Taxation of interest income for an individual taxpayer

This article explains how to tax an individual taxpayer’s interest income. It is relevant for FTX-LSO candidates, thus providing a good foundation for TX-LSO examinations. The article is based on prevailing legislation applicable to tax years 2025 and onwards.

The general rules of taxation for interest income receivable by an individual are set out in the Income Tax Act 1993 within sections 27 and 158. 

Under section 27 (interest), the first M500 of interest is exempt from income tax, provided that the following conditions prevail:

  • if it is derived from a single savings account, nominated by a Lesotho tax resident individual who is not a minor
  • the nomination must be made to the financial institution with whom the account is held and must have the individual’s identification number, and
  • the savings account should be held with a registered financial institution which is tax resident in Lesotho.

Under section 158 (payments of interest), subject to section 27, a person who is tax resident in Lesotho, other than an individual, must withhold tax at the rate of 10% of the gross amount on the payment when the interest is paid to someone who is tax resident in Lesotho. This refers to the withholding tax agents such as financial institutions and other institutions, but not individuals. The first M500 is exempt where relevant, before charging withholding tax of 10%.

This implies that section 27 is linked to section 158.

Section 158 further provides that tax withheld is the final tax, where the payee is a Lesotho tax resident individual. This means that the interest should not form part gross income when calculating the chargeable income of the individual.

This part of section 158 tends to confuse candidates when they are required to calculate the tax payable on the interest income received by an individual from different bank accounts. An example of how this could be tested is provided below:

EXAMPLE
Mopeli, a sole proprietor, submitted a tax return for the year ended 31 March 2025, which showed annual revenue of M205,000; and allowable expenses of M94,000.

In addition, Mopeli received interest from the following bank accounts:

 
M
Standard Lesotho savings account (nominated)
5,400
Nedbank Lesotho fixed deposit account
3,100
 8,500

Required:
Calculate the income tax payable by Mopeli for the year ended 31 March 2025.

Solution:

  
M
Revenue 
205,000
Expenses (all allowable) 
(94,000)
Chargeable income 111,000
Tax payable:  
70,500 x 20% 14,100
((111,000 – 70,500) x 30%) 12,150
  26,250
Less personal tax credit (11,040)
Tax payable 15,210

Candidates should note that the interest income has not been included in the chargeable income because Mopeli, as the recipient, is an individual taxpayer. According to the Income Tax Act, the interest should be charged by the bank through the withholding tax system.  

Mopeli will be charged on interest income as follows:
M
Interest from Standard Lesotho bank savings account (5,400 – 500)
4,900
Interest from Nedbank Lesotho fixed deposit account
3,100
 8,000
Withholding tax at the rate of 10% (8,000 x 10%)800

The M800 withholding tax is the final tax on interest income that is why it is not included in the chargeable income of M111,000 above. 

Section 27 and section 158 have been applied accordingly to calculate tax on interest income of the individual taxpayer.

Written by a member of the TX-LSO examining team

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