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The tax implications of buying government retail bonds

by , 27 August 2015

Government retail bonds (or RSA Retail Bonds) can be a useful savings vehicle. But like all other sources of interest and income, you may have to pay tax on your gains.

So when are you liable to pay tax on the interest you receive from government retail bonds? And is there anyway round it?

Read on to find out…

How government retail bonds work


From just R1,000 you can invest in government retail bonds. In return for lending money to the South African government for a specific term, you’ll receive interest payments twice a year.

The interest you receive depends on the term of the bond you buy. Generally, the longer the term to maturity, the more interest you receive.


The taxation of interest from government retail bonds


Interest you receive from government retail bonds is taxable under the Income Tax Act. This means you may have to pay tax on interest you receive.

It depends on your personal circumstances and how much you’ve invested in bonds along with what you receive from other interest bearing sources.

For this tax year, South Africans have an annual exception of up to R23,800. If you’re over 65, this exemption is up to R34,500 a year.

If you’re not sure, you speak to a tax consultant or professional to ensure you pay tax if necessary.


How to avoid paying tax on interest received from government retail bonds


In March this year, the National Treasury launched tax-free savings account. You can buy government retail bonds through this. In doing so, you avoid having to pay tax on any interest.

But there are limits to this.

Firstly, you can only invest R30,000 tax-free in one of these accounts. And you’re limited to contributing R500,000 over your lifetime into a tax-free savings account.

Due to this, you should try to leave any savings and interest in your account as once you withdraw you lose that entitlement in your account.

If you plan to use government retail bonds as part of your long-term savings plan, it can be beneficial to use your tax-free savings account, especially if you already earn interest elsewhere in excess of your exemption.

So there you have it. The tax implications of buying government retail bonds.

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