Income Tax Exemption on Long-term Deposits

Sections 24(B)(1) and 25(A)(2) of the National Internal Revenue Code of 1997, as amended, provide that interest income from long-term deposit or investment evidenced by certificates in the form prescribed by the Bangko Sentral ng Pilipinas (BSP) is exempt from income tax.
If the holder pre-terminates the certificate before the fifth (5th) year, a final tax is imposed on the entire income and is withheld and deducted by the depository bank from the proceeds of the certificate based on the remaining maturity.

“Long-term deposit or investment certificates” refers to a certificate of time deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments.
The maturity period must be not less than five (5) years.
The certificate’s form must be prescribed by the BSP.
The certificates must be issued by banks only; they are issued to individuals and include denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.

The interest income is covered by the income tax exemption only when the depositor/investor is an individual citizen (resident or non-resident), resident alien, or nonresident alien engaged in trade or business in the Philippines, and not a corporation.
The long-term deposit or investment certificate must be under the name of the individual, not under the name of a corporation, bank, or trust department/unit of the bank.
The deposit/investment must be in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts, and other investments evidenced by certificates in the form prescribed by the BSP.
The deposit/investment must be issued by banks only, excluding issuance by other financial institutions.
The maturity period must be not less than five (5) years.
The deposit/investment must be in denominations of Ten thousand pesos (P10,000) and other denominations as may be prescribed by the BSP.
The exemption covers only the interest income from the long-term deposit or investment certificates.
Income tax exemption does not apply to other income such as gains from trading and foreign exchange gain.
The certificate must not be terminated before the fifth year; otherwise, the final tax rates apply.

When a holder pre-terminates the certificate before the fifth (5th) year, the final tax applies to the entire income and is withheld and deducted by the depository bank from the proceeds.
The final tax is computed using the following graduated rates based on the remaining maturity:
- Four (4) years to less than five (5) years: 5%
- Three (3) years to less than four (4) years: 12%
- Less than three (3) years: 20%

Any rulings and issuances inconsistent with these requirements and tax consequences are void and of no legal effect for being contrary to law.
All internal revenue officers must give this Circular wide publicity as possible.