Retired people do not have a regular income to rely on for their household expenses and medical needs. The longtime belief is that, once retired, you use interest income from your retirement pay and other financial sources to survive.
This way, you keep what you have for emergencies and live off the interest income.
Not all retirees have the money to make investments or time deposits. For those who can, and because they are fortunate to have the capacity, they might be the ones at a disadvantage due to the higher tax on interest income.
Last week, the Department of Finance announced the increase in the withholding tax on interest income from bank deposits, from 15 percent to 20 percent. The move was presented as a step toward “harmonizing tax rates.”
But for retired Filipinos who rely on interest income from savings for their daily expenses, this tax on interest could be unfair. Retirees and elderly individuals with limited income sources may be affected by this new rule.
I say “may be affected” because there’s no certainty yet. But JC Punongbayan, assistant professor at the University of the Philippines School of Economics, said in a One News interview that the 20 percent tax on interest income may discourage long-term deposits. While he didn’t specifically discuss its impact on retirees, this is exactly the sector that would be most likely to keep their savings in long-term deposits to earn more than regular savings accounts.
Government officials have clarified that the 20 percent tax applies to interest earned, not to the savings itself. They gave the example of a P100,000 deposit earning one percent annual interest. That amounts to P83.33 in interest per month. The principal remains intact, and the tax is applied only to the interest. To be deducted is just P16.66 per month.
But from the retiree’s point of view, let’s look at the same P100,000 in a time deposit earning a typical two percent annual interest. That earns P2,000 gross per year. Under the old 15 percent tax, the net interest is P1,700. Under the new 20 percent, this drops to P1,600.
You might say that’s just P100 a year, a small contribution to help reduce the national debt. But that P100 could buy Losartan, the common blood pressure medicine, sold at P13.50 per tablet. It could cover an entire week’s supply. And that is where interest income often goes, to the health of retirees and the maintenance medicine that helps prevent hospitalizations which cost far more.
For many retirees, every peso counts, especially when inflation continues to rise. Retirees are not hedge fund managers or crypto investors. Most don’t take risks with their money. What they have are small deposits, saved over decades of work.
Government should not burden retired persons who have already paid taxes and are now simply trying to preserve their remaining funds.