The Ins and Outs of Tax-Free Investments in South Africa

What is a tax-free investment?

A tax-free investment (TFI) is an investment of which the capital amount is guaranteed, and the investment returns exempted from income tax, dividends tax, and capital gains tax.

Introduced on 1 March 2015, TFIs is a South African government incentive to encourage South Africans to increase their savings or to start to save.

A tax-free investment is commonly referred to as a tax-free savings account (TFSA).

Which type of investments qualify as tax-free investments?

According to the South African Revenue Service (SARS), the following investment accounts qualify as tax-free investments (TFIs).

• Fixed deposits.
• Retail savings bonds (available from national treasury).
• Unit trusts (collective investment schemes).
• Linked investment products.
• Certain endowment policies issued by long-term insurers.
• Exchange-traded funds (ETFs) that are classified as collective investment schemes.

Fixed deposits include money market or fixed-term bank accounts. Retail savings bonds are available from the national treasury.

Exchange-traded funds (ETFs) are also commonly known as tax-free shares.

Which financial service providers (FSPs) are allowed to provide tax-free investments?

The following FSPs are allowed to receive money to be invested in tax-free investments:

• Long-term insurers.
• The national government (national treasury).
• Licenced banks.
• Managers of registered collective schemes (with certain exceptions).
• Mutual banks.
• Co-operative banks.

Conditions of tax-free investments

Who is allowed to invest in TFIs?

TFIs are only available to South African residents, including minors.

Limits of investment amounts

Lifetime limit

Currently, the lifetime limit is set at R500 000 per individual. If a taxpayer’s tax-free investments exceed the lifetime limit, SARS will tax his or her contributions above R500 00 at a rate of 40%.

Investment returns that are added to the capital amount, causing the lifetime limit of R500 000 to be exceeded, are not viewed as extra contributions, and are excluded from the tax penalty of 40%.

Annual limit

As from the 2020/2021 tax year (March 2025 to February 2025), the annual limit for an individual is R36 000.

As with the lifetime limit, the same principle with regard to excess contributions applies to annual contributions. For example, if an investor invests R43 000 in a tax-free investment in a particular tax year, he or she will be taxed at 40% on R7 000 (R43 000 – R36 000).

For instance, the excess of R7 000 x 40% = R2 800 (penalty), which is added to the normal tax payable on the notice of assessment by SARS.

In line with the lifetime limit, the capitalisation of investment returns within the same investment account is not considered an excess contribution. For instance, if an individual invested R36 000 in a particular tax year and let the return of R4 500 on the TFI be capitalised to bring the total amount of the investment to R40 500, the interest return of R4 500 is not observed as a contribution.

However, when the investor withdraws the investment return of R4 500 and invests it in the same tax-free investment account, the amount of R4 500 is regarded as a new contribution, exceeding the annual limit of R36 000 and subjected to the tax penalty of 40%. Further, according to SARS: ‘The same principle will apply if any portion of the capital is withdrawn and reinvested in the same tax-free investment account.’

Any unused portion of the annual limit falls away and is not carried forward to the next tax year.

Regarding withdrawals from tax-free investments

Ad hoc withdrawals from TFIs are allowed and can be done at any time and without penalties.

However, regular withdrawals are not allowed because allowing regular withdrawals will have the opposite effect of the South African government’s initiative to encourage South Africans to save more.

Withdrawals are not considered when an individual’s annual limit and lifetime limit are determined. Put differently, any withdrawals made from a tax-free investment account have no impact on how the limits are calculated.

For example: Anne invests respectively R20 000 and R16 000 during a tax year in a tax-free investment account. The R36 000 (R20 000 + R16 000) is the maximum amount she is allowed to invest in TFIs during the particular tax year. Hence, her annual limit of R36 000 is reduced by R36 000 and her remaining limit for the year is R0.

The remaining lifetime limit is R464 000 (R500 000 – R36 000).

If Anne withdraws R20 000 from the TFI in the same tax year, the situation is as follows: Due to the fact that withdrawals are not taken into account when the annual limit and lifetime limit are determined, the maximum limits remain unchanged, R0 and R464 000, respectively.

The effect is that when Anne withdraws the R20 000, she is not allowed to replace it above the annual limit of R36 000.

Bear in mind, depending on the type of investment account (for instance a one-year fixed deposit account), a withdrawal will be subjected to a time limit (like 32 days). Penalties, applicable to early withdrawals, vary from service provider to service provider but may not exceed R500.

Minors and tax-free investments

Parents and legal guardians are allowed to invest in tax-free investments on behalf of minors, regardless of their age.

The following requirements apply:

• Contributions to investments of minors are considered part of their annual and lifetime limits.

For example: John’s father opened a TFI account on behalf of him as a minor in April of the 2025 tax assessment year, investing R30 000. John celebrated his 18th birthday in November of the particular tax year and is in terms of the South African law no longer considered a minor. He received R10 000 as a birthday present from uncle James and decides to invest the money.

