Is Interest You Earn From Lending Money Privately Taxable? BIR Rules for Non-Bank Lenders

Interest earned from lending money privately — to a relative, a business partner, or any borrower outside the banking system — doesn’t get the 20% final tax treatment reserved for bank deposit interest. Instead, it’s ordinary income, added to the lender’s other taxable income and taxed at the regular graduated rates. This surprises many first-time private lenders who assume all interest income automatically gets the same flat, already-settled tax treatment their savings account interest does.

For the related question of how a business classifies certain lenders for withholding purposes, see Why Financing Companies Pay Percentage Tax, Not VAT, Under NIRC Section 122 and Input VAT vs. Output VAT: How BIR VAT Credits Work in the Philippines.

Why the 20% final tax doesn’t automatically apply #

The 20% final withholding tax most taxpayers associate with “interest income” is narrower than it sounds — it’s tied specifically to interest from bank deposits, deposit substitutes, trust funds, and similar financial-system arrangements, not to interest income in general. NIRC Section 24(B)(1) sets the final tax at 20% on:

“Interest from any peso bank deposit, and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements”

That is a category describing money sitting inside the regulated banking and deposit-substitute system, where the bank itself is the withholding agent with an automatic mechanism to deduct the tax before crediting interest to the depositor’s account.

A private loan — cash you personally lend to a relative starting a business, or to a friend buying a car, documented with a simple promissory note — never passes through that banking mechanism at all. There’s no bank standing between lender and borrower to withhold anything, and the arrangement itself isn’t a “deposit” or “deposit substitute” in the regulatory sense those terms carry.

Where private lending interest actually falls #

Interest income is part of gross income under the Tax Code’s general definition regardless of source, so private lending interest doesn’t escape tax — it just falls under the general, not the final-tax, regime. NIRC Section 32(A) includes “interests” among the enumerated items of gross income, and absent a specific final-tax provision covering it (the way Section 24(B)(1) covers bank deposit interest), that income is taxed the ordinary way: added to the taxpayer’s other income for the year and subject to the graduated income tax rates that already apply to compensation, business, and professional income.

The practical difference isn’t just the rate — it’s the mechanism. Bank interest is withheld automatically and the depositor generally has no further reporting obligation on that specific item. Private lending interest requires the lender to actively track and report it themselves; there’s no automatic system doing that on their behalf.

Worked example: lending to a sibling’s small business #

A private lender earning interest from a family loan reports that interest alongside their other income and pays tax on it at their marginal graduated rate, not a flat 20%.

An individual with a day job (compensation income of ₱900,000 for the year) lends ₱500,000 to a sibling starting a small retail business, documented with a promissory note charging 8% annual interest, generating ₱40,000 in interest income for the year:

The ₱40,000 doesn’t get a separate 20% final tax carve-out — it’s folded into the ₱940,000 total and taxed at whatever graduated bracket that combined income falls into, which for a taxpayer already in a higher bracket from compensation income could mean the interest is effectively taxed above 20%, not below it as a bank depositor might assume. The lender should keep the promissory note and any payment records, since this income doesn’t come with an automatic BIR-facing paper trail the way a bank certificate of final tax withheld does.

Frequently asked questions #

Is interest from lending money to a family member or friend taxable? #

Yes. Interest income is part of gross income under NIRC Section 32(A), regardless of who the borrower is. What differs is the rate and mechanism: interest from a private, non-bank loan is not subject to the 20% final tax reserved for bank deposit interest, so it is instead included in the lender’s other taxable income and taxed at the regular graduated rates.

Why doesn’t the 20% final tax on interest apply to a private loan? #

The 20% final withholding tax under NIRC Section 24(B)(1) is specifically tied to interest from bank deposits, deposit substitutes, trust funds, and similar arrangements — financial-system interest, in other words. A private loan between individuals or between an individual and a business isn’t a bank deposit or deposit substitute, so it falls outside that specific final-tax category.

Does the borrower have to withhold tax when paying interest to a private lender? #

It depends on whether the borrower is a withholding agent for expanded withholding tax purposes (a business, for instance, rather than an ordinary individual borrower) and how the payment is structured. Where withholding does apply, it functions as a creditable amount the lender credits against their own income tax, not as a final settlement the way bank-deposit interest withholding is.

How does a private lender report this interest income? #

A private lender includes interest income from non-bank lending as part of gross income on their regular income tax return, combined with any other income they have, and it’s taxed under the graduated rates (0% to 35%) rather than a flat final rate.

Does this apply to informal lending businesses too? #

A person or entity regularly engaged in the business of lending money — not just an occasional private loan — may additionally need to register as a lending investor or financing company with the BIR and SEC, which brings its own separate compliance and percentage tax obligations under NIRC Section 122, on top of how the interest income itself is taxed.

Summary #

The 20% final tax most taxpayers know from their savings account is a bank-specific rule under NIRC Section 24(B)(1) — it doesn’t cover interest earned from private, non-bank lending, which falls under the general gross income rules and gets taxed at graduated rates instead. A private lender needs to track and self-report that interest, since there’s no bank automatically withholding it on their behalf.