Which term describes the tax savings generated from the deductibility of interest payments?

The term that describes the tax savings generated from the deductibility of interest payments is known as the "interest tax shield." This concept refers to the reduction in taxable income that a corporation or individual can achieve by deducting interest expenses from their overall income. Because interest payments on debt are typically tax-deductible, they effectively lower the total taxable income and thus the taxes owed.

This mechanism encourages borrowing, as it can lead to a significant tax benefit, making debt financing potentially more attractive compared to equity financing where dividends are not tax-deductible. The interest tax shield is particularly crucial in evaluating the capital structure of firms and in corporate finance decisions, as it can enhance the overall value of the firm by reducing tax liability.

In contrast to other terms presented, debt repayment refers to the act of paying back borrowed funds, which does not inherently provide any tax saving. A tax loophole usually describes a provision in tax law that allows individuals or companies to reduce their taxes in a manner not intended by lawmakers, and capital gains tax is the tax on the profit from the sale of an asset, which is unrelated to the concept of interest tax deductibility.