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Interest on security deposits

Security deposit interest calculator with an entered rate

Letting flats and houses comes with many responsibilities, one of which is handling the security deposit correctly. A security deposit is a refundable payment made by the tenant as protection against unpaid rent or damage to the flat. Yet few people know that landlords are required not only to return the deposit at the end of the tenancy, but also to add interest to it. What does this mean for you as an owner, and what should you watch out for? Read on.

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Published 2/1/25, 3:22 pm

What is a security deposit?

A security deposit is a form of advance payment – an amount paid before a particular contractual relationship begins. In the case of letting, we are talking about a refundable security deposit, which may be no more than three times the monthly rent.

What is a security deposit for?

A security deposit serves as protection for the landlord if the tenant fails to pay rent or causes damage to the property. In the event of damage to the flat's furnishings, the deposit provides funds for their repair or replacement.

Security deposit or guarantee?

The security deposit (guarantee) and the right to payment of a contractual penalty must not exceed three times the monthly rent, excluding advance payments for utilities, in total (§ 2254 of the Civil Code). At the end of the tenancy, the security deposit is settled after deducting any tenancy-related debts, and the tenant is entitled to interest from the date it was provided.

You can read the exact wording of § 2254 of the Civil Code below:

“At the end of the tenancy, the landlord returns the security deposit to the tenant, after deducting any amounts the tenant may owe under the tenancy. The tenant is entitled to interest on the security deposit from the time it was provided, at least at the statutory rate.”

Why is a tenant entitled to interest on a security deposit?

In effect, the tenant is lending money to the landlord. During the tenancy, the tenant cannot use these funds and their value therefore diminishes, particularly over a period of several years. The principle is fair, but its implementation may not be. The problem is the level of interest, which has recently been very high, and an ordinary landlord is nowhere near able to achieve comparable returns.

The security deposit as a loan

From a legal perspective, the security deposit is treated as credit provided to the landlord. This interpretation may make sense from the tenant’s perspective, but it is less logical from the owner’s point of view. The real purpose of this money for the owner is not a loan; they would probably never take out such credit themselves. After all, the security deposit serves as protection against potential arrears and damage caused by the tenant. On the other hand, it is fair to pay the tenant a return on their funds so that they do not lose out. 

How to calculate interest on a security deposit

The amount of interest requires an assessment of the specific agreement and the applicable rules. The range of lending rates alone does not determine the rate for a particular security deposit.

You can read the exact wording of Section 1802 of the Civil Code below:

“Where interest is payable and its amount has not been agreed, the debtor shall pay interest at the rate set by legislation. If the interest is not set in this way, the debtor shall pay the usual interest charged on loans provided by banks at the debtor’s place of residence or registered office at the time the agreement was concluded.”

How do you calculate the amount of a security deposit?

The security deposit depends on the amount of rent. It may be no more than three times the monthly rent. 

Security deposit interest calculator

Interest can be estimated using an entered rate and period. Determining the legally applicable rate is a separate matter; without it, no universally binding result can be provided. Below, we set out a model approach and its limitations.

What can be calculated is the ideal level of rent. You can use our market rent calculator, which monitors public listings across the entire market.

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A practical example of calculating interest on a security deposit

Now let us look at a specific example of how to calculate interest on a security deposit:

Net rent excluding utility advances: CZK 20,000

Security deposit amount: CZK 60,000 (three months’ rent)

Model rate: 10% per annum (illustrative only, not a statutory rate)

Interest for one year: CZK 6,000

Interest for two years: CZK 12,000

This example clearly shows that this is far from a negligible amount.

You must pay interest on the security deposit out of your own pocket

The security deposit must be settled at the end of the tenancy in accordance with the agreement and the law. Any return earned on money held in an account does not in itself determine the extent of the tenant’s entitlement to interest; any difference is borne by the landlord.

What can you do? 

The best solution is always mutual agreement, ideally in advance, so that neither party is at a significant disadvantage. A fair solution is to calculate interest according to mortgage interest rates, which currently range between 5–6%.

Practical tips for landlords

Agree the interest in advance. The most transparent solution is to clearly define the rules beforehand: agree an interest rate with the tenant that reflects the real return you can achieve on the money.

Use the security deposit effectively. Consider placing these funds in a savings account with higher rates while still allowing easy access to the money. At the same time, remember your obligation to tax interest income.

Consult a lawyer. A well-drafted agreement is the cornerstone of every tenancy. A professional will help you set terms that are fair to both parties.

Practical tips for tenants

You are entitled to interest. Even if you agree zero or very low interest with the landlord in the agreement, you can still claim interest. This entitlement cannot be circumvented by law.

Do not forget to tax the interest. Interest is income like any other and must be properly taxed.

Conclusion

A fair solution lies in good communication between both parties. A tenancy should be based on mutually beneficial terms. If you do not want to deal with calculating interest, agreements and other administration, you can turn to professional property managers. They will arrange everything for you and ensure your rental runs smoothly.

 

Source: Civil Code.

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Security deposit interest calculator with an entered rate

Enter the principal, annual rate and period. The calculator will calculate simple interest and the total including the principal. No rate is pre-filled: the tool does not determine it legally. The result is not automatically the amount to be returned, as it does not take account of debts, set-offs, changes to the principal or other contractual terms.

Method: principal × annual rate / 100 × number of actual calendar days / 365. We calculate from and including the start date up to, but excluding, the end date, without compound interest. The denominator remains 365 even in a leap year; this is an expressly selected model, not a determination of a legally binding convention. Interest is rounded to haléře only at the end.

Data is calculated only in your browser; it is not sent to the CRM through the form and is not stored in your browser storage. When an input changes, the previous result is cleared; press the button again to recalculate.

Legal basis: Section 2254 and Section 1802 of the Civil Code. In the event of a dispute, variable rates, changes to the principal or capitalisation of interest, an individual assessment is required.

Calculating interest is not the same as determining the rate

For estimated simple interest using an entered annual rate, use: security deposit × rate / 100 × number of days / 365. For example, CZK 60,000 at a model rate of 5% for 365 days equals CZK 3,000. This illustrates the arithmetic, not a recommended or legally prescribed rate.

First, the applicable rate and period must be determined. Section 2254 gives the tenant the right to interest from the provision of the security deposit, at least at the statutory rate; Section 1802 governs the determination of interest where its amount has not been agreed or set by legislation. You cannot automatically use the Czech National Bank repo rate, a savings account rate or default interest. If the rate is disputed, seek an individual legal assessment.

The security deposit and the right to payment of a contractual penalty must not, in total, exceed three times the monthly rent excluding utility advances (Section 2254 of the Civil Code). If the security deposit changes during the tenancy, divide the estimated calculation into individual periods. Legal source: Civil Code, Section 1802 and Section 2254.

Would you like your agreements and rental management handled together? See our comparison of property management with self-managed letting and guaranteed rent terms and conditions.