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Saturday, January 30, 2016

How Does Reduction of EPF Deduction from 11% to 8% Affects Your Income Tax?

Update: I had reviewed my article.  Rather than rewriting the whole article to amend where was wrong, I'm leaving this here and posted a new article here.  Hopefully, this article answers your queries better.

Update: been receiving quite a few comments asking me on this post. Rest be assured I will try to get this answered. As I don't want anyone get into trouble for filing the wrong tax return, I've decided to ask my contacts in LHDN to vet through my interpretation. Any amendments will be clearly highlighted. Hope that helps. 

Yesterday soon after the announcement of the Budget recalibration, some individuals began to spread rumours that when the govt reduce the employee's portion of EPF deduction, the government will be able increase their income tax base.


You can see this here.



I had supposed that only the gullible would have fallen for this.  But unfortunately no. I have seen some of those who shared this are working professionals who should know how tax computation works. 

I had intended to explain deeper how the budget recalibration works, but I guess debunking this have to come first. 

How does income tax work?
When calculating income tax, you need to know what is your annual income.  Most of us will be receiving either EA Form (Private Sector) or EC Form (Government Sector) from our employers soon.

In this form, it will be stated what is your annual income for the year and this will be the basis to calculate your income tax.

But not all income is taxable. And you do have different incomes that is taxable.  

I won't be going into the nitty gritty part of that.  That is for you to discover yourself. 

Tax Relief
Next we have tax relief. 

Tax relief is allowable deduction to be made against your income.  

There are different types of tax relief, and some of these changes from year to year. 

Examples of tax relief are personal relief, cost of purchasing a computer (made available every 3 years), purchase of books, insurance, and the most popular due to the EPF rate deduction, EPF.

If you have a look at EPF, you can only deduct up to RM6,000 and EPF is combined with life insurance. 

For further details, you may read it here.

After deducting your income against the tax relief, only then you will get your chargeable income. 

Tax Rate
Different income has different tax rate.
Income Tax Rate for YE 2015

Tax Rebate
Tax rebate is a rebate on your income tax payable.  This is in a way, discount govt gave you on your income tax.  

Scenario
Just to illustrate so you can understand better, I have prepared as simple scenario.

Say Ali, who is single and does not know how to maximize his income tax relief and rebate.  He does not utilise the rest of the relief or rebate because, like you and me, he doesn't like to read. 

I gave him a scenario of having incomes at different level.  Let's see how does the reduction of 3% EPF affects him.

Ali's Scenario - Note of thanks to reader WeeHing, as he helped to point out a mistake I missed out.

As mentioned earlier, reader Weehing was confused with my presentation.  So I decided to split the 11% calculation and 8% calculation into 2 tables.  This one here is for 11%. Note of thanks too to Marx Aedeit Samani.

Scenario for 8% EPF option


There you have it. Unless if you are having an annual income that reaches RM100,000, the next tax effect on you is very minimal, between nil to RM400 plus.  But the net increase of cash in hand would be as low as RM360 up to RM2,880.  

For more details, you may get more info from LHDN website.  Click here.

How about the photo I shared above? 

I believe the person had quoted the Monthly Tax Deduction Schedule.  The rate the person had quoted (RM77) is very near to the actual rate (it is actually RM77.35 for PCB 2016 and RM76.35 for PCB 2015).

Therefore, a person earning RM4,000 will be paying in annual income tax paid of RM928.20. 

But RM928.20 is much higher than the tax paid, as you can see in the table above.  At 8% EPF deduction, his actual tax is RM366 RM316 (actual tax rebate should be RM400, not RM350 as indicated in the original post).  Therefore, he will be getting his tax refund of RM562.20 RM612.20 from the Government somewhere around February to April next year.

36 comments:

  1. Great stuff to debunk the nonsense that is being viralled by the gullible.

    I could have done a better job myself.

    Only one insignificant observation though. Your titles to reflect the 8% is a copy of the 11% although the calculations right.

    ReplyDelete
    Replies
    1. Yeah, coz I'm a bit lazy. Will do the correction later today.

