July is when most salaried individuals file their Income Tax Returns (ITRs). The last date for filing ITR for individuals who don’t need an audit is 31st July 2026. Self-employed individuals usually receive their payments after a TDS of 10% has been deducted. At the time of filing ITR, they can claim any excess TDS, after adjusting for any tax payable, as a refund. Over the years, the Income Tax Department has upgraded its systems to enable faster processing of ITRs and issue of refunds. Have you already received your income tax refund? If yes, or are awaiting it, this article will show you how to make the most of the income tax refund.
Making the most of the income tax refund for financial planning
Some individuals treat the income tax refund as a bonus. They usually splurge it on the latest gadget/consumer durable, or plan a vacation or spend it somewhere else. These individuals need to understand that the income tax refund is their own hard-earned money being returned to them, and that they must use it judiciously.
Spending the income tax refund of the above-mentioned things can give instant gratification. But when used judiciously, it can help you in your financial planning journey and in achieving your financial goals faster. You can choose the middle path by using a smaller portion of the income tax refund to purchase an item from your wish list and a larger portion for improving your personal finances.
You can use the income tax refund to improve your personal finances in the following ways.
1. Repay high-cost debt
Do you have any high-cost debt, such as credit card outstanding or personal loan(s)? If yes, use the income tax refund to repay it. Credit cards usually charge an interest rate of 3.0% to 3.5% per month on the outstanding balance carried forward. It translates into an interest rate of 36% to 42% per annum, making credit cards one of the most expensive forms of credit.
If someone has credit card dues as well as a personal loan, the income tax refund may be used to clear the credit card dues first, and the remaining amount, if any, may be used for personal loan prepayment. Repayment of high-cost debt helps free up cash flow that can then be used for investing towards financial goals.
2. Build or boost your existing emergency fund
If you don’t have any credit card outstanding or a personal loan, you can use the income tax refund for your emergency fund. An emergency fund comes in handy during events like hospitalisation or other medical emergencies, job loss, salary delays, salary cuts, etc. An emergency fund must have sufficient balance for 3 to 6 months of expenses.
If you still don’t have an emergency fund, you can use the income tax refund to build and maintain an emergency fund. If you already have an emergency fund, check whether the amount is adequate. If not, use the income tax refund to boost your emergency fund. The emergency fund amount may be maintained in a savings account or a liquid mutual fund.
3. Home loan prepayment
For most individuals, a home loan is a long-term commitment of 15 to 20 years or even longer. A significant part of the monthly income goes towards paying the home loan EMI. Many individuals desire to repay their home loan earlier than scheduled.
In such cases, lump sum amounts, such as an income tax refund, annual bonus, quarterly/annual variable pay, or others, can be used to make a partial prepayment on the home loan. When you make a partial prepayment using the income tax refund, you can ask the bank to either reduce the EMI or the loan tenure.
If the EMI forms a significant part of your monthly income, you may ask the bank to reduce the EMI. It will free up some cash flow that can be directed towards other purposes. If you are comfortable with the EMI, you ask the bank to keep the EMI constant and reduce the loan tenure. It will help you repay the loan earlier than scheduled.
4.Invest towards financial goals
If you don’t have a home loan, you can use the income tax refund to make additional contributions towards your financial goals. These can include building a fund for a child’s higher education or their own retirement. When investing in equity mutual funds towards long-term goals, you should take the SIP route. So, you can park the income tax refund lump sum amount in a debt fund, such as a money market fund or a liquid fund. From there, you can do a systematic transfer plan (STP) to transfer small monthly amounts in the equity fund that you are using for building a corpus for your child’s higher education or own retirement.
Deploying the income tax refund amount towards financial goals can help you achieve them faster than scheduled. When building a retirement fund, contributing lump sum amounts, such as an income tax refund, along with regular SIPs, will help you accumulate a bigger retirement fund than planned.
Some people contribute a lump sum amount each year to the National Pension Scheme (NPS) or the Public Provident Fund (PPF). So, the income tax refund amount can also be deployed towards this purpose. It will help you make your annual investment into these financial products and contribute towards achieving your financial goals.
Your income tax refund can accelerate your financial planning journey
Some people get excited on receiving their much-awaited income tax refund. There is an urge to use it to upgrade the mobile or tablet for instant gratification. However, instead of splurging it on a lifestyle expense, use it towards improving your personal finances. If you use the income tax refund and other lump sum cash flows towards this, it can accelerate your financial planning journey and help you achieve your financial goals earlier than expected.
