Tax free investments and their benefits

Tax free investments were introduced in 2015 to encourage South Africans to save more and are sometimes called tax free savings accounts.

Tax free investments or tax free savings accounts may only be offered by designated providers as designated by the Minister of Finance such as licenced banks, long-term insurers and certain other registered financial service providers.

All income, dividends and capital gains earned on a tax free investment are entirely tax free, provided that you adhere to the rules which we summarise below.

Tax Free Investment / Tax Free Savings Accounts – The Basic Rules:

  • South African individuals are allowed to contribute a maximum of R36 000 in cash per year to a tax free investment.
  • Contributions to a tax-free investment account are currently limited to an amount of R500 000 in aggregate over a person’s lifetime.
  • One may have as many tax free investments as you like, but the total contributions to all your tax free investments may not exceed R36 000 in a particular year or R500 000 over your life time.
  • If you contribute more than the prescribed maximum amounts, you will be taxed at a rate of 40% on the returns on those contributions.

Tips when using tax free investments

  • The earlier you start investing in them, the better!
  • Invest in assets that will provide capital growth, for example an ETF, rather than an investment that pays interest because you already receive an exemption for interest income.
  • DO NOT use a tax free investment for short-term savings, because you will be wasting your lifetime allowance and will not receive any substantial tax benefit.
  • Once you put the money in, do not take it out until you have to. The greater the capital gain, the more of a tax benefit you will receive.