7 Smart Ways To Use Your Tax Refund
Oct 26, 2017

Author: PersonalFN Content & Research Team

Mr Shah has been with the diamond jewellery manufacturing industry for more than 3 decades. And he is among the highest tax paying citizens. With November almost here, he anticipates a huge chunk of tax refund. He is planning a 10-day family vacation to South Africa in December. He is relying on the tax refunds to finance for this trip.

Many like Mr Shah equate the refunds as a windfall income. But the fact is, this is your own hard-earned money in the Government’s kitty. This is something you had probably forgotten about and/or stopped counting on. Most people can get overwhelmed by such unexpected flow of money. And spend their fortune recklessly on expensive trips, luxury cars, or other extravagant things.

Here are some of the smart ways to use your tax refund:

Reduce (or eliminate) your debt

The first thing you could do with your refund money is to repay any kind of debt partly or fully. Any financial obligations such as credit card dues, personal loans , business loans, etc. should be repaid; especially the ones that have higher interest rates. This will not only lead you to save on a lot of interest payments, but also improve your credit rating. It is imperative to have a good credit score when you need to obtain loans in the future.
Boost your contingency reserves

Being optimistic is a good thing, but you would agree that nothing in this world is permanent or guaranteed. Hence, while you endeavour for the best, also plan for the worst. Have a contingency or an emergency fund in place, it is important. Ideally, this fund should be at least 6 – 12 months of your regular monthly expenses, including EMIs which should be parked in a separate saving bank account and/or liquid funds. And if you are very conservative, 24 months of regular monthly expenses, including EMIs can be maintained in a separate savings account and/or liquid funds. A contingency reserve will help you withstand exigencies viz. loss of job, medical emergency, natural calamity, economic slowdown, etc. which impair your ability to earn for a sometime. Hence, make it a point to add the tax refund to your contingency reserve.
Boost your important financial goals

While you may have envisioned financial goals such as buying a dream home, car, providing the best education to your children, getting them married in pomp and style, going on holiday to an exotic location, and even your retirement; reviewing the financial plan to achieve such goals is important when you receive a tax refund. Prioritize financial goals to see how best you address to them best.

You see, although you might be tempted to use this money for a lot of leisure activities or to improve your standard of living, contributing an adequate amount each month to fulfil the more pressing objectives such as saving for your retirement or building your daughter's education corpus, is more important considering the weight of such life goals.
Meet your insurance needs

Life in other words means uncertainty. With the increasing stress due to our lifestyles, a lot of us are prone to physical ailments and mental disorders. Thus, it is extremely important to have an adequate life insurance and health insurance cover.

In case you are under-insured, use a portion of the tax refund to increase your insurance cover. According to the 'Income Rule', one should have a sum assured of 8 to 10 times of one's annual income. Alternatively, you can also evaluate your life insurance needs based on Human Life Value—expense method, which is a scientific approach.

Remember, when indemnifying risk to your life, the objective is ‘insurance’. Hence, be careful about the policy you buy. Buy only a pure term insurance plan for the cost-to-benefit it offers, and keep your insurance and investment needs separate.

From a health insurance perspective, purchase a policy with a minimum cover of Rs 5 lakh and covering all your family members.
Invest the funds wisely

Inflation erodes your income every single day. So, it is imperative for you to invest your new-found wealth in productive investment avenues such as mutual funds, taking care of the asset allocation that’s best suited for you to achieve the envisioned financial goals. Refrain from getting caught-up in the hype, exuberance, or what your friends and family have to say. It is important for you to recognise your risk appetite, investment objectives, financial circumstances, goals, investment horizon… and then accordingly invest.Even though your risk appetite would have increased due to the tax income, it is necessary to adopt caution while investing. Mutual funds are a promising avenue to invest in equities if you aren’t well-versed with investing in stocks directly. The top-6 benefits of investing in mutual funds are:

1. Diversification;
2. Professional management
3. Lower entry level (you can start with as little as Rs 500)
4. Economies of scale
5. Innovative plans/services for investors (SIP/STP/SWP)
6. Liquidity

Mutual funds are an effective medium of wealth creation, but selecting winning mutual funds is critical. Moreover, pick mutual fund schemes congruent to your needs.

If you are looking at best equity mutual fund schemes to start SIP-ping into mutual funds, consider PersonalFN’s exclusive report —The Super Investment Portfolio. With over decades of experience, PersonalFN has put together a research report on potentially the best mutual fund SIPs for your long-term portfolio. Under this, detailed analysis is done on how SIPs in the top shortlisted mutual fund schemes have performed, across multiple market conditions and time frames. Only those funds that successfully pass this evaluation are chosen. Here are 5 benefits of SIPs:

1. SIPs are lighter on the wallet;
2. Professional management;
3. Enable rupee-cost averaging;
4. Offer the benefit of power of compounding ; and
5. SIPs are an effective medium of goal planning

SIPs in mutual funds can make your dreams come true. Meaning, they can help you achieve the envisioned financial goals. And if you start early, a sizable corpus can be built.
Invest in home improvement

You may even use these funds to finance your home improvements. Maybe you have been delaying refurbishing your kitchen for the longest time. Take charge and utilise the tax refund for home improvements. After all, home is where our heart is, we have emotions, it is a long-term investment and thus maintaining it well is important.
Invest on yourself

With so much happening in life, many a times we tend to forget our own self-development. Utilise your tax refund to learn a new skill which could be relevant to your job or an area of personal interest, such as photoshop, advance use of excel, cooking, baking, photography, music, etc. Basically, anything you’ve been putting off for the longest time. Learn new things that you are passionate about and upgrade yourself. This will boost your confidence. Eventually, this will help you grow in your professional or personal life.

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PersonalFN is of the view that a tax refund is your own hard-earned money. Use it with care, thoughtfully! Do not spend it recklessly on unnecessary things. You may have some personal wishes and it is not wrong to spend some portion of money on yourself. Just ensure you do not splurge it all. Balance out how you spend and invest your money.