Tax-free Investments in South Africa.. Everything You Need To Know

South Africans have a money problem. With the cost of living rising faster than incomes, most people struggle to make ends meet consistently. A report came out that 76% of South Africans are broke before the end of the month, with most of them running out of money by the 15th of every month.

This forces them to borrow from friends and family, or from financial institutions just to keep the lights on.

The strange part is that running out of money is not exclusive to low income earners. The study found that 44% of those who earn more than R50 000 a month also go broke before their next pay cheque.

Cognizant of this, the South African government in 2015 introduced tax-free investments as a way of encouraging household savings.

For the categories that qualify, investors are not obliged to pay income tax, dividends tax or capital gains tax on the returns from these investments.

These are the accounts included in this sort of waiver.

* Fixed deposits
* Unit trusts (collective investment schemes)
* Retail savings bonds
* Certain endowment policies issued by long-term insurers
* Linked investment products
* Exchange traded funds (ETFs) that are classified as collective investment schemes.

Since this is a scheme mostly targeting low to middle income earners, there is a maximum tax-free investment per tax year.

This annual limit is adjusted by the SARS every year. It started at R30 000 in 2016, but in 2021, it has reached R36 000.

Here’s a breakdown.

There is also a life time limit of R500 000 per person, which means you would need to invest the maximum for about 14 years before hitting your limit.

Any unused annual limit is forfeited, meaning it cannot be rolled-over to the subsequent year.

Any investment above the annual limit is penalized at a rate of 40%.

For example, if you invest R40 000 when the annual limit is R36 000, you have an excess of R 4000.

SARS will penalize/tax/deduct 40% of that. In this case, R 1600.

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These investments are open to everyone including minors.

You can have more than one tax free investment account, eg. in different financial institutions, but the annual limit is an aggregate of all of them.

For example, you can have R20 000 invested with Old Mutual, R10,000 with Absa and R6 000 with Investec. Put together, they should not exceed the annual limit.

Read: What is a Good Credit Score in South Africa?

Who provides tax-free investments in South Africa?

These tax-free investments can only be offered by a licensed bank, long-term insurers, a manager of registered collective schemes (with certain exceptions), the National Government, a mutual bank and a co-operative bank.

They also need to have been designated by the Minister in a Gazette notice.

Here are other great investments you can make in South Africa right now.