      Note: all calculation is correct as I made sure my excel calculation is correct.

      Delete
    2. Yeah, coz I'm a bit lazy. Will do the correction later today.

      Note: all calculation is correct as I made sure my excel calculation is correct.

      Delete
  2. Great stuff to debunk the nonsense that is being viralled by the gullible.

    I could have done a better job myself.

    Only one insignificant observation though. Your titles to reflect the 8% is a copy of the 11% although the calculations right.

    ReplyDelete
  3. It looks to me you have deducted the EPF amount twice. Take RM4000 income for example, after deduction of 5280, you got 42720. Subsequently you minus 5280 again on column 9.
    Can you verify?

    ReplyDelete
    Replies
    1. Had just rechecked.

      This is what was meant by Marx Aideit. Column 9 & 10 refers to EPF & Life Insurance, at 11% & 8% respectively. So there's no calculation error.

      Now I'm outside. But later tonight, I'll redo the table for better clarity.

      Delete
    2. Sorry, need to double confirm:
      chargable income at 11% 28440:

      48000 - 5280 - 9000 - 5280 = 28440.
      Is this correct?
      This is what i am asking.

      Delete
    3. 48000 - 5280 = 42720
      42720 - (14280) = 28440
      42720 - (9000 + 5280 ) = 28440.

      Delete
    4. Sure! On my way home now so should be checking it on PC. Handphone screen is a bit too small.

      If you are right, you deserve a mention.

      Delete
    5. Hi WeeHing,

      I have edited the graphic so it should be clearer to you now. But thanks to your questions, I noticed I had used the tax rebate for Year of Assessment 2009 instead. So giving you the credit for the discovery.

      Delete
    6. Yes, I agree with WeeHing that there's a double deduction of the "EPF (Employee)" from columns 3 and 7 to arrive at the "Chargeable Income" in column 9.

      The "Chargeable Income" should be "Annual Income" (column 2) minus "Total Tax Relief" (column 8).

      Delete
    7. been receiving quite a few comments asking me on this post. Rest be assured I will try to get this answered. As I don't want anyone get into trouble for filing the wrong tax return, I've decided to ask my contacts in LHDN to vet through my interpretation. Any amendments will be clearly highlighted. Hope that helps.

      Delete
    8. been receiving quite a few comments asking me on this post. Rest be assured I will try to get this answered. As I don't want anyone get into trouble for filing the wrong tax return, I've decided to ask my contacts in LHDN to vet through my interpretation. Any amendments will be clearly highlighted. Hope that helps.

      Delete
  4. Great. But the new tax relief of RM2,000 for those earning below RM8,000 seems not included in the computation.

    ReplyDelete
    Replies
    1. Yes, I'm trying to put it in a controlled parameter. But if you want, I'll do another table with the parameter.

      Delete
    2. Yes, I'm trying to put it in a controlled parameter. But if you want, I'll do another table with the parameter.

      Delete
  5. Intipati Utama Pengubahsuaian Bajet 2016

    1) Kerajaan akan mengurangkan potongan caruman KWSP pekerja sebanyak 3 peratus mulai Mac 2016 sehingga Disember 2017. Walaubagaimanapun, caruman majikan dikekalkan. Langkah ini, dijangka meningkatkan perbelanjaan penggunaan swasta sehingga 8 bilion ringgit setahun.

    2) Kerajaan akan memberi pelepasan khas cukai sebanyak 2 ribu ringgit, kepada pembayar cukai individu berpendapatan 8 ribu ringgit sebulan ke bawah, untuk tahun taksiran 2015. Dengan langkah ini, walaupun Kerajaan akan kehilangan hasil sebanyak 350 juta ringgit, namun, ianya dapat memberi penjimatan bayaran cukai individu sehingga 475 ringgit. Khabar gembira ini akan memanfaatkan seramai 2 juta pembayar cukai.

    Hi! I would like to inquire, should we consider point 2 above as additional tax relief of RM2,000? If yes, your calculation will show RM11,000 individual tax relief instead, thus lowering the tax paymen, wont it?

