Are Money Market Funds taxed in Kenya?
Yes. The Fund Manager deducts 15% of your interest. The 85% interest is credited to your money market fund account.
Do you need to declare withholding tax arising from Money Market Fund transactions?
What are the implications if you don’t? This article will help you gain the clarity you need.
Withholding Tax on Money Market Fund Income
Thanks to their structure, MMFs give investors exposure to a mix of short-term, near cash assets. Here is a pie chart showing the different investments these funds buy into in a bid to generate attractive returns to their unit holders:
Interest Income from MMFs
When you invest your money in an MMF, the fund manager will allocate you units in exchange. In most if not all MMFs in Kenya, a unit is priced at KES1. Therefore, when you invest KES 1,000, you are in essence purchasing 1000 units of the MMF. The more invested you are in the fund, the more units you’ll own.
Unit holders earn ‘interest income’ from their investment in the MMF. The fund manager calculates the income every day based on a daily updated interest rate. Remember, the daily performance of an MMF varies depending on the performance of the mix of underlying assets it has invested in – treasury securities, commercial paper, cash deposits, etc.
The interest is computed and accrued (accumulated) daily and added to the principal every end of month (compounding). This means if you invested KES 10,000 in February 2022 and the annualized yield (uncompounded) remains 8.52% each day, you will earn KES 65.36 at the end of the month.
Here is how it is calculated:
The assumption made here is as follows:
The annualized yield (uncompounded) will remain 8.52% for the whole month.
However, the actual practice is that the annualized daily yield changes every day even if by a few basis points. If you get hold of your favorite daily newspaper -mine is Business Daily 😊 you’d see this under the “Market Data” section.
From the image above:
Daily Yield: This is the annualized percentage which when divided by 365 days in a year gives you the day’s interest rate.
Effective Annual Yield: This is the annualized yield based on the daily yield factoring in the monthly compounding.
So, every day of February 2022 interest is calculated using the daily yield and accumulated separately until the end of the month when it is added to the current principal to form the new principal for March 2022. And the cycle goes on and on.
Here is where it accumulates for CIC:
Withholding Tax and the Implications
At the end of every month, the fund manager deducts 15% of your monthly gross interest income. This is withholding tax. Our calculations above show that the withholding tax for February 2022 is KES 9.80.
MMF Interest Categorized as Qualifying Interest
Before the Tax Laws (Amendment) Bill, 2020, MMF interest was not included in the definition of qualifying interest.
Old definition (before 2020)
“Qualifying interest” means the aggregate interest, discount, or original issue discount receivable by a resident individual in any year of income from—
(i) a bank or financial institution licensed under the Banking Act (Cap. 488); or
(ii) a building society registered under the Building Societies Act (Cap. 489) which in the case of housing bonds has been approved by the Minister for the purposes of this Act; or
(iii) the Central Bank of Kenya:
(a) interest earned on an account held jointly by a husband and wife shall be deemed to be qualifying interest; and
(b) in the case of housing bonds, the aggregate amount of interest shall not exceed three hundred thousand shillings.
Amended definition (From 2020 onwards)
“Qualifying interest” means the aggregate interest, discount, or original issue discount receivable by a resident individual in any year of income:
- interest earned on an account held jointly by a husband and wife shall be deemed to be qualifying interest; and
- in the case of housing bonds, the aggregate amount of interest shall not exceed three hundred thousand shillings.
The part highlighted in yellow was deleted and this meant that
- Qualifying interest was expanded to incorporate any interest received by a resident individual including but not limited to MMF interest.
- Withholding tax on qualifying interest (in this case MMF interest) will be final. Check Section 5 (h) of the income tax act. It says:
Provided that the tax so deducted shall be final;
(h) in respect of qualifying interest
- The amendment only applied to individuals and not companies. It talks of resident individual which according to the Act is defined as a ‘natural person’
The Income Tax Act in Section 20 – Collective Investment Schemes
This section of the Act is dedicated to Collective Investment Schemes including MMFs. It gives powers to unit trust schemes to withhold income tax on interest income.
Subject to such conditions as may be specified by the Minister under section 1, a unit trust registered by the Commissioner, shall be exempt from income tax except for the payment of withholding tax on interest income and dividends as a resident person as specified in the Third Schedule to the extent that its unit holders or shareholders are not exempt persons under the First Schedule.
