Introduction

In India, filing Income Tax Returns (ITR) is mandatory. If you delay the filing, you may have to pay a penalty. You can also claim an income tax refund only after you file the ITR. The income tax department initiates an income tax refund when the taxes an Assessee pays are higher than the taxes due.

Once received, you can use your income tax refund in many ways. Some taxpayers use the money to fulfil daily expenses, clear off bills, pay down debt or increase their emergency fund. Others invest the refund to earn more returns in the future.

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If you’ve received your refund recently and are considering how you should use it to your advantage, here are five smart ways to use your money.

• Pay off your debt

While it’s tempting to book a vacation, you should use your refund to tackle a debt. Managing debt, especially high-interest debt, must be a priority. Start with your credit card debt, as it has high interest rates. If that has been taken care of, move to the other types of debt like car or student loans. Eliminating high-interest debts will save you the most money in the long run.

• Build your emergency fund

An emergency fund prepares you for the worst. It is money set aside as a financial safety net for unexpected events or mishaps.

If you haven’t prepared yourself for expenses of misfortunes or other emergencies, you must hold on to your tax refund.

Financial experts suggest that you must have around six months of emergency cash. However, this is a suggested period. The size of your emergency fund will depend on your financial situation. You must create an emergency fund after you have reduced or cleared off your high-interest debts.

• Fund your retirement

If there are no high-interest debts or other pressing needs, you can invest your tax refund in retirement plans. This is a great move for your long-term finances. You can convert a modest tax refund into a significant retirement income by investing returns in a tax-advantaged retirement account for many years.

The National Pension Scheme (NPS), Fixed Deposit (FD), 401(k) contributions, or any other pension plan are good options to benefit from compound interest. These investment instruments help you save money and plan a sizeable retirement fund.

• Increase your down payment or prepay your mortgage

If you’re saving money to buy a home, you can add the tax refund to your savings and increase your down payment. A higher down payment helps you avoid costly private mortgage insurance payments and reduces the overall mortgage amount.

Additionally, if you already have a home loan, you can use the tax refund to make extra payments on the principal loan amount. Consequently, you can cut down on the interest rates and save money.

Another way you can use the tax refund on your home is by starting the much-awaited home-improvement project. You can upgrade the interiors, replace the leaky pipes, or add new light fixtures and appliances. Making your home more functional helps to increase its resale value.

• Invest in the stock market

Investing your tax refund in the stock market can give you returns in the long run. Stocks may be more volatile than other types of securities in short intervals, but you can earn higher returns on long-term investments. Many new investors create a plan based on their investing goals with the assistance of financial advisors.

You can invest your tax refund in individual stocks, mutual funds, or Exchange-Traded Funds (ETF) through online or traditional investment brokers. Make sure you select individual stocks or index funds that follow the market trends and keep your risk low.

Conclusion

There are many ways to use your income tax refund. The choice is yours. Some taxpayers like to spend the money on the expenses of a vacation or buying an expensive gadget, while others want to put it to good use. You can use your tax refund to invest in stocks or retirement funds or buy life insurance to generate returns. Alternatively, you can use it to create your emergency fund, renovate your home, start a business, or pay for your child’s higher education.

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