Lock $50,000 into a 12-month term deposit at 4.8 percent per year, with interest paid at maturity, and assume a 32 percent marginal tax rate. Over one year the simple interest is $50,000 times 4.8 percent, which is $2,400, so the deposit matures at $52,400. That interest is assessable income, so at a 32 percent marginal rate the tax is $768, leaving $1,632 of after-tax interest. If instead you chose monthly compounding, the interest would be a little higher than $2,400 because each month earns interest on the previous month, but for a one-year term paid at maturity the simple calculation applies and the gross interest is exactly $2,400.
How it is calculated
The calculator handles two interest styles. When interest is paid at maturity, it uses simple interest, so the gain is the deposit times the annual rate times the term in years. When you select monthly, quarterly, or annual compounding, it applies the rate divided by the number of periods per year and raises that growth factor to the number of periods, so interest earns interest. Interest earned is the maturity value less the original deposit. The after-tax figure multiplies that interest by one minus your marginal rate, because term deposit interest is assessable income taxed in the year it is paid or credited. The tool does not add the Medicare Levy or HECS effects, so the after-tax number is a clean illustration of the marginal-rate impact rather than a full tax return.
Frequently asked questions
Is term deposit interest taxed?
Yes. Interest is assessable income in the year it is paid or credited, taxed at your marginal rate. The bank reports it to the ATO, and if you have not given your TFN the bank withholds tax at the top rate. Term deposits are covered by the government deposit guarantee up to $250,000 per institution.
What is the government deposit guarantee for Australian term deposits?
The Australian Government Guarantee Scheme protects deposits up to $250,000 per account holder per authorised deposit-taking institution (ADI). If you hold more than $250,000 in a single bank, only the first $250,000 is guaranteed. Splitting deposits across multiple ADIs is a common way to stay fully within the protection limit.
Can I break a term deposit early?
Most Australian banks allow early withdrawal but charge a prepayment cost, which is typically a reduction in the interest rate earned for the period you held the deposit. The exact penalty varies by institution and is set out in the product disclosure statement. It is worth comparing the penalty against your reason for breaking the deposit before proceeding.
How does compounding affect my return on a term deposit?
When interest compounds monthly or quarterly, each period earns interest on the accumulated balance rather than the original principal, producing a higher maturity value than simple interest at the same stated rate. The difference grows with longer terms and higher rates. For short terms of three to six months the difference is small, but for deposits of two years or more the compounding effect becomes more meaningful.