How to invest your Income tax refund?

  • October 4, 2021
  • 3 minutes read

Filing Income Tax Returns (ITR) is a task that consumes time in terms of finding the Section of the Income Tax Act, 1961 to get your deductibles/etc. But once you do the work and file your ITR, it is worth the time and energy. The groundwork you do will pay off in the years to come, as you’ll learn more about investments and how to diligently manage your finances. 

After you file your ITR and receive the refund, instead of splurging your hard-earned money on purchases, consider making some smart investments. Well, now comes the question as to where you can invest, and how much to invest. We’ve got you covered.  

Here are the best ways you can invest your income tax refund: 

Pay off your dues 

When you receive your income tax refund, the first thing to do is to get rid of any debt you may currently have running. Borrowing when necessary is okay, but repaying in full and on time is essential to maintain good financial health (and to increase your CIBIL score). Once the burden of debt is reduced, you can save money to create funds for the future. Also, you will save on any penalty charges if your top priority is to eliminate debt. 

If you have a credit card bill due for payment, make it a point to pay off not just the minimum amount, but pay as much as you can. Since credit card debts have higher interest rates (than other general debt), clearing these off first will ensure that you do not pay more as ‘interest’ than absolutely necessary. If you have any other debt (like a ‘home’ or ‘personal’ loan), and you’ve received a decent income tax refund, you can foreclose your loan by paying more than your standard EMI for that month.  

Foreclosure or pre-payment is an option provided by financial institutions to borrowers. It involves paying off a larger amount than the standard EMI due, and reducing the overall loan amount due. The loan can be entirely foreclosed, or partially paid off well before the end of the loan tenure. So, when you have a large sum of money in hand, you can utilize it to foreclose your loan in part or in full. This also means that you effectively reduce the overall amount you’ll pay as interest (as the loan will be closed sooner than expected). 

Have a savings account  

If you already have a salary account with a bank, don’t use it as your savings account. Open another savings account (preferably in another bank) to save up for emergencies. Banks offer competitive interest rates on savings accounts to attract customers to save with them. Not all savings accounts are the same, some have built-in deposit features and some offer higher interest rates than others. While it is true that keeping all your wealth in the same bank account is the best way to earn the highest interest, using different banks is a great way to explore different financial products and enjoy bank-specific benefits. Also, since the purpose of you opening the savings account is not to use it regularly but to save it for emergency expenses, you can go ahead and cut up that debit card! 

Invest in Fixed Deposit (FD) 

If you do not have any debts to pay off and already have an emergency fund towards which you contribute every month, the next best thing to do is to invest in a fixed deposit. Open a FD account with a bank that offers the highest interest rate. Since the terms to operate an FD account are pretty much the same in all the banks, only the customer service aspect would vary. You can pick a bank that has both – high interest rates on FD and good customer service. New FD products allow for withdrawals before the FD term is completed. 

Invest in mutual funds or other investment plans 

Once you have carried out the above mentioned three ways to invest your income tax refund, you could consider investing in mutual funds. You can also explore other investment plans. This will ensure that your money is invested where you are likely to make profit. 

Utilize the above-mentioned ways to invest your income tax refund and see your money grow. Feel free to ask any questions you have in the comments below.  

Written by: Marketing Fincity

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