Tax on savings certificates no longer final, who benefits and who loses

In the budget for the current fiscal year, The withholding tax deducted from profits earned on savings certificates has been excluded from the list of final taxes.

This means that when purchasing savings certificates, a 10 per cent tax is deducted from the profit earned. If an investor does not possess a Taxpayer Identification Number (TIN), a 15 per cent tax is deducted from the profit.

Until now, this tax was considered final. No additional tax had to be paid on profits from savings certificates. Once deducted, the tax could not be reclaimed either.

However, starting from the current fiscal year, the tax deducted at source on the profit of savings certificates will no longer be considered a final tax liability. It will instead be treated as an advance tax.

If excess tax is deducted by year-end, the surplus amount can be claimed as a refund. Conversely, if the calculated liability is higher, the remaining amount must be paid to the tax department of the National Board of Revenue (NBR). These calculations are made through income tax returns.

Let us look at who stands to benefit and who may lose under the new rule.

The withholding tax deducted when profits from savings certificates are paid will no longer be considered the final tax liability. From now on, income from savings certificates will be added to a taxpayer's total income and tax will be charged according to the applicable tax slabs for each individual.

Every taxpayer is required to pay taxes at rates of 10, 15, 20, 25, and 30 per cent at year end based on their income (if it exceeds the tax-free threshold). As a result of this new rule, taxpayers who fall into tax slabs higher than 10 per cent will see an increase in their tax burden. This is because the 10 per cent tax previously deducted at source was considered final and served as an exemption from further tax liabilities.

Consider an example. A taxpayer earns Tk 100,000 in profit from savings certificates in a year. A total of Tk 10,000 is deducted as withholding tax. The taxpayer also earns another Tk 350,000 from salaries or other sources. This brings the total taxable income to Tk 450,000. No tax is payable on the first Tk 400,000, while the remaining Tk 50,000 is taxed at 10 per cent, amounting to Tk 5,000.

However, since the taxpayer has already paid Tk 10,000 as advance tax on the savings certificates, they can claim a refund for the remaining Tk 5,000 when filing the tax return.

This will benefit low-income and middle-class families who rely heavily on profits from savings certificates, reducing their tax burden. If excess tax has been deducted, they will receive a refund.

Under the new system, taxpayers whose applicable tax rates are higher than 10 per cent will have to pay tax on that income according to their actual tax slabs, such as 15 per cent, 20 per cent or higher.

Here is another example. A taxpayer earns Tk 500,000 in profit from savings certificates. At a withholding tax rate of 10 per cent, Tk 50,000 is deducted. The taxpayer also earns Tk 400,000 from a salary or other sources. This brings their total annual income to Tk 900,000.

Under the previous system, the taxpayer would have had to pay only Tk 50,000 in tax, as the tax paid on savings certificate profits was considered final. Under the new system, however, the calculation will be as follows: no tax on the first Tk 400,000; 10 per cent tax on the next Tk 300,000, amounting to Tk 30,000; and 15 per cent tax on the following Tk 200,000, amounting to another Tk 30,000.

The taxpayer's total tax liability will therefore be Tk 60,000. Since Tk 50,000 has already been paid as withholding tax on savings certificate profits, the taxpayer will have to pay an additional Tk 10,000. This will be the extra tax payable for the year.

If the amount deducted as tax is higher than the taxpayer's actual tax liability, the excess can be refunded.

For example, Tk 30,000 may be deducted as advance tax on a taxpayer's savings certificate profits over the course of a year. But when filing the annual return, the taxpayer may find that their total tax liability is Tk 20,000 after accounting for various tax rebates. In that case, the remaining Tk 10,000 can be refunded.

To receive a refund of advance tax deducted from savings certificate profits, taxpayers must file an income tax return. Therefore, people who make small investments in savings certificates but have no taxable income will now need to obtain a TIN and file an annual return to reclaim the advance tax deducted from their profits.

When filing the return, taxpayers must provide their bank account number and claim the refund. They must also submit documents as proof of the tax deducted at source. After verification, tax officials will refund the amount due to the taxpayer's bank account within 120 days.