How Is Term Deposit Interest Taxed in Australia?

Term deposit interest is income. The ATO treats it the same as salary, wages, or any other earnings — it gets added to your taxable income for the financial year and taxed at your marginal rate. There's no special discount or concession for interest earned on deposits.

That sounds straightforward, but there are a few details that catch people out — especially around timing, payment frequency, and how interest compares to alternatives after tax.

When is the interest taxed?

Interest is taxable in the financial year it's credited to you, not when you opened the term deposit. This matters because the payment frequency you choose affects your tax timing.

If you open a 12-month term deposit in March that pays interest at maturity the following March, all the interest falls into the next financial year. If you chose monthly payments instead, some interest would fall into one financial year and the rest into the next.

For most savers this is a minor detail. But if you're close to a tax bracket threshold, or you're timing income around the end of financial year, the payment frequency can shift when the tax hits.

Your marginal rate determines the real return

This is the part many savers underestimate. The headline rate on a term deposit is the gross return — before tax. Your actual return depends on your marginal tax rate. The table below uses the FY2025–26 brackets and includes the 2% Medicare levy:

• 0% tax rate (taxable income under $18,200): you keep the full interest — a 5.00% TD pays 5.00%
• 18% combined rate ($18,201–$45,000): 16% marginal + 2% Medicare levy — a 5.00% TD pays around 4.10%
• 32% combined rate ($45,001–$135,000): 30% marginal + 2% Medicare levy — a 5.00% TD pays around 3.40%
• 39% combined rate ($135,001–$190,000): 37% marginal + 2% Medicare levy — a 5.00% TD pays around 3.05%
• 47% combined rate (above $190,000): 45% marginal + 2% Medicare levy — a 5.00% TD pays around 2.65%

At the top bracket, nearly half the interest goes to the ATO. A 5.00% headline rate sounds competitive — a 2.65% after-tax return is a different story.

Why this matters for the offset comparison

If you have a mortgage with an offset account, the offset benefit is tax-free — it reduces the interest charged on your loan rather than generating assessable income. A dollar in your offset at a 6.00% mortgage rate saves you 6.00%, regardless of your tax bracket. A dollar in a term deposit at 5.00% earns you only 2.65–4.10% after tax, depending on your bracket.

For borrowers in the 30% bracket or above, an offset account almost always delivers a better after-tax return than a term deposit — unless the term deposit rate substantially exceeds the mortgage rate, which is uncommon.

Do you need to declare it?

Yes — always. Your bank or credit union will report the interest to the ATO automatically via your Tax File Number, and it will appear on your pre-filled tax return. If you don't provide a TFN to the institution, they're required to withhold tax at 47% (the top marginal rate of 45% plus 2% Medicare levy) from your interest payments.

Make sure every institution where you hold a term deposit has your TFN on file. If you've spread deposits across multiple banks — which is common for savers managing around the Financial Claims Scheme limit of $250,000 per account holder per ADI — each one needs your TFN separately.

Term deposits inside an SMSF

Self-managed super fund trustees often use term deposits for the stable, low-risk portion of their portfolio. Inside an SMSF, interest is taxed at the fund's concessional rate — 15% in the accumulation phase, and potentially 0% if the fund is paying pensions in retirement phase.

A 5.00% term deposit taxed at 15% nets 4.25% — significantly better than the same rate taxed at a personal combined rate of 39% or 47%. This is one reason term deposits remain popular within SMSFs despite modest headline returns.

What to do before your next term deposit matures

First, check whether you've provided your TFN to every institution where you hold deposits — without it, you're losing 47% in withholding tax that you'll need to claim back at tax time. Then compare current rates across lenders on the AuRatePulse rate table — the best after-tax return starts with the best gross rate, and the gap between the top rate and your bank's default offering is often substantial.

This is general information, not financial advice. Tax brackets shown reflect FY2025–26 rates and may change. Consider consulting a registered tax agent if you're unsure how interest income affects your tax position.