Tax-Free Investment: Limits, Benefits and How to Start

WHAT IS A TAX-FREE INVESTMENT?

A tax-free investment (TFI) account is a government initiative that encourages South African citizens to save more for their future through certain tax benefits. It’s designed for long-term saving outside of retirement — money you’re investing by choice to build future options over time.

You can use a TFI to save for any long-term goal outside of your retirement — for example, building wealth over time, investing for a child, or growing a flexible pool of long-term money you can access if you need it.

HOW DOES A TAX-FREE INVESTMENT WORK?

When you contribute to a TFI, the investment returns earned by your underlying investment in a unit trust grow completely free of local tax — and remain tax-free even when you withdraw. In practical terms, this means more of your return stays invested to grow over time.

In practice, that means you pay no local tax on:

• Interest or other income
• Dividends
• Capital gains

As a result, your investment return will be higher than simply investing in a unit trust — but there are restrictions to investing via a TFI account.

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WHY INVESTING TAX FREE MATTERS

Long-term outcomes are often shaped by what happens quietly in the background: compounding. A TFI helps because not paying tax means there is more money invested to grow — and the benefits of investing tax-free can compound over time.

Coronation illustrates this with a long-term example. In the scenario below, investing through a tax-free investment can more than double the outcome compared to investing the same amount in a standalone unit trust — because more of the return stays invested to compound over time.

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WHAT TO CONSIDER WHEN INVESTING TAX FREE

A Tax-Free Investment is simple in principle, but it comes with specific rules — especially around contribution limits. Below we summarise the key benefits and limitations so investors can use the allowance well and avoid costly mistakes.

WHAT ARE THE BENEFITS?

• Pay no local tax on interest and other income, dividends and capital gains
• Select any unit trust without any regulatory restrictions (a long-term growth-oriented fund may offer the biggest benefit)
• Free to switch or withdraw at any time
• Pay no initial fees or ongoing administration fees
• Open a Coronation Tax-Free Investment for minor children
• Transfer an existing tax-free account from a bank or another investment manager to Coronation free of charge

WHAT ARE THE LIMITATIONS?

• Only South African resident individual investors (not trusts, companies, etc.) are eligible
• Doesn’t pay out a regular income; interest and dividends earned are automatically reinvested
• No protection against creditor claims
• Cannot contribute more than R36,000 per annum or R500,000 over your lifetime

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Next step: If you want to start investing tax free, Coronation’s guided journey walks you through the essentials — including how to use your allowance and how to choose a suitable fund.

HOW TO START A TAX-FREE INVESTMENT WITH CORONATION

A practical way to get started is to keep it simple: contribute consistently, choose an investment approach that matches your time horizon, and make sure you understand the annual and lifetime limits. From there, it becomes about staying invested long enough for compounding to do the heavy lifting.

1. Decide on a contribution you can commit to
   With a Coronation TFI account, you can start contributing from as little as R250 a month, or a lump sum amount of R5,000.
2. Use your allowance well
   You can invest up to R36,000 per tax year and R500,000 over a lifetime. The guided journey describes it as a “use-it-or-lose-it” principle, which is why it’s best to max out contributions every tax year — without fail.
3. Choose a suitable Coronation unit trust to power your returns
   With a TFI account you are free to choose any of Coronation’s funds, and your fund choice is not subject to regulatory limits.

Need help narrowing it down? The guided journey highlights fund options commonly used by long-term tax-free investors and explains how to match a fund to your time horizon.

HOW DO YOU CHOOSE A FUND FOR A TAX-FREE INVESTMENT?

Fund choice should match what the money is meant to do and how long you can leave it invested.

Coronation highlights that you can invest in any of its rand-denominated unit trust funds in a TFI, without regulatory limits, and notes that a long-term growth-oriented fund may offer the biggest benefit.

Need help narrowing it down? The guided journey highlights fund options commonly used by long-term tax-free investors and explains how to match a fund to your time horizon.

HOW DOES A TAX-FREE INVESTMENT FIT WITH RETIREMENT SAVING?

One thing investors don’t always realise is that, while a TFI is a powerful tool for discretionary long-term savings, retirement products like a retirement annuity can also offer tax benefits while you remain invested — in exchange for locking money away until retirement.

To see how these account options work together in practice, read more in the Corolab Investment Guide, or watch this video.

CLOSING

A Tax-Free Investment is one of the most straightforward ways to build long-term wealth in South Africa: invest your money, see your returns grow tax free, and let compounding do the rest — as long as you stay within the annual and lifetime limits.

If you want to get started, Coronation’s guided journey walks you through the essentials, including how to choose a fund and follow the online application process.

Frequently asked questions (FAQ)

• What is a Tax-Free Investment (TFI)?
  A tax-free investment (TFI) account is a government initiative that encourages South African citizens to save more for their future through certain tax benefits.
  
  
• How much can I contribute to a Tax-Free Investment?
  Contributions are capped at R36,000 per tax year and R500,000 over a lifetime.
  
  
• What happens if I contribute more than the limit?
  If you go over the limit, SARS charges a 40% penalty tax on the extra amount.
  
  
• Can I withdraw from my Tax-Free Investment at any time?
  Yes. Coronation notes you’re free to switch or withdraw at any time, and there is no limit on how much you can withdraw.
  
  
• Is my money tied up in a Coronation Tax-Free Investment?
  No. However, Coronation recommends remaining invested for the long term to get the maximum benefit from both its investment approach and the power of compounding.
  
  
• Can I top up my existing Coronation Tax-Free Investment?
  Yes — but only if you have not yet contributed the maximum of R36,000 for the current tax year.
  
  
• Who can open a Tax-Free Investment?
  Only South African resident individual investors (not trusts, companies, etc.) are eligible, and only South African citizens qualify for a TFI.
  
  
• Can I open a Tax-Free Investment for a child?
  Yes. You can open a Coronation Tax-Free Investment for minor children.
  
  
• What are the fees on a Coronation Tax-Free Investment?
  Coronation states the account charges no initial, upfront, account, or switching fees (with limited exceptions), and charges an annual management fee depending on the chosen fund.
  
  
• Does a Tax-Free Investment pay a regular income?
  No. It doesn’t pay out a regular income; interest and dividends earned are automatically reinvested.