Will the 23,800 rand be tax free and the remaining amount taxed at 40%?

Pa Garrett Collier

August 17, 2022 00:56

I was lucky enough to receive 2 million rupees as an inheritance from a loved one. I am now in my late 40s, own a home and would like to consider early retirement. Finding out as much as possible, I thought of putting the money into Capitec in their 60 month Fixed Deposit Savings Account with an annual nominal return of 9% interest on money invested over R100,000. The interest earned, if my maths is correct, would be R180 000 per year.

My question is how much of that 180,000 rand would I get after tax if the interest earned on that investment was hypothetically my only income? My understanding is that the annual interest tax exemption is R23,800 per year. If I understand what that means correctly, and this is my question, would that mean that out of that 180,000 rand, 23,800 rand is exempt and then I will be taxed at 40% on the remaining 156,200 rand? This will result in annual interest earned after tax of R93,720 + the exempt amount of R23,800 for a total of R117,520.

Dear reader,

Thanks for the question. The first thing to consider is the terms of your fixed deposit as there are two options for earning and distributing interest.

The first problem is that the interest is reinvested as it is earned, thereby increasing the value of your capital and generating cumulative interest income over the period. The problem for you here is that the funds may not be available for the 60 month period and thus will not be able to provide you with the money to live on.

The second option is when the interest earned is distributed during distributions, in which case the interest is paid to you as cash to cover your living expenses.

In both the above options, the interest earned is taxable in the year in which it accrues. You are absolutely correct in terms of the R23,800 a year interest exemption, but note that the balance of the interest earned is added to your taxable income and taxed on the PAYE tables, not at the flat rate of 40%.

Given your assumptions, if you receive interest of R180,000 in a tax year with no other taxable income, the treatment and taxation of that interest will be calculated as follows:

Gross interest income 180,000 rubles
Less: Annual Exemption -23,800 rubles
Net taxable income 156,200 rubles
PAYE tax (R156 200 x 18%) R28 116
Less: Primary discount -16,425 rupees
Net tax payable 11,691 rupees
Your net income will now be:
Gross interest income 180,000 rubles
Less: Net tax payable -R11 691
Net profit after tax R168,309

As can be seen from the above, your annual net income will be R168,309 after applying the annual interest exemption and tax deduction.

Note that if you continue to earn income, the amount of interest that exceeds the annual allowance of R23,800 will be added to your taxable income.

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