Splurge on white goods or go for a holiday only after you have utilised some part of the money wisely.
The release of tax refunds has been expedited by the income tax department over the past few years. However, a quicker receipt of the funds does not necessarily translate into better allocation of the funds in the financial plan.
E-filing of income tax returns is one of the chief reasons for this. It has turned out to be a boon for tax payers. It’s not only fast but also convenient. The latest reported statistics indicate that overall, this tax-filing season saw a more than 100 per cent jump for returns filed online as compared to last year. And over 26 per cent returns were filed after regular office hours.
With rising compliance and a stronger information-sharing network, the income tax department, with help from its Centralised Processing Centre, has begun processing refunds at a much faster pace. A lot of tax payers have already started receiving refunds for the returns filed this July.
Unfortunately, tax refunds are mostly never a part of an individual’s financial plan. Moreover, in the past, due to the long delays in realising the refunds, people ignored these. But things have changed now and the tax refund amounts warrant the individual’s attention. A tax refund always brings joy to the tax payer. Using it prudently will make it beneficial too.
PREPAY HOME LOAN
With rising interest rates and equated monthly instalments, most borrowers have now started looking at options to prepay their loans. Most loans allow for prepayment up to 25 per cent of the amount outstanding at the start of the year, without any penalties. In these circumstances, a tax refund would add up to those ‘surprise sources’ of funds that can be used for the prepayment. More so, it is observed that one of the main factors for the refund nowadays is on account of the tax benefit on home loan interest. In such cases, it makes ample sense to utilise this benefit for the purpose of reducing the loan liability.
TOP-UP EMERGENCY FUND
A challenging factor in an individual’s financial planning is setting the right amount aside for an emergency fund. Especially where there have been no precedents for unwarranted situations, the right level could be is merely based on guesswork. Therefore, any unallocated and surplus funds should be prioritised and allocated to one’s emergency fund.
RAISE TRAVEL BUDGET
Any surplus money need not always be diverted for savings / liabilities. Sometimes, it makes sense to spend the bonus money which wasn’t anticipated. On similar lines, if an individual has no debts and has sufficient funds earmarked for emergencies, then it makes sense for the refund money to find its way for some splurging. Although options for using this additional money are aplenty, it is recommended that increasing the budget for your annual holidays is the best bet. The additional allocation would help in easing some pressure on holiday credit card bills which generally arise out of impulsive purchases.
ALLOCATE FOR RETIREMENT CORPUS
Taking a long-term view on the application of these funds, these funds can be diverted towards one’s retirement corpus. The same should be utilised for investments with a longer lock-in, to avoid the tendency to withdraw funds before retirement. It is recommended that refunds be utilised to add to the Public Provident Fund contribution for the year, if the entire allocation is not entirely used up. A word of caution here is that the refund money should not be utilised to take up additional pension policies or other investment options that would require ongoing contributions, even if this is for retirement. The ongoing contributions would add up to the liability in the later years, when one may or may not receive any refunds. So, the lump sum source of funds should be utilised for lump sum investments only. (EFFECTIVE TAX MANAGEMENT INCLUDES:)
CLEAR CREDIT DUES
Another effective way to utilise the refund money is to pay off credit card dues. This is an indirect way of easing the pressure on the household budget for that month. By not utilising current income for paying off the debt, the individual would not only save interest costs on the revolving credit but also have some spare cash for the month.
FULFIL THAT LAST PRIORITY WISH
Limited resources and a long wish list often compel an individual and his planner to prioritise among wishes. Luxuries are accorded the last priority, which hardly get attention by the end of the year. The refund money, if adequate to meet the budget, could be utilised to fulfil that want.
The refund money, thus, can be utilised for any or all of the above, depending on the quantity received. Yet, large refunds should send a warning signal. These also imply that the taxes paid / deducted at source for the individual was higher than required. Here, it makes ample sense to understand two of the most important causes for refunds:
Higher TDS by employer: This signals an incorrect declaration given by the employee. It is possible that some of the deductions, such as life and medical insurance premiums, home loan interest etc were not declared in time or the relevant paperwork was not given to the employer within the prescribed deadline.
Too high advance tax paid: In the case of professionals, this would imply improper forecasting of income and it should be corrected at every instalment date.
It is recommended that the individual sit with his planner to understand the cause for a high refund and try to work on it. A lower refund would definitely leave a higher amount of money in the individual’s hands during the year, which would be far more welcome than waiting for refunds.
The writer is a certified financial planner
