Interest exemptions and the over-65 threshold

The interest you earn on an RSB is taxable — but only after you exceed the annual interest exemption set out in Section 10(1)(i) of the Income Tax Act. The exemption is one of the more useful retail tax breaks in South African law and it changes the optimal product mix more than people realise.

Note: tax thresholds change with each Budget. The numbers in this article are illustrative — verify against the latest SARS guidance before relying on them for a real decision.

The two thresholds

There are two annual exemption levels, depending on your age on the last day of the relevant tax year:

• Under 65: approximately R23 800 of interest income is tax-free per year.
• 65 and over: approximately R34 500 of interest income is tax-free per year.

These exemptions apply across all your interest income — RSB coupons, bank-deposit interest, money-market fund distributions, even certain bond-fund distributions. They are not stackable across spouses' separate accounts, but each spouse has their own exemption.

Worked example: a 50-year-old, R250 000 in a 5-year fixed bond at 9%

• Annual interest: R250 000 × 9% = R22 500.
• Exemption used: R22 500 of R23 800 — so R1 300 of headroom remains.
• Tax payable on RSB interest this year: zero.

Now suppose the same person also has R200 000 in a money-market fund yielding 7%.

• Money-market interest: R200 000 × 7% = R14 000.
• Combined interest: R22 500 + R14 000 = R36 500.
• Exempt: R23 800.
• Taxable interest: R12 700.
• Tax at, say, a 31% marginal rate: R3 937.

The combined holding now produces tax. And the exemption is gone — every additional rand of interest is taxed at the full marginal rate.

How this changes product choice

If you are below the exemption, the headline rate is the after-tax rate. That's the cleanest case and the comparison between products is just rates against each other.

If you are above the exemption, the after-tax rate on RSB interest is headline × (1 − marginal). At a 31% marginal rate, a 9% bond pays 6.21% after tax. A 4.75% real-yield ILB indexed to 5% inflation pays roughly 10% nominally — but only about 6.9% after tax. At higher marginal rates the gap closes; at lower ones it widens.

RSBs cannot be held in a Tax-Free Savings Account. The annual exemption above is the only tax relief on their interest, and anything over it is taxed at your marginal rate.

Reinvesting does not defer the tax

A subtle implication: under Reinvest, interest still accrues into the bond and is taxable as it's earned, not when you withdraw it at maturity. Section 24J of the Income Tax Act deems interest to accrue year by year over the life of the bond. So switching to a payout option does not change whether you owe tax — only your cash flow.

That removes any tax-timing case for choosing payouts. Reinvested interest is never saved up for a single maturity year, so taking payouts cannot use up an exemption that reinvesting would have wasted. What does change is the cash: on Reinvest the bond pays nothing until maturity, so any tax due has to be funded from elsewhere.

Inflation-Linked bonds have a similar catch. Treasury's terms treat the capital adjustment as well as the coupon as normal interest for tax, even though you only receive the adjusted capital at maturity.

What the calculator does and does not do

The Real Return Calculator reports headline yields, not after-tax yields. Tax treatment depends on details (your age, marginal rate, other interest income) we cannot infer from a portfolio. Use these articles to estimate the after-tax adjustment yourself before committing.