Definition of Tax-Exempt Interest

Tax exempt interest is not subject to State or/and Federal level income taxes. Mostly, it comes from a municipal bond and also the dividends that come from municipal bonds are tax exempt. It is mandatory to report tax exempt interest in Internal Revenue Service (IRS) or any other relevant authorities operating in that particular state..

Explanation of Tax-Exempt Interest

Suppose Mr. X has purchased a municipal bond for $10,000. He gets 10% ($1,000) interest on his investment every year. That income of worth $1,000 is tax exempt as municipal bonds are tax free investment.