However, he is only allowed to invest R6 000 of the R10 000 in his TFI account because that is what the remaining annual limit is (R36 000 – R30 000).

With regard to his lifetime limit: With the commencement of his adult life, John’s lifetime limit is R470 000 (R500 000 – R30 000). After the additional investment of R6 000 the lifetime limit decreases to R464 000.

• Withdrawals from minors’ TFI accounts can only be made to a bank account held in their name.
• Contributions made on behalf of minors are considered donations and are subjected to a donations tax of 20%. SARS exempts the first R100 000 donated by a natural person in a tax year from donations tax.

Tax-free investments and certain bank and other specifications

Tax-free investment accounts cannot be used as transactional accounts. Transactional accounts, also known as current accounts, cheque accounts, or savings accounts, are accounts in which a person deposits money for immediate use.

ATM transactions are not allowed to execute FTI account transactions.

A person may not take out a loan from a TFI or cede it or use the tax-free investment as any form of security.

Transfer of tax-free investments

As of March 1, 2018, individuals are allowed to transfer tax-free investment accounts between financial service providers. The transfer process must be executed by the service providers involved. An investor will not be able to switch to another service provider by withdrawing funds from his or her TFI account and depositing the money into a TFI account with a different service provider – that would be considered a new contribution.

TFI accounts cannot be transferred from one person to another.

How many tax-free investment accounts are allowable per individual?

Any South African resident (including minors) is granted more than one tax-free investment account. However, the annual limit remains the same, regardless the number of TFI accounts.

For instance, a person can invest R15 000 in a tax-free shares account at bank ABC, R10 000 in a unit trust tax-free account at investment manager DEF, and R11 000 in an endowment policy tax-free account at long-term insurer GHK during a particular tax year.

Any additional contributions to any one of the tax-free investment accounts mentioned above will trigger a 40% tax penalty.

Further, the national treasury does not allow the conversion of an existing savings account into a tax-free savings account (TFSA).

Are contributions to tax-free investments deductible for income tax purposes?

Contrary to contributions towards approved annuity and retirement funds, contributions to tax-free investments are not allowed as deductions for income tax purposes.

Procedures when the holder of a tax-free investment dies

As mentioned, a tax-free investment account cannot be transferred from one person to another.

Therefore, the investment will have to be liquidated and paid to the deceased’s nominated beneficiary or beneficiaries. Typically, the proceeds of the investment will comprise the market value of the investment account, less fees and charges. If there are no nominated beneficiaries, the investment will remain in the deceased estate and distributed in accordance with the deceased’s last will and testament.

Fees involved in tax-free investment accounts

When considering a tax-free investment account as an investment option, it is important to select a TFI account with the lowest possible fees.

Fees pertaining to TFI accounts vary between financial service providers. Hence, shop around for the best possible option. Remember, fees and other charges reduce your savings.

Typically, fees involved in TFIs are:

• Initial and annual review financial advisor fees – negotiable between investor and financial advisor.
• Administration fees for services provided by the financial service provider.
• Investment or asset management fees – depend on the underlying fund(s) selected and the market value of the units held in the fund.

Is a tax-free investment suitable for me?

Although comprising tax exemptions with regard to income tax, dividends tax, and capital gains tax, TFIs may not be suitable for all investors and may not provide significant tax benefits.

For example: If you are not investing for the long-term or are already paying tax on the interest earned from a South African investment source, meaning your interest income exceeds the exemption amount set by SARS – see table below.

SARS tax table for interest exemptions

How do I invest in a tax-free investment?

There are numerous financial service providers, such as banks, investment fund managers, and long-term insurers, that provide tax free investment opportunities.

There are also numerous ways to start investing in TFIs, such as:

• Using an authorised financial advisor who will introduce you to a variety of tax-free investment products.
• Approaching a financial service provider (FSP) directly via the FSP’s website or its application on a smartphone. FSPs can also be contacted on telephone numbers provided on their websites.

Depending on the type of investment account, investments can be done monthly (varying from R250 to R1 000 per month) or via lump sums, such as R10 000, R15 000, or R20 000.

Service providers are obliged to provide SARS bi-annually with the following information regarding tax-free investment accounts:

• Total contributions per tax year.
• Total amount of withdrawals during the tax year.
• Total amounts transferred per tax year.
• Total of investment returns during the tax year, for example: interest, dividends, capital gains, and capital losses.

Service providers will provide taxpayers who hold tax-free investment accounts with the information mentioned above by issuing an IT3(s) Tax-Free Investment certificate annually.

Key considerations involved in tax-free investing

• Preferably, discuss a tax-free savings product with an authorised and trustworthy financial advisor before you start investing.
• Take your personal circumstances into account.
• Is the TFI suitable for your requirements at any stage of your life?
• How much time left to reach your investment goals?
• How does a specific TFI complement your investment portfolio?
• Start contributing as early as possible.
• Try to contribute consistently and as much as you can, keeping the annual and lifetime limits in mind.
• If possible, leave the money in the investment as long as you can, trying not to withdraw the money you have already invested.