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Tax-Exempt Interest
Tax-exempt interest is interest income that is exempt from income tax. Examples of tax-exempt interest include:
- Interest on government securities
- Interest on municipal bonds
- Interest on certain other exempt investments
Types of tax-exempt interest:
- Government securities: Interest on Treasury bonds, Treasury bills, and other government securities is exempt from income tax.
- Municipal bonds: Interest on municipal bonds is exempt from income tax for residents of the municipality issuing the bond.
- Certain other exempt investments: Interest on certain other investments, such as investment trusts and certain retirement accounts, is exempt from income tax.
Eligibility requirements:
To be eligible for tax-exempt interest income, the income must meet the following criteria:
- Source of income: The income must be derived from a source that is exempt from taxation.
- Purpose of income: The income must be used for a purpose that is exempt from taxation.
- Recipient: The income must be received by a person who is exempt from taxation.
Examples:
- A person who receives interest on government securities is not required to pay income tax on that income.
- A resident of a city who receives interest on municipal bonds is not required to pay income tax on that income.
- A retired person who receives interest on a retirement account is not required to pay income tax on that income.
Note: Tax-exempt interest income is still subject to other taxes, such as sales tax and property tax.