You feel excited when you get a lumpsum amount into your account as your income tax (IT) refund for the financial year. After all, who wouldn’t like a sudden and possibly unexpected windfall? But then comes the onus of using it fruitfully and intelligently to make the most of the money. The right choices could lift your financial situation.
However, it would not be wise to consider your IT refund as a bonus or free money. It's the money you have earned during the year but didn't collect in your paycheques. Hence, sensibly utilizing the same will help you to stay financially sound.
“We must be careful about our behavioural bias of mental accounting in which we treat money from different sources with (a) different value. In fact, when people get tax refunds, they generally are waiting to splurge it off because, in their minds, they have already written off that money as tax paid. We should hold that urge and look at it more objectively. Would you still have splurged that additional money had you calculated the tax amount correctly and paid the exact amount? In such a scenario, you would have that money still lying in your account. If you would still have spent it, maybe you needed that stuff badly, and hence, it would be a justified purchase,” says Chenthil Iyer, founder and chief strategist, Horus Financial Consultants, a financial planning and wealth management company.
Here are six ways to make the most of your IT refund:
Refill Your Contingency Fund: “In case you had to use a portion of your contingency fund to meet certain emergencies, you could utilize the income tax refund money to refill your contingency fund,” says Arijit Sen, a Sebi-registered investment advisor and co-founder of Merry Mind, a Kolkata-based financial advisory firm. You would need your contingency fund in case of any financial trouble, like losing a job or a sudden medical emergency. On rainy days too, you could make use of your contingency fund to pay your EMIs (equated monthly instalments) and your insurance premiums.
Pre-Pay Your Outstanding Credit Card Bills/Personal Loans: As you receive the income tax refund, you can pre-pay your outstanding credit card bills, or you may choose to foreclose or partially pay towards your personal loan, for which you have been paying huge interest to the lender.
Partially Pre-Pay Your Home Loan: If you have a home loan, you can use the income tax refund to partially pay your home loan, which will help reduce the principal component.
Funding Your Short-Term Commitment: You can fruitfully utilize your income tax refund to support your near-term financial commitment.
Increase Equity Exposure: Alternatively, you may buy shares of a good company with the tax refund money for keeping till eternity. “Every year, if you do this, some or the other such stock might turn into a multi-bagger and create long-term wealth for you. Do not consider it a part of your investment portfolio to fulfil any future goals per se,” adds Iyer. You may also start investing in a debt fund and slowly move it to an equity fund. You could use this money for big purchases, like paying a down payment or reducing your loan burden.
Get Yourself Insured: If you haven’t already, you could get yourself a life or health insurance policy. You could opt for a single premium term plan. With this, you could make a one-time payment, and it will take care of your life insurance until you are 60. For health insurance cover, you could go for a family floater health plan for all your family members.
Donate To Charity: Last but not least, if you wish to, you could donate some of your money to an NGO (non-governmental organization) or a charity for a good cause. While this could surely lift your spirit and bring in blessing, this would also help you to save tax under Section 80G of the Income Tax Act.
