Diwali cash gifts and bonuses: Turn festive money into future wealth

New Delhi: The festive season is marked by the exchange of gifts among friends and family. These gifts may be in the form of products, vouchers, cash, among others. Employers may give Diwali bonuses to employees, which might be in the form of hampers, cheques or cash.

While people may choose to spend the money on shopping, it can also be employed for other purposes and goals that may support their financial needs in the future. When planned accordingly, the money one receives from friends, family and employers during Diwali could provide a platform to start a new investment, clear debts or build an emergency fund.

Outstanding debts and emergency funds

A person should build their financial portfolio on a strong foundation, which can be achieved through proper planning. “To create a strong base for investment and contingency funds, it is generally advisable to clear outstanding dues first, while keeping a small emergency buffer for immediate needs. Debt can keep one stuck in a cycle in which money is always short. To avoid this and invest freely without worrying about repayments, a person should begin by paying off credit card dues and personal loans.”

A Diwali gift might be the principal amount one needs to pay off outstanding credit card dues or might suffice to cover the interest on a personal loan taken from a bank.

On the other hand, if there are no dues to clear, this sum may be used to prepare one's finances for an unprecedented situation. Experts often suggest an emergency corpus equal to three to six months of expenses, which should be kept in an easily accessible instrument such as a savings account, liquid funds or a sweep-in FD.

Investments

Those who have already cleared their debts and built an emergency corpus may leverage their Diwali gifts to start their investment journey. There is an abundance of options one may choose from to allocate the funds based on their goals and requirements. Those who prefer stability and predictable returns may choose to put their money in a Fixed Deposit (FD) or a Recurring Deposit (RD), whereas stock market or mutual fund investments may be suitable for people with an appetite for risk. However, it is important to understand that despite the possibility of higher returns, these instruments are market-linked and thus do not guarantee returns. Direct investment in the stock market should be undertaken by someone with experience who knows how to read market movements. An expert must always be consulted before investing the money.

Meanwhile, RDs and FDs are safer choices, with returns determined by the interest rates fixed by banks.

A person does not have to invest the entire sum at once or in a single instrument. The sum can be broken down into portions, which can then be allocated to different investment options. Alternatively, the portions can be used for staggered investments through options such as a Systematic Investment Plan (SIP) in mutual funds.

However, these Diwali gifts may have tax implications depending on their source. For instance, a Diwali bonus received from an employer in the form of cash is fully taxable as salary. Similarly, gifts from non-relatives are taxable if the aggregate amount exceeds Rs 50,000 in a year. Thus, it is crucial to understand the tax liability on the corpus accumulated during the festive season before deciding to put it towards future financial goals.