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What To Do with Income Tax Refund? Research Team | Posted On Thursday, February 06,2020, 12:40 PM

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What To Do with Income Tax Refund?



Just got that big income tax refund? Now the big question. What to do with this income tax refund? Should you splurge all this money? Go on a trip abroad? Buy a swanky mobile? Well, there are a lot of things to do with the income tax refund. But, what’s the wise method of spending it?

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What to Do with Income Tax Refund?

Clear Up all Debts:

Well, the first thing to do with the income tax refund is to clear all debt. Get rid of that car and personal loan. Finish off credit card debt.

Now, personal loans charge interest of 14-22% a year. Credit cards charge interest of 2-3% a month. Isn’t it great if you can get rid of all this debt?

Clear costly loans like credit card debt, personal and car loans. The ones with higher interest rates and no tax benefits go first. Then it’s the home and education loans. Look at pre-payment charges before repaying loans.

See Also: Have You Got the Income Tax Refund?

Invest in NPS:

New Pension System or NPS enjoys an additional tax deduction under Section 80CCD(1b) up to Rs 50,000 a year. This is over and above the Section 80C tax deduction of Rs 1.5 Lakhs a year. NPS is a great tax investment only if you stick to the old tax regime.

Before investing in NPS take a look at this. Investors must compulsorily buy an annuity plan with 40% of the corpus at retirement. (This is the age of 60 years). Out of the remaining 60% of NPS amounts withdrawn at maturity, 40% is tax free. The remaining 20% is taxed. Annuity payout is taxed.

Make Sure to Increase Equity Exposure

Should you keep the income tax refund idle in the bank account? A very bad idea. Why not invest in equity?

You may consider ELSS or equity linked savings scheme which is a tax-saving scheme with 90-95% exposure to stocks.  It also has a 3-year lock-in period. ELSS can give returns as high as 15-17% a year. So, ELSS is an excellent way of availing equity exposure with tax benefits.

With most investments giving sub-par returns, equity is an inflation-beater. Equity diversified mutual funds help achieve long-term financial goals.

See Also: Steps to File Income Tax Returns

Get Life and Health Insurance

You can’t leave your family without protection. This is why you need a term life insurance plan. This is pure risk protection for your family. In term life plan you pay a premium for a sum assured.

On death of policyholder within the term of the plan, the family/nominees get the death benefit/sum assured. There are no survival benefits.

Take a family floater health insurance plan which covers the entire family. This protects you from emergency hospitalization.

See Also: How To File Income Tax Returns?

Build an Emergency Fund

Yes, the income tax refund can be used to build an emergency fund. This is 3-6 months of living expenses; depending on whether you are married or unmarried.

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The emergency fund helps to meet sudden expenses like a family financial emergency. An emergency fund must never be used for daily expenses.

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