Tax Refund – Smart Ways to Use your Tax Refund

Usually, none of us likes to receive emails from the Income Tax Department. Because they are often regarding the errors in tax filing, deadline reminders, cash outflows and similar. Having said that, there are also times when you receive an email from the Income Tax Department notifying that you have received a refund against your tax filing.

Getting a tax refund can be both exciting as well as stressful. It requires you to carefully think and decide what to do with the unexpected funds. However, before you decide anything, you must remember that this is not the extra cash that you have received from the department; it is your own money that you had overpaid to the government which department is returning you. Therefore, as a part of personal financial management, you need to assess your options for smartly using your tax refund. You may consider doing your money management by either choosing to save it or invest it or use it to pay off your existing debt. While some choices could improve your financial situation, others might push you backwards. Therefore, it is crucial to do good financial planning to make the most of your tax refund. Here are a few smart ways to use your tax refund.

• Ways to utilise your tax refund to improve your personal finance
• Pay-off existing debt

If you are carrying any debt, including a loan or high credit card bill, you can use your income tax refund amount to pay off your existing liabilities. Your first priority should be paying off high-interest rate debts. This will, in turn, help you improve your credit rating. Besides, it will reduce your financial as well as psychological burden of debt.

Build up an emergency fund

Contingencies strike us when we least expect them. Even though we cannot prepare ourselves mentally but we can at least prepare ourselves financially. Building an emergency fund offers a safety net that protects you from unforeseen situations such as costly medical expenses, loss of a job, etc. Typically, your emergency fund should help you cover living expenses for at least three to six months.

Invest in a retirement plan

Another smart way of doing financial planning and using your refund is to invest in a good retirement plan. You can do this via monthly SIPs and build a huge corpus for the long run. This fund can help you meet your old age expenses.

Fund your goals

With good financial planning, you can fund your financial goals with the help of the tax refund amount. It can be a great source to build up your financial portfolio and help you move closer to your goals. This can be done by investing in equity-oriented mutual funds for long-term goals and debt-oriented mutual funds for short term goals.

Invest in your health

One of the best uses of your tax refund could be to use it towards improving your health. You can use the amount for buying comprehensive annual health check-up or you can invest in a fitness device or take up a gym membership, depending on your interests and abilities.

Buy life insurance policy

If you are the primary bread earner in the family and your parents, spouse and children are dependent on your income then it is worth investing in a good life insurance plan. With the refund amount, you can consider buying a term policy and pay for it while you need it.

Invest in stocks and mutual funds

Your tax refund can be an excellent opportunity to begin investing in stocks and mutual funds. Both the investment avenues have great growth potential and are an ideal investment vehicle for a long-term horizon. However, before you invest in stocks and mutual funds, it is advisable to research well and access your risk tolerance, investment horizon and financial goals before taking any decision.

Start a goal-oriented savings account

It is a good idea to open a savings account with your tax refund keeping a specific goal in mind. It can be buying a new car or home theatre, accumulating funds for your child’s higher education or marriage and similar such expenses. Dedicate the savings account for meeting the expenses related to the goal. Moreover, a dedicated account can help you keep track of your progress towards meeting your goal and prevent you from spending money on unnecessary things.

Donate to charity

You can use your tax refund for a good cause by donating it to charity. It is not only a noble cause but also helps you in your tax planning. You can claim a deduction in your tax return for the amount you donate as a charity. Just remember to save the donation receipts for documentation purposes.

Treat yourself

Once you have covered all the above options, then you may consider spending on your leisure. You may use the refund to sponsor an exotic vacation or buy yourself a smart television or a smartphone you have been waiting to buy. Besides, you may also consider investing in yourself by taking up a skill development course or learning new experiences. Just ensure that you spend keeping your financial planning in the mind.

Conclusion

Tax filing can be daunting, so a refund could make you feel rich and inspire you to spend on unnecessary things. You can counter this by using your tax refund amount in the above-mentioned ways and increase your financial security. You must consider your income tax refund as an opportunity to better plan your personal finance. So, next time you get a tax refund, consider doing money management by using the refund amount to your financial advantage.Disclaimer: "Investment in securities market and Mutual Funds are subject to market risks, read all the related documents carefully before investing."