RSA Government bonds give interest as earnings. Depending on when you scheduled to receive your interest, your interest will either be re-invested until maturity, or accrue to you semi-annually or monthly. The interest you earn from the bonds will have a portion that is tax exempt.
For instance, if you invested R50,000 today on a 5 Yr Fixed bond with a 10,50% yield, your total interest in 5-Years will be R33 467 (thirty three thousand four hundred and sixty seven). Of this interest, approximately R23 800 (if you’re younger than 65 years), or R34,500 (if 65 years and older) will be tax exempt. So assuming you are 30 years old today, and receive R33 467 interest, in 5 years you will only be taxed on R9 667 of these earnings at your marginal rate at that time. That is, R33 467 – R23 800 = R9 667, will be included in your gross income.
What can we take from this?
It is important to structure your investments in a way that will result in the most tax savings.
What I would’ve done is to spread/(diversify) the R50,000 to different investments. Invest some of it in shares (following fundamentals). When I sell the shares in 5 years, I’ll be able to use the capital gains exemption of R40 000 against any gains I would’ve made from the stocks. In that way, I will be strengthening my investment portfolio and making use of some tax deductions and exemptions available to me as an individual.