Term deposits are a type of deposit in which customers hold an amount of money at the bank for a specified length of time. We hold our money at the bank and in exchange the bank will pay us a certain amount of interest, depending on how much we deposit and for how long.
The interest we earn on term deposits will be taxed in our income tax return as return on capital.
It is important to note that we will only be taxed on the returns we obtain and never on the amount initially deposited.
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
Earnings on deposits should be reported under box 027 of your income tax return.
Usually, all this information will already be shown in the tax information on record and the bank will already have applied the 19% tax withholding.
Aside from the personal income tax return, term deposits are also subject to payment of wealth tax (Impuesto sobre el Patrimonio) if that the taxpayer's taxable base exceeds €700,000 without including the primary residence up to €300,000, although this amount can and does vary by autonomous region (in some regions term deposits are tax exempt).
To understand how term deposits are taxed, let's use an example.
Let's suppose we have invested €10,000 in a term deposit and obtained a 5% return, giving us a gain of €500.
Of this €500 gain, we will effectively receive €405 since the remaining €95 will be retained by the tax office as part of the personal income tax withholding applied to deposits.
When the time comes to file our tax return, we will not need to pay anything else since with the €95 that they have already deducted we will have already paid 19% tax on the gain under the first tax bracket (up to €6,000).