Know How Gross Interest Rates Vary From Net Interest Rates
Do you know that money credited to you as interest is not always what you calculate? It invariably is lesser than that. Why? This is primarily because gross interest rate is not the same as net interest rates. What is advertised to you is gross interest rate. And what is computed is actually the net interest rate. Why so? This is because of the tax man. The tax man always steps in to take away a part of the interest. So, what is left over is termed as the net interest and this is what you actually get paid. Where you get mislead, is in advertisements which talk only in terms of gross rates.
Let’s Illustrate This With An Example.
A person deposits $ 4000 in an account earning 3% a year. So, his gross interest amounts to $120. But before crediting this amount to the man’s account, banks or any financial institutions deduct tax. If the putative tax rate is 20%, then $ 24 will be deducted from the accrued interest. That is the person, instead of receiving $ 120 in full actually gets $ 96, with the rest amount being taken away by the taxman.
So, when you go to deposit money, remember that the net interest is the actual sum that you receive.
How To Work Out The Net Interest Rate
If the net figure is not published besides the gross, you need to do a bit of computing. The calculation is pretty easy. You just have to take the gross rate and multiply it by 0.8 (if the tax rate is 20%).
For example if the gross rate is 5% then the net rate would be 5% * 0.8 = 4%.
Now that you know how to calculate the net interest you won’t be disappointed when you actually get the interest.