The Ministry of Finance (MoF) has clarified that interest earned on fixed deposits before January 1, 2026 will remain tax-exempt, even if the interest is received after the new Income Tax Act came into force, providing certainty to thousands of depositors and directing financial institutions to ensure proper implementation of the law.
The Ministry has informed that the tax treatment of interest income depends on when the interest was earned, rather than when it is paid or credited. The clarification follows earlier instructions issued to banks and financial institutions regarding the withholding of tax on interest income.
According to the Ministry, the Income Tax Act of Bhutan 2025, which came into effect on January 1, 2026, is prospective in application and does not apply to income earned before that date. Consequently, interest accrued on fixed deposits before January 1, 2026, remains governed by the Income Tax Act of the Kingdom of Bhutan 2001, under which such income was not subject to taxation.
“This portion of interest remains non-taxable, even if it is received after 1 January 2026,” the Ministry states.
The clarification is expected to address concerns raised by depositors after the introduction of the new tax regime, particularly among individuals holding long-term fixed deposits that span both the old and new tax systems.
Many depositors had expressed uncertainty over whether interest accumulated before the implementation of the new tax law would become taxable simply because the payment was made after January 1, 2026. The Ministry’s clarification confirms that the determining factor is the period during which the interest was earned, not the date on which it is received.
The Ministry also provides guidance to banks and other financial institutions responsible for deducting withholding tax on interest income, stating that withholding tax is only a provisional deduction and does not represent the depositor’s final tax liability. Financial institutions have been instructed to deduct withholding tax only on interest earned from January 1, 2026, onwards.
The clarification effectively separates interest income into two categories for fixed deposits that extend across the implementation of the new tax law. Interest accrued up to December 31, 2025, will continue to enjoy tax exemption under the previous legislation, while interest generated from January 1, 2026, onward will be subject to the provisions of the Income Tax Act 2025, including applicable withholding tax requirements.
Importantly, the Ministry has also addressed situations where financial institutions may have inadvertently deducted tax from interest that should have remained exempt. It stated that if any tax has been deducted on interest earned before January 1, 2026, the excess amount must be refunded to the depositor following verification.
The refund provision is expected to benefit customers whose fixed deposits matured after the introduction of the new tax system but included interest accumulated during the tax-exempt period. It also places responsibility on financial institutions to review deductions carefully and ensure that customers are not unfairly taxed.
Ministry officials say the clarification reinforces a fundamental principle of taxation—that new tax laws generally do not apply retrospectively unless expressly provided for in legislation. “By confirming that income earned before the commencement of the new Act remains subject to the previous legal framework, the Ministry has provided legal certainty and reduced the possibility of disputes between depositors and financial institutions,” an official from the Ministry reiterated.
The notification is particularly relevant as fixed deposits remain one of the most popular savings and investment instruments in Bhutan. Thousands of individuals rely on fixed deposits for retirement planning, education savings and long-term financial security. The clarification therefore affects a broad section of depositors whose investments were made before the commencement of the new tax regime.
Financial institutions are now expected to ensure that their systems accurately distinguish between pre-2026 and post-2026 interest accruals when calculating withholding tax. The guidance is also intended to promote consistent implementation of the Income Tax Act across the banking sector and prevent unnecessary deductions or administrative disputes.
The latest clarification forms part of the government’s ongoing efforts to ensure the smooth implementation of Bhutan’s new tax framework. As the Income Tax Act 2025 continues to be rolled out, the Ministry has been issuing detailed guidance to taxpayers and financial institutions to facilitate compliance, improve transparency, and strengthen confidence in the country’s evolving tax administration system.
Tashi Namgyal, Thimphu
