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Maximising your returns The benefits of investing your tax refunds in savings bonds

09 Feb 2024

Introduction:

Most taxpayers eagerly await income tax refunds each year. It is the return of the excess taxes by the government that were withheld from your paychecks throughout the year. While receiving a lump sum can be exciting, you must use your income tax refund judiciously to maximise your benefits. And one of the best ways to use your income tax refund is by buying savings bonds.

In this blog, you will explore what income tax refunds are and the advantages of using them to buy savings bonds. Keep reading.

What are income tax refunds?

An income tax refund is a repayment of the excess income tax you’ve paid to the government during the financial year. It typically happens when the amount withheld from your paychecks or paid through estimated taxes exceeds the amount of tax you owe. The government returns the excess amount to you as a refund.

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As per the Income Tax Act of 1961, a TDS (tax deducted at source) is deducted from certain payments and submitted to the Government of India. It acts as the payment of advance income tax to the government. However, if the TDS exceeds your actual tax liability, you can claim a refund from the government while filing your income tax returns (ITR).

Why buy savings bonds using your income tax refunds?

Different individuals prefer to use their income tax refunds in different ways. For example, some people can use them to plan their next vacation, some can buy their favourite gadgets, while others can invest them to build a corpus for their future. Buying savings bonds is one of the smartest ways to use your income tax refunds.

The government issues these bonds and come with fixed tenures of up to seven years. Another feature of savings bonds is that they come with pre-determined lock-in periods, depending on the buyer’s age.

Below are a few advantages of investing your income tax refunds in savings bonds:

  • Build a long-term corpus

Savings bonds are one of the most useful investment instruments to help you build a corpus for your long-term financial goals. They come with fixed tenures and lock-in periods, facilitating disciplined investments for substantial tenures.

For example, you can invest in savings bonds to build a corpus for your retirement, child’s education, etc. There can be no better way to use your income tax refund than this.

  • Stability and security

Savings bonds are known for their stability and security, making them an attractive option for risk-averse investors. As the government issues these bonds, they are considered one of the safest investment instruments available in the financial markets.

Unlike other investment avenues subject to market volatility, the Reserve Bank of India’s (RBI’s) treasury guarantees the principal amount invested in savings bonds.

  • Guaranteed returns

Another advantage of investing in savings bonds is that you will get guaranteed returns on your investment. When you invest in savings bonds, you earn interest at a fixed rate. Although the interest rates on savings bonds may be lower compared to some riskier investments, the predictability and stability of these returns can ensure peace of mind.

The Reserve Bank of India revises the savings bonds interest rate periodically. The current interest rate stands at 8.05% per annum, which applies to savings bonds purchased on or after 30 June 2023.

  • Multiple interest payout options

Savings bonds offer you the flexibility to receive interest payouts in multiple ways. The two interest payout options are cumulative payouts and non-cumulative payouts. In the cumulative payout option, the interest is paid at maturity. For example, buying a savings bond worth Rs. 1,000 will receive Rs. 1,703 at maturity. The interest will be paid to the investor every six months in the non-cumulative payout option.

To conclude

Investing in savings bonds can effectively make the most out of your income tax refund. While the ultimate returns may not be as high as from riskier investment instruments, they offer peace of mind and allow you to create a corpus for your long-term financial goals.

With Motilal Oswal, you can consider investing in diversified instruments, including bonds, equities, mutual funds, and more. We offer a solid platform to help you prosper in your journey towards financial freedom.

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