Tax-exempt interest is interest income that is exempt from income tax. Examples of tax-exempt interest include:

• Interest on government securities
• Interest on municipal bonds
• Interest on certain other exempt investments

Types of tax-exempt interest:

• Government securities: Interest on Treasury bonds, Treasury bills, and other government securities is exempt from income tax.
• Municipal bonds: Interest on municipal bonds is exempt from income tax for residents of the municipality issuing the bond.
• Certain other exempt investments: Interest on certain other investments, such as investment trusts and certain retirement accounts, is exempt from income tax.

Eligibility requirements:

To be eligible for tax-exempt interest income, the income must meet the following criteria:

• Source of income: The income must be derived from a source that is exempt from taxation.
• Purpose of income: The income must be used for a purpose that is exempt from taxation.
• Recipient: The income must be received by a person who is exempt from taxation.

Examples:

• A person who receives interest on government securities is not required to pay income tax on that income.
• A resident of a city who receives interest on municipal bonds is not required to pay income tax on that income.
• A retired person who receives interest on a retirement account is not required to pay income tax on that income.

Note: Tax-exempt interest income is still subject to other taxes, such as sales tax and property tax.