Introduction to Redemption of Withholding Tax

This module covers the calculation of the Withholding tax, on interest payable to a customer for early redemption of a term deposit. The interest amount arrives at by netting the early redemption fee from the calculated interest, and applying tax on the balance interest amount.

Click here to understand the terms and abbreviations used in this module.

WHT is applied for the interest earned on account or deposit products belonging to private customers (not corporate). The bank is responsible for the tax at source and forwards the deducted tax amount to the state treasury. Requested module is connected with the WHT calculations in Finland, Sweden and has the possibility to cover situation when there is an early redemption of deposits. In such scenario, the tax needs to be calculated after deducting the early redemption fee.

There are two functional aspects addressed:

• Calculation of early redemption fee: The early redemption fee is calculated based on the differential market borrowing cost of funds, for the financial institution, applicable, for the remaining term of the deposit, from the date of redemption, and the market borrowing cost of funds applicable, when it had taken the deposit from the customer.
• Withholding tax on interest calculated for early redemption: The Withholding tax is calculated as a percentage of the interest computed during early redemption, with the early redemption fee netted off.

This user guide provides details on the necessary configuration required in the system to achieve the functionality of calculating Withholding tax, in Sweden, based on a threshold amount.

Deposit Early Redemption Charge Ceiling

Fixed Term Deposits (FTDs) are popular investment options offered by banks and financial institutions.

One key feature of FTDs is their fixed term, meaning that the deposited funds are locked in for the duration of the term, with limited or no access to withdrawals until the maturity date.

However, circumstances may arise where a depositor needs to access their funds before the agreed-upon maturity date. In such cases, financial institutions often allow for early redemption of the Fixed Term Deposit, albeit with a penalty attached. This penalty, known as Early Redemption Charge, is levied on the depositor for withdrawing funds before the maturity of the FTD.

The early redemption charge acts as a deterrent against premature withdrawals, discouraging depositors from disrupting the agreed-upon investment term. Additionally, these charges help compensate the institution for the potential loss of interest income that would have been earned had the deposit remained until maturity.

For a 3-month renewing Fixed Term Deposits (FTDs) in SEK currency, the early redemption charge will be limited to the amount of the interest accrued, ensuring that the principal amount remains unaffected.

This functionality allows banks to manage the calculation method for early redemption charges on a 3-month renewing Fixed Term Deposit (FTD) in Sweden. The early redemption charge will not surpass the interest earned during the period. Furthermore, the with-holding tax calculations will remain unaltered.

The functionality works only when the following are satisfied:

• Specific Interest property.
• Specific Currency.
• Specific Term or Renew period.