Definition of fixed-term taxation
A term deposit is a financial product whereby a natural or legal person (company) lends a certain amount of money to a financial institution for a set period of time.
After the set period of time, the financial institution returns the principal that it borrowed plus the fixed interest. This interest can be paid in full at the end of the term or periodically: monthly, quarterly, semi-annually, annually, in a current account other than the one for the term deposit.
Characteristics of a fixed-term deposit
• At the time of signing the contract between the parties: client and financial institution, establish a fixed interest rate for the agreed period of time.
• The interest rate is higher than the one set in current accounts or savings accounts.
• Fixed-term deposits have an established expiration date, at which time the amount loaned by the client to the financial entity will be reimbursed, together with the interest generated.
• If the client needs part or all of the amount loaned to the bank before the term ends, he will pay a penalty commission for the amount withdrawn or this amount will not generate interest in favor of the client.
• In this type of contract, collection and payment movements are not allowed.
• At the expiration of the term established in the contract, it can be canceled or renewed for the same initial period or for a different term, at a new interest rate, which may be the same, lower or higher than the one set at the beginning, depending on the market conditions.
Interests
To be able to compare different offers from financial institutions for the same period of time, you must compare their Annual Equivalent Rate (APR), where the interest rate offered, commissions and expenses that may be charged will be taken into account.
In this way, through the APR it is possible to determine which offer is the most advantageous for the client.
There are structured denominated deposits in which the variable interest rate linked to the evolution of an index is fixed, such as the Madrid Stock Exchange index: IBEX 35, or to the price of shares of a certain value.
Taxation
The interest paid by the financial entity is considered as income from movable capital and is therefore subject to the income tax on movable capital (IRCM) at the rate in force at any given time.
Advantage
• Fixed return.
• They are covered by the Deposit Guarantee Fund for the established limit.
• Non-complex product.
drawbacks
• The interest rates currently offered (summer 2015) are very low, as the official interest rates are in installments close to 0%.
• Penalty if redeemed prior to expiration.
• There are other products such as investment funds where higher returns can be obtained.
Example.
A client lends €10,000 to a financial institution for a term of 6 months at an annual nominal rate of 0.5% (APR 0.52%), interest will be paid at maturity.
The gross interest generated is:
€10,000 * 0.5%* ½ = €25
Assuming that the capital withholding tax is 20%:
IRCM: €25 * 20% = €5, amount that the financial institution paid to the Tax Agency.
For what the client receives in his checking account / passbook at the expiration of the contract (6 months from the opening date) payment of:
€25 – €5 = €20 in interest.