bragged to Sayan that I had done it. Then the idea of sharing the spreadsheet to the world through Sayan’s website came. I wrote a blog post with Sayan’s help. He also recommended that we make a demo video, which I think was an excellent idea.

Please head over to Arthgyaan for an overview and demo of my short-term savings tracker.

5 Apr 2023

Liquidity of insurance + investment products

Much before I knew what investing was, I “invested in” an LIC policy. I had the desire to save for the future, but I had no idea what I should be doing. I consulted a friendly LIC agent, and he advised me to get this policy. I bought the policy with my eyes closed. More than a decade later I understood what this policy was like. This is a participating policy, so the investment return is not predetermined.

When I had paid premium for 15 years, I asked an LIC branch to tell me the surrender value of this policy. The policy’s total value came to be over ₹6.46 lakhs. However, if I were to surrender the policy (i.e. abandon the investment), I’ll get just a little bit more than the premium I had paid.

A piece of paper with investment value written by hand

For the corpus value of ₹6,46,875, the growth rate (XIRR) is an impressive 9.52%. But if I couldn’t continue the investment for any reason, I’ll only get ₹3,25,528. Growth rate for that is a measly 0.81%! A return of 0.81% after paying on time every single premium for 15 years straight.

To my surprise, most people seem fine with this. They only look at the 9.5% return, but ignore the lack of liquidity. When discussing liquidity, I ask people this question: “If I have ₹10,00,000 in my PPF account that matures in 5 years, and I need ₹6,00,000 today for a surgery, do I really have that ₹10,00,000?” The answer is No. If you cannot spend the money, you effectively don’t have it.

That’s my main problem with all these insurance + investment products. They give you a good or great return as long as everything goes perfectly as planned. The moment you have to deviate a bit from the original plan, you end up with a big loss. Imagine earning an annualised return of 0.81% on a 15-year investment. That’s as good as gifting money to the insurance company!

If you are considering buying one of these insurance plans with the focus of investing, here is my advice:

  1. Don’t. Liquidity is just one problem. There are many other issues with these products: high cost, low return, insufficient insurance coverage, etc.
  2. If you must buy one, choose a plan that has a short time horizon. A 5-year investment plan is easier to adhere to than a 25-year investment plan. The longer the time duration is, the more you need liquidity and flexibility.

4 Apr 2023

Do TCS deductions reduce advance tax liability?

From 1-Jul-2023, 20% of the LRS amount will be deducted as Tax Collected at Source (TCS) by the bank, and only the remaining 80% will be transferred to the brokerage account. That means, if an investor sends ₹5,00,000 to their brokerage account, they will receive USD worth ₹4,00,000 only! The remaining ₹1,00,000 will be taken away as tax collected at source.

This is a big blow for Indian investors who invest outside India through the LRS scheme. Sure, this is not additional tax. Investors can claim this ₹1,00,000 as tax refund while filing tax return. But there is an opportunity cost as this ₹1,00,000 remains uninvested for up to 15 months (or sometimes even longer).

Can we adjust this TCS with advance tax?

I invest in a Vanguard ETF that is not traded in India. To make this investment, I send money out to a foreign brokerage account through the Liberalised Remittance Scheme (LRS). I was thinking about this new rule, and wondering if there was a way to reduce its impact on me.

I am liable to pay advance tax every quarter as I have regular rent income. I was wondering if the TCS collected at the time of LRS transfers can offset the advance tax I need to pay. Here is an illustration:

  • I send ₹5,00,000 to my brokerage account on 12-Aug-2023. The bank takes out ₹1,00,000 from my remittance and deposits it as income tax into my account.
  • On 15-Sep-2023, I have an advance tax liability of, let’s say, ₹54,000 from other incomes such as rent, capital gains, etc.
  • The question I had was: Can I skip paying the advance tax because the TCS deduction was more than my advance tax liability?

The answer seems to be Yes!

Section 209 of the Income Tax Act, called “Computation of advance tax”, says this:

(1) The amount of advance tax payable by an assessee in the financial year shall […] be computed as follows:
  (d) the income-tax calculated […] shall […] be reduced by the amount of income-tax which would be deductible or collectible at source during the said financial year under any provision of this Act from any income […]; and the amount of income-tax as so reduced shall be the advance tax payable

It is not the easiest text to follow, but it seems to say that advance tax liability is computed as Advance Tax Payable = Total Tax Payable – (All TCS payments + All TDS payments).

I can skip or reduce my TDS payments based on how much TCS had been deducted in the quarter. That means I’ll have a little bit more capital left with me, which I can invest in India.

The new rule mandating 20% TCS on LRS payments is a big blow for many people. Having rent income has kind-of made it a little bit less severe a hassle for me.