    ReplyDelete
    Replies
    1. Yes, I'm aware of the RM2,000. First, I want my calculation in a controlled environment. That's how you remove all uncertainties when you study the effect of 1 single variable. I'll be doing that next, I hope. (Had many broken promise of writing something but didn't because of writer's block).

      Second, the 3% reduction is actually affecting income tax for Year of Assessment 2016. While the personal relief is set at additional RM2,000 for Year of Assessment 2015 only. Meaning this is a retrospective implementation which actually affects Budget 2015 instead of Budget 2016. And I understand this was only for 1 year.

      Hope this clarifies.

      Note: I could have included it, and thus lowering the supposed income tax payable. But won't that be lying and propaganda? It defeats the purpose to educate people.

      Delete
  6. Intipati Utama Pengubahsuaian Bajet 2016

    1) Kerajaan akan mengurangkan potongan caruman KWSP pekerja sebanyak 3 peratus mulai Mac 2016 sehingga Disember 2017. Walaubagaimanapun, caruman majikan dikekalkan. Langkah ini, dijangka meningkatkan perbelanjaan penggunaan swasta sehingga 8 bilion ringgit setahun.

    2) Kerajaan akan memberi pelepasan khas cukai sebanyak 2 ribu ringgit, kepada pembayar cukai individu berpendapatan 8 ribu ringgit sebulan ke bawah, untuk tahun taksiran 2015. Dengan langkah ini, walaupun Kerajaan akan kehilangan hasil sebanyak 350 juta ringgit, namun, ianya dapat memberi penjimatan bayaran cukai individu sehingga 475 ringgit. Khabar gembira ini akan memanfaatkan seramai 2 juta pembayar cukai.

    Hi! I would like to inquire, should we consider point 2 above as additional tax relief of RM2,000? If yes, your calculation will show RM11,000 individual tax relief instead, thus lowering the tax paymen, wont it?

    ReplyDelete
  7. I'd like to clarify on the 2 points below:

    1. Taxable Income
    Taxable Income = Gross Income - Tax Relief

    Taxable Income should not be Gross Income less EPF contribution as per the table. EPF contribution comes into the calculation as part of Tax Relief where individual gets up to RM6,000 tax relief on their EPF contribution + life insurance.

    2. Monthly Income more than RM8,000 also get tax relief

    Notice in the table that those earning more than RM8,000 would not enjoy the individual tax relief of RM9,000 and EPF+Life Insurance tax relief of up to RM6,000.

    This should not be the case as I can't seem to find exception to those earning more than RM8,000 from enjoying those two tax reliefs stated anywhere.

    Hope you can clarify those two points above as it may affect the analysis.

    ReplyDelete
    Replies
    1. Yes, I agree on both points. Seems that this blog entry is erroneous.
      On the second point, less than RM8,000 income is entitled for tax rebate, but I agree, doesn't mean above RM8,000 will not have tax relief.

      It can be simplified: Only those with annual income of less than RM54,545 (or monthly RM4,545) will be affected. Those earning above those threshold will NOT have any tax increase by reducing EPF contribution from 11% to 8%.

      Delete
    2. Bro, do you mind sharing what is that tax rebate you were referring to for income less than RM8,000?

      On your second point, I believe it should be RM6,250 per month instead of RM4,545.

      8% of annual income of RM54,545 would be RM4,363.60. It would mean that not all RM6,000 tax relief are utilised, consequently increases the tax, assuming no life insurance taken up by that individual.

      Delete
    3. Hi all,

      I had reviewed my article and a new post is up to reply all (I hope) of your queries.

      http://themalaysianpatriot.blogspot.my/2016/02/revisit-to-reduction-of-epf-11-to-8.html

      Delete
  8. Been receiving quite a few comments asking me on this post. Rest be assured I will try to get this answered. As I don't want anyone get into trouble for filing the wrong tax return, I've decided to ask my contacts in LHDN to vet through my interpretation. