Interest is income generated from the giving of a loan. This includes the easily-recognisable situations of a bank-deposit, as well as somewhat more obscure sources such as tax refunds (where the tax-man has effectively “borrowed” the money from the taxpayer) and period pay-outs on bonds.
Taxation of interest falls into a number of categories, so I shall set out some of the more common examples below.
I shall not be dealing with taxation of interest of private loans (i.e. between two individuals), nor that earned by a shareholder from their company (or vice versa). Similarly, I shall not deal with the question of interest earned as part of a larger business enterprise (e.g. banks).
Interest earned from overseas
For all new or veteran returning residents (from 1st January 2007), interest earned from overseas sources is fully exempt in Israel for 10 years. After that period expires, interest will be subject to tax at the rates discussed below; although interest that has accrued within the 10-year period will be exempt.
For example, a 12-month deposit pays 1,200 $ interest. The deposit matures exactly 4 months after the 10-year exemption ends. As such, 800 $ (1200 $ X 8/12) will be tax-free, with the balance (i.e. 400 $) subject to tax.
All other interest income is taxed at the rate of 25% (although interest that accrued by 31 December 2011 is taxed at 20%).
In certain circumstances, otherwise taxable interest is tax-free during the tax year, up to given limits. The situations are as follows:
(1) A couple (or singleton) whose total joint taxable income (from all sources) for the year is less than 61,560 NIS is entitled to tax-free interest of up to 9,600 NIS per annum. If the joint income exceeds this limit, the tax-free allowance is reduced by a shekel for every shekel that the income is above the limit. E.g. if the joint income is 65,000 NIS, the limit is exceeded by 3,440 NIS (65,000 less 61,560) and so the tax-free interest allowed is 6,160 NIS (9,600 less 3,440).
(2) A single person, or one of a couple. who was born in 1947 or earlier and has reached Israeli retirement age, is entitled to tax-free interest of up to 13,200 NIS per annum. There is no income test.
(3) The entitlement in (2) is raised to 16,200 NIS per annum if both spouses meet the age criteria mentioned.
In these cases, the banks are required to deduct tax at source, but the tax authority has a system whereby the tax is refunded directly periodically.
