How to save tax on Fixed Deposit interest

Standard

Fixed Deposits are a popular banking product mainly because they pay returns that are much higher than are available with standard savings account products. Moreover, returns on standard fixed deposits are guaranteed.

Here, we will tackle the interesting question of tax on the interest earned through fixed deposit; we will look at the applicability of income tax and how to save interest on income tax, if applicable. We will also look at this question from the point of view of foreigners working or residing in Singapore.

Applicability of Income Tax on Fixed Deposit interest

The interest received from fixed deposits is taxable, unless they are specifically exempted under the Income Tax Act. And, as per the provisions of the Income Tax Act, interest received from deposits with approved banks or licensed finance companies in Singapore is not taxable.

fixed deposit

Approved banks include those banks that have been classifed by the Monetary Authority of Singapore (MAS) as “Commercial Banks” or “Merchant Banks”. Licensed finance companies are categorized as such by the MAS. You can easily check out these entities on the MAS website.

Moreover, you do not need to declare interest that is not taxable.

When interest on Fixed Deposit interest is taxable

Fixed deposit interest income from the following sources is taxable:

  • Deposits with non-approved banks
  • Deposits with finance companies not licensed in Singapore
  • Pawnshops

If tax is applicable, you need to declare the full amount of your taxable interest under “other income” in your tax form.

Deductions that can be availed to save taxes

If you are liable to pay tax on your fixed deposit interest you can use the following broad categories of deductions to save on your taxes:

  • Employment expenses, if you are an employee
  • A range of expenses and allowances if you are self-employed, a sole-proprietor or a partner in a partnership
  • Rental expenses
  • Angel Investors Tax Deduction Scheme (AITD)
  • Donations

FD Interest – Tax applicability for foreigners

Foreigners refer to non-Singaporeans and non-Singapore Permanent Residents (SPR). Foreigners are liable to tax in Singapore on all income accrued in, or derived from Singapore. The extent of tax liability will depend upon tax residency status.

  • If you are a tax resident:
  • Your income after deductions of tax reliefs will be taxed at progressive resident rates.
  • If you’ve been issued with a work pass of at least 1 year validity, you will be treated as a tax resident upfront.
  • You will be taxed on all income earned in Singapore and any foreign-sourced income (with the exception of those received through partnerships in Singapore) that was brought into Singapore prior to 01st Jan 2004.
  • You will also be required to file Form B1 (Income Tax Return for Residents).

If you are a tax non-resident:

  • You will only be taxed on all income earned in Singapore.
  • You will not be entitled to tax reliefs.
  • Your employment income will be taxed at a flat rate of 15% or the progressive resident rates, whichever results in a higher tax amount.
  • Director’s fees and other income such as rent earned in or derived from Singapore will be taxed at the prevailing rate of 20%.
  • You are required to fill in Form M (Income Tax Return for Non-Residents).
  • If you are employed for 60 days or less in a year, your short term employment income is exempt from tax. This rule does not apply if you are a director of a company, a public entertainer or a professional in Singapore.
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