Introduction

If you’re one of the many people who has not utilised their tax deductions or were unable to declare their tax-saving investments to their employer, chances are that you might be paying a higher tax deduction at source and are liable to receive your benefits in the form of a tax refund. Since our government has been issuing tax refunds proactively, you would likely be getting your dues back from the government soon, if you haven’t received them already. This article seeks to explain how to reinvest your tax return so that it accrues maximum benefits with minimal risk.

What is a tax refund?

When your tax liabilities are less than your taxes paid while filing your income tax returns (ITR) for a certain financial year, the government makes a provision to return your hard-earned money in the form of an income tax refund. Since you receive a lump sum payment from the government, it is considered wise to invest tax refunds in various novel investment avenues available today.

How to reinvest your tax return?

Following are some of the advisable investment options available today, to help reinvest your tax returns as per your risk appetite. Let us have a look at them:

  1. Equity-based mutual funds

Equity mutual funds are a lucrative investment option available today as their wealth generation is primarily driven by the share market. Equity fund managers try to diversify their portfolio across companies and sectors to mitigate risk.

Equity based mutual funds largely differ on the kind of companies they invest on. Large-cap funds for example, invest in the top 1oo companies on the basis of market capitalisation in the stock market.

Some mutual funds also allow you to flexibly invest across companies that fall under the ambit of a specific theme or sector such as automobile, pharmaceuticals, banking, etc.

Equity based mutual funds are a good choice to invest your tax refunds in as they can potentially offer higher returns but are also equally high in risk and don’t offer tax benefits.

  1. Public Provident Fund (PPF)

Public Provident Fund (PPF) remains a top contender when it comes to parking your tax refunds for a long-term. Backed by the government of India, PPF allows citizens of the country to invest upto Rs.1.5 Lakhs per annum at an appeasing interest rate. At present, the PPF offers an interest rate of 7.10% and is changed by the government every quarter.
One must note that the interest being offered on PPF is higher than many of the wealth generation instruments we see in the banking sector today. Additionally, what makes PPFs a top choice is the fact that the interest earned from PPF is exempt from taxes. This feature has a major impact on the net earnings you generate from the instrument.

However, the only drawback with this scheme is that it requires you to lock in your money with the bank for a period of 15 years which can serve as an issue for people who want to invest in an easily liquefiable instrument.

All in all if you’re looking to invest tax refunds for a long term, the PPF is perhaps the most risk-free and tax-free instrument available in the market.

  1. Fixed Deposits (FD’s)

Fixed deposits are the most conventional avenue to invest tax refunds but are also equally reliable. Since the government provides you with a lump sum amount as a tax refund, opening a fixed deposit of the same and locking it in as per the time frame of your choice seems ideal.

The rate of interest offered on this instrument varies greatly from one banking institution to another but is often at par with that offered by the PPF. The only major drawback is that the interest earned from fixed deposits is taxable as per norms by the government.

Even though fixed deposits are low on additional offerings, they are inarguably the most hassle free and safest way of approaching such kinds of investment.

  1. Debt mutual funds

Debt mutual funds are suitable for people who are looking for investment avenues with minimal risk and constant returns. Debt mutual funds invest in securities such as treasury bills, corporate bonds, commercial papers etc, that generate a set revenue which is not directly affected by the happenings in the global markets. Hence, they offer low but constant returns.

Due to stability of this investment, Debt mutual funds are a good choice for investing your tax refunds

  1. National Pension Scheme (NPS)

National Pension Schemes offered by the central government are open to employees from the public and private sectors to invest for their retirement. Under this scheme, you are required to set aside a corpus of funds and invest it in a pension account at regular intervals. Fund managers invest this money for you and offer high rates of interest. Once you retire, you are liable to withdraw a certain sum of money from this accumulated sum and receive the remaining as monthly pension payments from then on.

At present, the NPS offers interest rates between 9-12% on the amount which makes it one of the most well rewarding government schemes and hence, a top choice to invest tax refund. The only drawback is that your money would be locked in for a long period of time and the benefits could only be availed after you turn 60.

Conclusion 

Tax refunds can be seen as one’s own money which they had given to the government in the form of anticipated taxes. When the government clears it’s dues, the amount that you receive is basically your money which has accrued minimal to no interest all this while. Hence, it is ideal to find an investment strategy for this additional corpus of funds as soon as possible. If you’re confused on how to reinvest your tax return you could choose to diversify your investment across a number of wealth generating investments such as Equity Mutual Funds, Debt Mutual Funds, Public Provident Funds, National Pension Schemes and Fixed Deposits.