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How to Utilize Your Tax Refund Wisely

Did you just get your income tax refund and wondering whether to save it, invest it, or splurge it? It would be wise to make the optimum use of it for your future benefit.

Receiving a nice chunk of change as your income tax refund can really light up your day. I mean, who wouldn't be thrilled by a surprise influx of money into their account, right? But then comes the important part: how to smartly use that money to make the most of it. Making savvy choices can seriously boost your financial situation.

However, it's not the best move to treat your tax refund as some kind of bonus or freebie. In reality, that's your hard-earned money from throughout the year that didn't end up in your paychecks. So, using it wisely can actually help you keep your finances on track.

We've got to watch out for this thing called mental accounting, where we tend to see money from different sources as having different values. When folks get their tax refunds, they often can't wait to splurge, thinking it's money they'd already mentally set aside for taxes. But it's better to resist that urge and take a more level-headed look. Ask yourself, if you'd calculated your taxes perfectly and paid exactly the right amount, would you still have spent that extra money? If the answer's yes, then maybe it was a justifiable buy that you really needed.

Shubham Jain, who co-founded Sawingz, a company that helps with financial planning and wealth management, puts it this way: "We have to be careful about our tendency to mentally separate money from different sources and treat it differently. Many times, people want to spend their tax refunds because they've mentally marked that money as already belonging to taxes. We should try to resist that feeling and think more objectively. Imagine if you would have spent that extra money if your tax calculations were right and you paid the exact amount. If you still would have spent it, then maybe it was something important you needed to buy."

Here are six ways to make the most of your IT refund:

Refill Your Contingency Fund: In case you had to use a portion of your contingency fund to meet certain emergencies, you could utilize the income tax refund money to refill your contingency fund. You would need your contingency fund in case of any financial trouble, like losing a job or a sudden medical emergency. On rainy days too, you could make use of your contingency fund to pay your EMIs (equated monthly instalments) and your insurance premiums.

Pre-Pay Your Outstanding Credit Card Bills/Personal Loans: As you receive the income tax refund, you can pre-pay your outstanding credit card bills, or you may choose to foreclose or partially pay towards your personal loan, for which you have been paying huge interest to the lender.

Partially Pre-Pay Your Home Loan: If you have a home loan, you can use the income tax refund to partially pay your home loan, which will help reduce the principal component.

Funding Your Short-Term Commitment: You can fruitfully utilize your income tax refund to support your near-term financial commitment.

Increase Equity Exposure: Alternatively, you may buy shares of a good company with the tax refund money for keeping till eternity. “Every year, if you do this, some or the other such stock might turn into a multi-bagger and create long-term wealth for you. Do not consider it a part of your investment portfolio to fulfil any future goals per se,” adds Iyer. You may also start investing in a debt fund and slowly move it to an equity fund. You could use this money for big purchases, like paying a down payment or reducing your loan burden.

Get Yourself Insured: If you haven’t already, you could get yourself a life or health insurance policy. You could opt for a single premium term plan. With this, you could make a one-time payment, and it will take care of your life insurance until you are 60. For health insurance cover, you could go for a family floater health plan for all your family members.

Donate To Charity: Last but not least, if you wish to, you could donate some of your money to an NGO (non-governmental organization) or a charity for a good cause. While this could surely lift your spirit and bring in blessing, this would also help you to save tax under Section 80G of the Income Tax Act.

Click on the button below to schedule a free wealth management call with CA experts from Sawingz.

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