Will R23 800 be tax-exempt and then I’m taxed at 40% for the remaining amount?
17 Aug 2022 00:56
I was lucky enough to inherit R2 million from a loved one. I am currently in my early 40s, own my home and would like to consider early retirement. In working out how possible this is, I have considered putting this money with Capitec in their 60-month fixed deposit savings account with an annual nominal return of 9% interest for money invested over the amount of R100 000. The interest earned, if my math is correct, would be R180 000 a year.
My question is how much of that R180 000 would I get to keep after taxes if the interest earned on that investment were hypothetically my only income? From what I understand, the annual tax exemption on interest is R23 800 a year. If I’m following what that means correctly, which is really my question, would that mean out of that R180 000, R23 800 is exempt and I would then be taxed at 40% for the remaining R156 200? That would bring that yearly interest earned after tax: R93 720 + the R23 800 exempt amount for a total of R117 520.
Thank you for the question. The first issue to consider is the terms and conditions of your fixed deposit as there are two options with regard to the earning and distribution of the interest.
The first issue is where the interest is reinvested as earned, thereby adding to your capital value and creating a compounding of your interest return over the period. The issue for you here would be that the funds may not be available within the 60-month period and would therefore not be able to provide you with cash to live off.
The second option is if the interest earned is distributed at the time of allocation, in which case the interest is paid to you as cash to provide for your living expenses.
In both options set out above the interest earned is taxable in the year that it accrues. You are absolutely correct in terms of the interest exemption of R23 800 per year, although please note that the balance of interest earned is then added to your taxable income and taxed on the PAYE tables, not at a flat rate of 40%.
Taking your assumptions into account, if you were to generate interest of R180 000 in a tax year with no other taxable income earned, then the treatment and taxation of this interest would be calculated as follows:
|Gross interest income||R 180 000|
|Less: Annual exemption||-R23 800|
|Net taxable income||R156 200|
|Tax per PAYE tables (R156 200 x 18%)||R28 116|
|Less: Primary rebate||-R16 425|
|Net tax payable||R11 691|
|Now, your net income would be:|
|Gross interest income||R180 000|
|Less: Net tax payable||-R11 691|
|Net income after tax||R168 309|
As is evident from the above, your annual net income would be in the amount of R168 309 after the application of the annual interest exemption and the deduction of tax.
Keep in mind that should you continue to earn an income then the interest amount accrued above the annual exemption of R23 800 will be added to your taxable earnings.
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