Interest on interest – new tax for individuals

In 2020, the phrase “The world will never be the same again” became really popular. And this statement has already become reality for people who keep their savings with Russian banks.

From 2021, the tax on interest received on bank deposits will be introduced.

To be fair, it is worth mentioning that interest on deposits is qualified as the same income as for example rental from leasing out a grandmother’s apartment. There is property that is not used for personal purposes, and it is possible to gain something from it. The same is with money, which is also classified as property if it generates income, and you need to pay taxes on such income.

When the rule on a special taxation procedure for interest on deposits was introduced, the logic of the legislator was clear. After all, the previous edition of the Tax Code does not address income in the form of interest on deposits in the list of income that is not subject to taxation. The tax law set rules for determining the tax base for this type of income. Thus, if the interest rate on the deposit was higher than the key rate by 5 points, such excess amount was subject to taxation at an increased tax rate of 35%. Obviously, banks were not ready to pay such high rates and, accordingly, citizens considered interest on deposits as income on which there was no need to pay taxes at all.

Undoubtedly, such approach was primarily in the best interests of banks. The trust our citizens, especially the elder generation, have regarding the banking system leaves much to be desired, and a lot of people still prefer to keep their savings in kitchen jars. Therefore, a lack of taxes on interest on deposits was a kind of “bait” for citizens.

Many of our compatriots interpreted a special taxation procedure for interest on deposits in a broad sense and paid no taxes, including on interest received on foreign deposits. But one high-profile scandal involving a famous lady was enough to put an end to this frivolous approach.

Citizens have just come to terms with the fact that taxes must be paid on interest in banks of Germany, France, Spain and other countries, and then were hit once again.

Thus, what and how will be subject to taxation?

The Ministry of Finance provided the following explanations:

  • Total interest income on deposits (account balances) with Russian banks paid to an individual during the tax period (calendar year) less non-taxable interest income, will be taxed.
  • Non-taxable interest income is calculated as the product of 1 million rubles and the key rate of the Bank of Russia set as of January 1 of the corresponding year (in view of the conditions of 2020, non-taxable interest income would amount to 60 thousand rubles).
  • Interest paid to an individual on foreign currency accounts will be converted into rubles for tax purposes at the official exchange rate of the Bank of Russia set as of the day of an actual receipt of such income. At the same time, changes in the amount of the currency deposit caused by exchange rate fluctuations are not subject to taxation.
  • When calculating the total interest income of an individual, income on ruble accounts with an interest rate not exceeding 1% per annum during the year will not be taken into account. Namely, the calculation of interest income completely excludes salary accounts of citizens for which the rate does not exceed 1%. Interest paid on such low-interest accounts will not be taxed.
  • Interest income on escrow accounts will not be taxed either.
  • The bank deposit amount (both in rubles and in foreign currency) is the property of an individual, and not his/her income, so it basically shall not be subject to personal income tax.

Example of the tax base calculation

An individual has three deposits:

  • 500 thousand rubles, the deposit rate is 4.5% per annum, interest is paid at the end of the deposit term, the deposit is valid until December 1, 2021;
  • 1 million rubles, the deposit rate is 5% per annum, interest is paid at the end of the deposit term, the deposit is valid until December 31, 2021;
  • 500 thousand rubles, the deposit rate is 4% per annum, interest is paid at the end of the deposit term, the deposit is valid until December 1, 2022.

For deposit 1, the interest income as of December 1, 2021 will amount to 2.5 thousand rubles.

For deposit 2, the interest income as of December 31, 2021 will amount to 50 thousand rubles.

For deposit 3, no interest income is accrued in 2021, since the deposit is valid until 2022 and interest thereon will be paid at the end of the deposit term.

Therefore, the total interest income on deposits with Russian banks paid to an individual in 2021 will amount to 72.5 thousand rubles.

Assuming that the key rate of the Bank of Russia as of January 1, 2021 amounts to 6%, then the non-taxable interest income of an individual in 2021 will amount to 60 thousand rubles.

As a result, the amount of tax payable by such an individual will amount to:

(72,500 rubles – 60,000 rubles) x 13% = 1,625 rubles.

What year will the tax be charged from?

The tax on personal income in the form of interest on deposits with Russian banks will be effective from 2021. Therefore, the tax will not apply to the interest received on deposits in the current year of 2020.

This means that citizens have at least another six months to review the policy of their assets, search for an alternative tax-free income and refuse from deposits, or accept new rules of the game and start sharing the interest earned by the bank with the government.

It is worth noting that it will not be necessary to declare interest on deposits with Russian banks, since this is done regarding interest on deposits with foreign banks.

Tax calculation will be performed by the tax authority automatically based on the information about the amounts of interest paid to the citizen provided by banks.

The tax will be paid on the basis of a notification from the tax authority. The tax authorities will file notifications after the end of the calendar year in which interest income is received.

For the first time, depositors will have to pay the new tax by December 1, 2022 based on tax notifications sent by the tax authorities.

Tatiana Frolova

Leading Lawyer

Korpus Prava Private Wealth

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