It goes ahead to reaffirm that the withholding tax is a final tax. This means the remaining MMF interest income is not subject to any further income taxation.
All distributions of income, and all payments for redemption of units of sale of shares received by unit holders or shareholders shall be deemed to have been already tax paid.
Withholding and Remitting Tax
Once the fund manager withholds the KES 9.80 income tax, on February 28,2022, they are required by law to submit it to KRA (Commissioner for Domestic Taxes) by the 20th of March 2022.
Here is what the Income Act states:
(5) Where a person deducts tax under this section he shall, on or before the twentieth day of the month following the month in which the deduction was made—
(a) remit the amount so deducted to the Commissioner together with a return in writing of the amount of the payment the amount of tax deducted, and such other information as the Commissioner may specify; and
(b) furnish the person to whom the payment is made with a certificate stating the amount of the payment and the amount of the tax deducted.
Withholding tax for companies
If the MMF investor is a company (corporate body), the fund manager will withhold 15% of the MMF interest income, but it won’t be final. The fund manager will categorize it as ‘Interest (any other Case)’ instead of ‘qualifying interest.’ This means the company will have to declare and pay additional tax on the MMF income.
Here is an example of the certificate the company will receive. Under the ‘Details of Tax Withheld’ section, check the ‘Nature of Transaction’ line.
Withholding Tax for Individuals
On 27th April 2020 the Tax Laws (Amendment) Act, 2020, was assented and commenced immediately. This meant that the MMF interest income the fund managers used to deduct from individuals was re-categorized from ‘Interest (any other Case)’ to ‘qualifying interest.’
The implication here is
- Fund managers would deduct the 15% from the individual MMF investors as final tax. The individual is not required to declare or file the income. If MMF interest is the only income, the individual will file Nil returns.
- The interest income withheld is combined with the income withheld from other investors and filed by the fund manager under a special account. Individuals no longer receive tax withholding certificates.
What does a Withholding Tax mean to you as an MMF investor?
Think of withholding tax as income tax you’ve paid in advance to KRA with respect to your MMF interest income. However, since the tax withheld is a final tax, you won’t be required to pay any other income tax on the MMF interest income.
This means if you do not have any other income apart from the MMF interest income, you’ll just file Nil returns at the end of the year. However, if you have other incomes in addition to the MMF interest income, you’ll file your returns on the other incomes as normal and pay the taxes you owe on those other incomes. Do not list MMF as part of the income, else you’ll end up paying additional taxes for nothing.
Frequently Asked Questions
1. I have received a Withholding Tax Certificate from my fund manager. Should I be worried?
Individual investors no longer receive Withholding Tax certificates. However, if you do receive, quickly check the line that reads ‘Nature of transaction’. If the transaction is described as Interest (any other Case), please reach out to the fund manager to correct that to ‘qualifying interest’. If you don’t, KRA will expect that you will declare that MMF income and pay additional taxes where applicable.
2. Do I need to declare the total tax withheld as shown in my certificates?
No. The WHT on MMFs interest income is final. Therefore, you neither declare the income nor the tax withheld. You simply do a Nil return unless you have other types of income other than the MMF interest income.
3. How do I file my returns when I have MMF withholding tax certificates?
Since withholding tax on MMF interest income is a final tax, you’ll file your returns on the other types of incomes except the MMF interest income. If you only have MMF income, go to iTax and file a nil return.
4. How do I file my tax return if I have both MMF income and employment income?
It is very simple! Just file your tax return on the employment income and leave out the MMF income. The reason being the 15% tax deducted is first and final.
5. Do I need to declare withholding tax arising from MMF transactions and what are the implications if I don’t?
No, you don’t declare and there is no implication. The tax withheld was final and the system has already captured it. Just file Nil if that is the only income you have.
Do you have more tax-related questions? Leave them in the comment section, we’re glad to help.
Written by: Thomas Mbaru
Thomas M. is a professional business writer, finance coach and small business consultant at AccountaxPlus Business Solutions. He advises MSMEs on business formation, regulatory mainstreaming, accounting, and tax. When he is not talking business, he spends time exploring web 3.0, blockchains, and the metaverse. Email him at email@example.com