Why taxing fixed deposit interest makes sense

A fierce public debate has erupted over the proposed introduction of a 10 percent withholding tax on fixed deposit (FD) interest. While the furore is understandable, given that taxation is never popular, it demands a deeper reflection on what it means to be a self-reliant, middle-income country.

Bhutan has officially transitioned out of least developed country (LDC) status. Yet, our mindset, and our fiscal structure, still reflect LDC-era dependencies on aid and grants. As citizens, we must evolve. True independence is not only about political sovereignty or diplomatic standing, it is about financial self-reliance. And taxation is a core pillar of that independence. It gives a nation the means to fund its own development and, equally important, gives citizens a powerful mechanism to hold their government accountable.

When people pay taxes, they have every right to demand better schools, cleaner water, faster services, and fairer laws. The fixed deposit interest tax, modest as it may seem, is a symbolic and practical step toward that future.

The outrage over this tax often ignores who it affects. The Royal Monetary Authority data shows there are only 12,933 FD account holders in the country. But collectively, they hold more than Nu 18.5 billion. A mere 382 account holders (just 3 percent) control 48 percent of all FD wealth. Another 474 accounts hold between Nu 5–10 million. Together, less than 7 percent of account holders own more than two-thirds of all FDs in the country. Meanwhile, over 9,000 accounts, each with balances under Nu 1 million, collectively hold just 11 percent of FD wealth.

This concentration of wealth underscores the inequity of the current system, where passive income from large deposits escapes taxation while wage earners are taxed at source. Is this fair?

Critics of the tax reforms also warn of a “deposit flight” or decline in remittances. The data does not back these claims. Many countries, including India, Australia, and Nepal, tax interest income, often at higher rates than the proposed 10 percent. And none have seen significant capital flight or declines in bank savings. In fact, household savings in India grew robustly even after a 10 percent Tax Deducted at Source was applied.

Bhutanese migrants, a major source of remittance inflows, still benefit from strong comparative returns at home. A Bhutanese fixed deposit with 7.5 percent interest yields significantly more, even after tax and remittance costs, than a term deposit in Australia. So, the idea that a 10 percent tax will suddenly reverse years of remittance flows is misleading.

However, tax reform should be progressive. Small savers, senior citizens, and low income families should be shielded. But those earning hundreds of thousands in untaxed interest should make a modest contribution to society. Passive income should not enjoy a privileged status when ordinary citizens are taxed on their salaries, farm sales, and shop earnings.

Taxing FD interest could also inspire behaviour change in productive ways. It will encourage those with cash to explore better uses for their money, whether investing in businesses, startups, or the capital market. Taxing interest will help redirect some of the Nu 18 billion in FDs toward sectors that create jobs, exports, and innovation. In government's part, it should create more investment opportunities and diversify  the capital market.

Taxation is never pleasant but it is a necessary evil. Let us not view taxation as a punishment but as a civic responsibility, an investment in our nation.