Got your tax refund: Here's how you can invest it to make money

Pranati Deva
Updated: 14 Dec 2021, 05:13 PM IST
TL;DR.

From mutual funds to PPF, let’s look at 5 popular ways to reinvest your income tax returns.

From mutual funds to PPF, let’s look at 5 popular ways to reinvest your income tax returns.

From mutual funds to PPF, let’s look at 5 popular ways to reinvest your income tax returns.

Getting a lump sum as your income tax return can be exciting. There are a number of ways you can use that return. You can either splurge or save or even invest and make money from it.

Let's first understand why you get that tax return. When your tax liabilities are less than what you have paid for taxes in a financial year the government returns the excess amount as a lump sum. Now that you have received a lump sum amount, there are many avenues you can consider for investing depending on your goal and risk appetite.

Let's look at 5 most popular options to help you re-invest your tax returns:

Equity and debt mutual funds: Mutual funds are one of the most profitable investment options available to investors. There are a number of options available in mutual funds. You can take a little risk and invest in equity funds like smallcap, midcap, etc, or be risk-averse to look for index funds or debt funds. For a well-balanced portfolio, you can also check out hybrid or balanced funds. It is generally preferred to invest in mutual funds for the long term since tax implications are lesser. There are also certain equity funds known for their tax benefits called ELSS. You can also invest in those if you want to further save tax.

Gold: This is another very safe as well as popular investment option available to investors. Even though it does not provide a lot of tax benefits, investment in gold is safer than equity or bonds. It is not affected by the volatility of the markets and especially when that happens, people start moving their assets more towards the yellow metal. There are different forms of gold you can invest in from physical gold like bars, coins and jewelry to digital gold in the forms of gold bonds and gold ETFs.

NPS: National pension scheme is another profitable form of investment if you want to save more cash. Under the new Section 80CCD (1B), an investment of up to 50,000 in a financial year is eligible for an additional tax deduction. This is over the 1.5 lakh investment limit in Section 80C. NPS generally offers interest rates between 9-12 percent making it more lucrative than FDs. Investing the extra money in NPS can give you a decent windfall during retirement. The only drawback is that you cannot withdraw the money before turning 60 since the main aim of this scheme is retirement savings.

Article1
How to save tax via investments

PPF: This is another popular and safe investment tool. It has a government-guaranteed interest rate and returns which means you can never be at a loss. This also has a tax benefit for an investment up to 1.5 lakh per year under Section 80C. However, PPF does have some drawbacks. While like NPS, you do not have to wait till retirement to withdraw your money, there is still a lock-in period of 15 years. However, after 7 years, you can withdraw a portion of the amount for emergencies. You can also take a loan against your PPF account if required. Currently, the rate of PPF is not very high but it is still higher compared to RDs and FDs.

Direct Equity: This is one of the riskier options but can be equally rewarding. If you have some basic knowledge of stock markets and a Demat account, you can directly invest the lump sum in one or more stocks. However, before making that investment, you should definitely do basic research on the company's fundamentals, domestic and global trends, etc. It is usually preferred by investors who have a higher risk appetite and understanding of equity markets. You can choose between large-cap, midcap, or smallcap stocks, or on the basis of ongoing trends, etc.

When you get that lump sum, in the form of a tax refund, it is ideal to choose the best-suited investment option for you instead of parking it in the bank with minimal interest rate or splurging it. These are a few ways you can choose to invest in the corpus in order to get robust returns in the future.

First Published: 14 Dec 2021, 05:13 PM IST
  • HT School
    HT School