The Department of Revenue and Customs (DRC) has issued a detailed clarification on the implementation of withholding tax on interest income under the Income Tax Act of Bhutan 2025, aimed at ensuring uniform application across all financial institutions from 1 January 2026.
According to the circular addressed to chief executive officers (CEOs) of banks and insurance companies, all financial institutions will be required to deduct a 10 percent withholding tax on interest income paid to individuals and entities, irrespective of the amount earned or the date on which the account was opened.
A senior official from the DRC said the clarification was necessary to avoid inconsistent interpretation of the law.
“The purpose of this circular is to ensure clarity and consistency in implementation across all banks and financial institutions. Withholding at source is a standard administrative mechanism and does not replace the final assessment process,” the official said.
While the Income Tax Act of Bhutan 2025 provides an exemption of up to Nu 400,000 per income year on interest earned from fixed deposits for individuals not engaged in business, the Department clarified that this exemption does not apply at the withholding stage. As a result, the 10 percent tax will be deducted on the full interest amount paid, without applying any threshold at source.
“Any excess tax deducted will be adjusted or refunded during the annual assessment period,” the DRC official added, reassuring depositors.
For joint accounts, the Department clarified that withholding tax will be deducted separately from each joint owner’s share of interest income, in proportion to ownership.
The DRC also reminded the public that under Chapter 12, Section 296 of the Income Tax Act of Bhutan 2025, all income earners are required to obtain a Taxpayer Number (TPN), including minors earning income. Registration can be completed online through the Revenue Administration and Management Information System (RAMIS).
A senior banker welcomed the clarification, noting that clear guidance would help financial institutions prepare for implementation.
“Having clear instructions from the Department allows banks to update systems in advance and communicate accurately with customers,” the banker said.
Among the public, reactions were mixed. Some depositors expressed concern about the immediate deduction, while others acknowledged the broader intent of tax compliance.
“Even though the tax is refundable later, people will feel the impact when interest is credited. Clear communication will be very important,” said a retiree with fixed deposits in Thimphu.
Another depositor viewed the move as part of strengthening fiscal discipline.
“If this helps improve transparency and tax compliance, then it is a step in the right direction, as long as refunds are processed smoothly,” a private sector employee said.
The Department clarified that registered non-profit organizations are exempt from withholding tax, provided they obtain an exemption certificate from the DRC.
For the avoidance of doubt, the DRC further stated that the 10 percent withholding tax does not apply to interest earned from government bonds, savings accounts and recurring deposit accounts, which remain exempt under the Act.
The Department has encouraged financial institutions and taxpayers to contact the DRC directly for further clarification and assured the public that implementation will be closely monitored to address any emerging issues.
Tashi Namgyal
From Thimphu
