Tax on Frozen Interest Raises Fairness Concerns

Bangladesh’s banking sector has been grappling with prolonged challenges involving public confidence, liquidity shortages and weaknesses in financial governance. While some depositors have faced difficulties withdrawing their own savings, others have experienced delays in receiving funds from matured fixed deposits and deposit pension schemes. Against this backdrop, a significant tax policy debate has emerged: should a taxpayer be required to pay tax on income that exists only on paper but has not actually been received?

The issue goes beyond a technical interpretation of tax law. It touches on broader questions of economic justice, taxpayer capacity and the fundamental principles of a fair taxation system. A modern tax framework is generally expected to impose obligations based on a person’s actual economic ability. However, when an income is recorded in financial statements but remains inaccessible to the taxpayer, applying immediate tax liability on that amount raises concerns.

Consider the example of a depositor who invested Tk50 lakh in a double-benefit fixed deposit scheme in 2020. When the scheme matured in mid-2025, the total payable amount became Tk1 crore, including Tk50 lakh as principal and Tk50 lakh as interest. Under existing rules, the bank deducted 10 per cent withholding tax on the interest amount, resulting in a Tk5 lakh tax deduction.

However, the situation becomes complicated if the depositor is unable to withdraw the money because of the bank’s liquidity problems. In several cases, customers have reportedly been offered the option of keeping their matured deposits in new schemes rather than receiving immediate cash payments. Faced with limited alternatives, many depositors may have little choice but to accept such arrangements.

As a result, an individual may see Tk50 lakh recorded as interest income in official documents, while being unable to use or access that money. When filing income tax returns, the taxpayer may then face additional tax obligations after adjusting the withholding tax already deducted. This creates a situation where a depositor suffers from delayed access to funds while also carrying a tax burden on income that remains beyond their control.

Under Bangladesh’s Income Tax Act, 2023, interest or profit earned from deposits with banks and financial institutions is classified as income from financial assets. Section 62 of the law defines the classification of such income. Section 63 follows the principle of recognising income based on whichever occurs earlier — when it is received or when it is earned. Therefore, if a bank calculates interest and creates a liability in favour of a customer, the amount may be treated as taxable income even if the customer has not physically received the money.

The law also contains provisions regarding withholding tax deductions when interest is credited to a customer’s account or actually paid. During tax return submission, the total tax liability is calculated and adjusted against taxes already deducted at source. As a result, the existing framework may leave some taxpayers paying tax despite not having effective access to the income.

The issue has gained greater importance because of the deteriorating condition of parts of the banking sector. Rising non-performing loans, capital shortages, weak liquidity management and governance concerns have affected confidence among depositors.

According to available banking sector data, the rate of classified loans has increased significantly in recent years. The situation reflects growing pressure on financial institutions and highlights the need for stronger measures to protect depositors and restore confidence.

The government has taken steps to strengthen safeguards for depositors through measures such as the Deposit Protection Ordinance, 2025 and the Bank Resolution Act, 2026. These initiatives recognise that depositors may face difficulties receiving funds under exceptional circumstances and aim to create mechanisms for restructuring troubled banks and protecting customers’ interests.

However, similar clarity has yet to emerge within the tax framework. A key question remains unresolved: when a bank fails to pay due to liquidity constraints, should the related interest income still be treated as fully realised taxable income?

Tax experts argue that taxation should reflect genuine financial capacity rather than merely accounting entries. If income remains unavailable because of institutional failure, regulatory restrictions or circumstances beyond the taxpayer’s control, the tax treatment may require reconsideration.

The issue also has implications for long-term savings behaviour. Public confidence in banks may weaken if depositors believe that their money may not be available when needed, yet they remain liable for taxes on associated income.

Several policy options could be considered to address the concern:

The National Board of Revenue could provide interpretative guidance to clarify the treatment of such cases. There is also scope for introducing amendments to tax regulations so that interest income trapped due to banking failures, regulatory restrictions or legal orders can receive special consideration.

The government’s need for revenue is undeniable, but taxation should not rely on income that taxpayers have not been able to enjoy in reality. An effective tax system is not merely about enforcing legal provisions; it must also uphold fairness, economic reality and public trust.

As Bangladesh works towards rebuilding confidence in its banking sector, tax policy must evolve alongside changing financial realities. Maintaining a balance between protecting depositors and securing government revenue will be essential for creating a more sustainable and equitable taxation system.