# How to compute your Time Deposit income

James Ryan Jonas

We recently received an email from one of our readers asking how to determine the interest earnings on his time deposit account. In response, we explain below how exactly it’s being computed.

Interest on a Peso Time Deposit account

Let’s assume we opened a P100,000 time deposit account that earns 2.0% per annum. We let it stay for 35 days. Considering the 20% withholding tax charged to peso time deposits, the interest income on the account is:

• P100,000 * 2.0% * (35 / 365 days) * 0.80 = P153.42

Most people usually think that when they are quoted an interest rate (2.0% in this case), they will get that interest no matter how long the holding period is. This is wrong. That quoted rate is an annual rate and you only earn it if you let the bank hold your money for one year.

In our example above, your principal of P100,000 would earn only the share of 35/365 of the 2.0% per annum rate, representing 35 days out of 365 days in a year that the money is with the bank. (The convention is usually 365 days but some banks may use 360 days in the computation.)

You also need to consider the 20% withholding tax charged on interest income from time deposits. This is represented by the “0.80” in our formula above, which means, we are getting 80% of the total interest only, because we deducted the 20% withholding tax.

Thus, for a P100,000 money placed for 35 days in a time deposit (TD) paying 2.0% interest per annum, the net interest income isĀ  P153.42. A bit small, indeed, compared to the principal placed. But then again, time deposit accounts are covered by the Philippine Deposit Insurance Corporation, which means they are virtually safe, so in effect you don’t get much return because there’s not much risk associated with a TD account.

PreTermination of Time Deposit

Do note that most banks do not allow pre-termination of your time deposit. It is possible that you will incur a loss if you redeem or close the account prior to the set maturity date.

That’s because the Documentary Stamp Tax (DST), which the bank usually shoulders if the account is held until maturity, will now be passed on to you. Most of the time, this DST is more than the interest you earned, which means your principal can even be reduced. We thus highly encourage you to wait for the time deposit to mature rather than preterminating it.

Related Reading: Banking, Insurance and Credit Cards discussion at the PMT Forum

James Ryan Jonas teaches business management, investments, and entrepreneurship at the University of the Philippines (UP). He is also the Executive Director of UP Provident Fund Inc., managing and investing P3.2 Billion (\$56.4 Million) worth of retirement funds on behalf of thousands of UP employees.