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How to use Tax refunds smartly?

Aug 26, 2019
5 mins | Views 27142

Usually no one enjoys receiving any mails from the Income Tax Department. Because often they are about deadlines, cash outflows, errors in tax filing, etc. Proper income tax planning can help you keep these problems at bay. But at times there is a mail that informs you that a tax refund will be paid to you. Such good news is enough to trigger dreams about extensive retail therapy or fancy meals. But before you execute those dreams, you should remember that this is not additional money. It is in fact your hard-earned money that you had over-paid to the government.

If you want to know how you can use this money smartly, read on…

  • Pay-off existing liabilities

    Debt is like an albatross around one’s neck. Now that you have some surplus cash in hand, you can use it to repay your existing loans or credit card bills. Focus more on the high-interest debt. This move will also improve your credit rating.

    However, before you try to foreclose any loan, do check if there are any charges or penalties associated with pre-closure. Else, it will be a double whammy.

  • Save for a rainy day

    Contingencies can strike us when we are least expecting it. Though there is not much we can do to prepare ourselves mentally for that, we can at least secure ourselves financially. Build an emergency fund with your tax refund money. Ideally, this kitty should help you cover living expenses for at least 3 to 6 months.

  • Fund your goals

    The tax refund money is something that you had anyway written off. So, why not invest the amount in mutual funds to help you achieve your financial goals? It could be a great way to pad up your mutual fund investment portfolio and help you move closer to your goals. You may invest in equity funds for your long-term goals and debt oriented mutual funds for your short-term goals. Investing in tax saving mutual fund i.e. Equity Linked Savings Scheme (ELSS) funds provides the dual benefits of tax planning by reducing your taxable income and helping you fulfil your long term financial goals.

  • Sharpen your skills

    One can also choose to invest the income tax refund money in taking up an educational course or learning some new skills. It can also help you in improving your career prospects. If learning a foreign language has been your consistent new year's resolution (and still not materialized), maybe this is God’s way of sponsoring the course.

  • Grow your business

    If you are a self-employed professional, you can use this tax refund to grow your business. You can invest in some tech upgrade or a marketing campaign. In case you are toying with the idea of starting something of our own, you can use the tax refund as the seed money.

  • Health is Wealth

    If a comprehensive annual health check-up is not already in your check-list, then you can use your income tax refund money for the same. You can also take up a gym membership or invest in a fitness device.

  • Donate

    While you might have wanted to donate to a charity/ relief fund for long, your monthly budgets may not have made it happen. Your refund from income tax department can be your saviour in this noble cause. Not only will it bring a smile to someone else’s face (and yours) it may also help you get income tax deductions as per Section 80G.

  • Treat Yourself

    Last but not the least, do not forget to treat yourself. Remember the saying, all work and no play makes Jack a dull boy. So, spend a portion of your tax refund in pampering yourself. Reward yourself and have some fun.

Final Word

Irrespective of the amount of tax refund you get, make sure to use it wisely. Do not throw it all away just for some instant gratification.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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