Expert tips for maximizing your tax refund so that you can do the best thing to do for your portfolio in India.

📚 Table of Contents

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• What is an income tax refund?
• What are the basic checks when you get a windfall?
• What you should not do right now?
• Do you have a financial plan already?
• How to adjust your financial plan with this extra money?

What is an income tax refund?

An income tax refund is issued once you file your yearly income tax refund and you have somehow paid extra tax. The return that you have filed is scrutinised, approved and then either a demand is produced, if tax is due or a refund is issued if you have paid excess tax.

There are many reasons why a refund might be due. A few examples are:

• Making mistakes while filing like not splitting out HRA from total salary
• Excess tax deducted due to not filing Form 15G/H on time for interest or dividends
• When your company did not consider all the proofs you submitted for 80C and HRA deductions

etc.

What are the basic checks when you get a windfall?

Whenever you get some extra money, a few basic health checks should be made regarding your financial life:

• An emergency fund with 6-12 months of expenses
• A term insurance policy (unless you are retired with no income)
• A health insurance policy (separate from the company-provided one, if any) for 10-15 lakhs as a base policy with a 50-100 lakhs super-top up
• A personal accident insurance coverage to safeguard against accidents where you do not die but cannot earn
• No high-interest debt like credit card or personal loans

If any of these are incomplete, please complete them before moving on to the next step. Consider if there is some small expense that you want to make, as a white goods purchase or a vacation, then allocate that money now. You will be investing the remainder as per goals in the same asset allocation as specified in your goal-based investing plan.

What you should not do right now?

Suddenly having a bit extra money makes it easier to spend it. We are not against spending an extra ₹50,000 for a new phone, trip or white goods. However, just because you have some money now does not mean that you get swayed by your bank relationship manager or insurance agent to buy an ULIP, pension, endowment plan or something similar. You can read more on this point here: The agency problem in personal finance. What should you do?.

Do you have a financial plan already?

We insist that all investors should invest after creating a financial plan. Without a financial plan there are a lot of avoidable mistakes that tend to get made: 12 mistakes that interrupt compounding: what to do instead.

If you don't have a financial plan as of now, you can follow these case studies to create your own: Show/Hide

How to adjust your financial plan with this extra money?

Since your bank account now has more money, you can add this to your cash bucket and then use the Arthgyaan Have-vs-Need framework to reallocate this extra money into your other goals: How to invest a lump sum amount for your goals?.