Reader's Request: Tax on Savings Deposit Account

I am a Money Magnet! We are Money Magnets!

" I've been working for a year already since graduating from college last year. Since then I've been saving a percentage of my monthly income and i'm proud that somehow i have saved some money already. recently, i've asked my bank for a statement of account and i was suprised to see that there were deductions to cover for withholding tax. I didn't know that there are such taxes imposed for savings account. (Medyo masama lang ang loob ko thinking that what i saved is already what is left from my net income where huge tax have already been deducted). Sir, will you enlighten me? kasi medyo na discourage ako na magsave pa thinking that it will all drain down to taxes. Can you suggest some readings regarding taxes imposed on banking and saving? "

I received the above comment from an anonymous reader a few days back.  I'm happy that he's making it a habit to pay himself first.  (A round of applause for this guy please.)  However, he was shocked to see that taxes were withheld from the interests he earned from his savings deposit account.  And he hopes to be enlightened regarding this matter.  Read on to know more about the withholding tax on bank deposits.

In the National Internal Revenue Code (as amended by the Tax Reform Act of 1997) which contains the laws governing taxation in the Philippines, interest income from bank deposits is considered as a form of "passive income."  Therefore it is subject to a final tax of 20% which is withheld at the source (bank).  Exceptions to these are interests earned from deposits held in foreign currency units which are only subject to a  final tax rate of 7.5%.  Also, long-term investments of over five years are exempt from the tax.  

You've probably seen bank time deposit instruments that requires you to place your deposit for at least 5 years for it to be tax free.  If you have availed of this type of investment, in case you withdraw your deposit before the 5 year limit, your interest income will be taxed depending on the remaining time to maturity. 

               If held less than 3 years - 20% tax
               3 to 4 years - 12%
               4 to 5 years - 5%
             A.L. Pellas and Associates
I hope everyone will not be discouraged to invest or to save because of these taxes.  Generally, all forms of income are really taxable.  Whether you invest your money in the bank, the stocks, UITFs, Mutual Funds, and even on your own business, if it earns and generates a considerable amount of income for you, it will be taxable.    

It seems like most of our income really just goes to government.  A majority of our population though is very much dependent on our government for basic social services.  And believe it or not, our taxes (although maybe only a portion of it) do reach these groups of people.  Let's just think that by paying our taxes we are helping these groups of people indirectly.  It makes paying taxes not so much a burden.  Let's also be grateful that we are paying taxes because that means we are earning a considerable amount of money. (^o^)/  

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  1. I forgot to write that although the money we deposit in the bank already is from our salaries which were heavily taxed already, interest income, which we earn by investing our money in a bank deposit account, will have to be considered as a new form of income that's why it needs to be taxed again.


    i haven't even mentioned VAT!

    *double sigh*

    Nevertheless, let us all be grateful ^^

    on July 8, 2009 at 3:57 AM