The 20% tax on interest income, explained

Local banks have started imposing a flat 20% tax on interest earned from time deposits.

This came a few months after President Ferdinand "Bongbong" Marcos approved the Capital Markets Efficiency Promotion Act, a law principally authored and sponsored by Senator Win Gatchalian and Rep. Joey Salceda. It officially took effect on July 1.

In a statement, Finance Secretary Ralph Recto called it a "landmark reform that brings capital market investments closer to the Filipino people."

"By making investment channels clearer, more affordable, and more accessible, especially for small investors, we open the door to greater financial inclusion for our people," he explained, adding that the tax will fund priority projects in various sectors, including infrastructure, education, and health.

The new tax system, however, became the subject of backlash among social media users, with many arguing that it's only an added burden to those who want to save money.

"People invest in long-term savings for the interest it earns. But if you tax that interest, what’s the point? Small investors who rely on that extra income will take the hit. Their money’s locked in for years, and now even the returns shrink. Focus on fixing budget misuse not piling more taxes," an Internet user wrote.

Dr. Tony Leachon also noted how the system "disincentivises savings, an option that is already low among Filipinos since high inflation robs them of disposable income."

"The public will have nowhere to go since bonds are also charged a 20% tax. If the people do not save, banks will have less to lend and that can strain the whole economy. Specifically for those who need to borrow. Small businesses, farmers and rural folk," he continued.

Others, meanwhile, pointed out that the new tax system could give people an "opportunity for others to explore other options for investments."

A social media user also said the move targets only the "rich" people, as "long-term deposit interest used to be tax-free."

Here's what you need to know about the new law.

What is CMEPA?

The 20% tax on interest earned from bank deposits isn't new—it has been in place since 1998 based on the Tax Reform Act of 1997.

However, the Capital Markets Efficiency Promotion Act, or Republic Act No. 12214, removes the old tiered system and standardizes the tax on interest earnings from all bank deposits (peso or foreign currency) to a uniform 20%, regardless of how long the money is held.

Previously, interest income from long-term peso time deposits enjoyed lower tax rates, depending on their maturity period.

For instance, deposits held for four to less than five years were taxed at only 5%, those for three to less than four years at 12%, those less than three years were at 20%, and deposits held for more than five years were tax-exempt. 

With the new law, interest is consistently taxed at 20%.

For example, you have P10,000 in your savings account, and over the years it has earned P2,000 interest. Under CMEPA, 20% of the interest will be taxed, leaving you with only P1,600.