Bank deposits are a savings product that customers can use to hold an amount of money at a bank for a specified length of time. In return, the financial institution will pay the customer the relevant amount of interest, based on how much they choose to deposit and for how long.
Once the agreed term has elapsed, the bank will return the amount deposited plus the interest to have accrued over that period at the agreed rate.
Bank deposits are considered one of the safest savings products. There is a specific structure, known as the Deposit Guarantee Fund, which guarantee up to €100,000 for each account holder and bank at which a deposit is held.
Being a very safe savings product, bank deposits offer somewhat lower returns than what we might expect to obtain from equity or fixed-income products, which come with higher risk.
What types of bank deposits are there?
Demand deposit or interest-bearing account:
This type of deposit allows customers to withdraw all or part of their money whenever they need it and without incurring a penalty. For this reason, demand deposits are seen as the most liquid savings product after cash.
With this type of deposit, we must continue to hold our money at the financial institution for a specified period of time. In return, the institution pays us the corresponding interest or return, based on the amount we have deposited and the agreed term. A term deposit does not mean that we cannot withdraw the money if necessary, but it does mean that we will incur a penalty for early termination, as explained in the contract.
When arranging this kind of deposit, we must be sure that we are not going to suddenly need the money we are depositing at any point over the agreed duration of the deposit.
What taxes are payable on bank deposits?
Taxation of deposits varies, depending on the type of deposit.
For instance, time deposits are taxable in our income tax return as income from capital. We pay tax solely on the return obtained and not on the capital initially delivered.
There are three tax brackets, depending on the amount of the deposit:
- 19% – Up to €6,000
- 21% – €6,000 to €50,000
- 23% – Over €50,000