- Date : 12/03/2021
- Read: 4 mins
Judicious use of your income tax refund can help you sort out your finances and help you grow financially.
The income you receive during a financial year is paid to you after deducting tax. This tax deducted at source (TDS) adds up as the total tax paid by you during the financial year. In many cases, your actual tax liability might be less than the amount you paid as income tax. In such cases, the balance amount is returned to you by the IT department.
This tax refund comes about if your total taxable income is lower than the tax deducted. Tax deductions and exemptions play a role in lowering your actual tax liability at the end of the year. This tax refund is always a welcome addition to your regular cash flow, and the temptation to spend it can be strong. However, if you use it judiciously, a tax refund can make a difference to your financial position.
1. Pretend you didn’t receive it
One should always maintain an emergency fund that can meet 3-6 months of household expenses. Your tax refund can be used to top up this emergency fund. The best way to make this happen is to stash it in an account and keep it out of regular use. It can be a savings account or an investment that you can easily liquidate in times of need.
2. Pay off an outstanding debt
The refund you get can be used to pay off a debt. You can save avoidable interest cost and get the liability off your books. Credit card dues are a prime example of avoidable debt that should be paid off at the earliest. These dues often carry hefty interest rates and you end up paying a lot more than you originally spent while using the card. However, while paying off a debt, it is important to find out if there’s any foreclosure penalty involved.
3. Use it for home improvement
Every woman likes to have her house in order. If your washing machine is malfunctioning, or your bathroom fittings are leaky, maybe it is time to repair them. Use your tax refund to bring these household essentials back in shape. Doing so will save you from the bigger expense of replacing these household items in the near future. Is it worth spending money on repairs before you sell your house?
4. Park it in your retirement fund
If you wish, you could contribute more to your retirement fund by diverting all additional income into it. It could be a long-term investment like PPF or the pension fund that you regularly contribute to. Most retirement plans will also help you earn some tax deductions. This includes other options like the National Pension Scheme, equity-linked saving schemes, tax-free fixed deposits etc.
5. Invest it in the stock market
If your retirement fund and safe investments are at a satisfactory level, you are better prepared to take some market risks. So, you can choose to invest in shares or equity mutual funds with your refund amount. If you already have a demat account, you can increase or diversify your share portfolio further. Clueless about investing in stock markets? Here are some options
6. Invest it on yourself
Investment need not be purely financial. You can also invest in your skill development and expertise to increase your professional worth. If you are a homemaker but have a passion for baking, you can use your tax refund to enrol for a professional baking certification. This can pay rich dividends in the future in terms of job opportunities or self-employment.
7. Buy insurance
Apart from investing your tax refund wisely, using it to avoid expenses, and saving it for the future, you can also use it to get adequate insurance cover. The absence of insurance can cost you heavily at the most difficult of times. Health insurance can protect you from hefty medical bills, while vehicle insurance can take care of your car repair bills. Similarly, life insurance can protect your family financially in your absence. All these covers strengthen you and your family financially. If you see any unaddressed risk in your life, using your tax refund to cover it can be a financially prudent move.
Tax refunds present an opportunity for you to further your financial growth. They can be used to increase your future income or avoid a contingent expenditure. Either way, you can ensure that this additional income is used in a meaningful manner. Treating it as a windfall and splurging on luxuries can give you a temporary high, but spending it purposefully will power your financial growth and yield long-lasting benefits. Give yourself the magic of compounding.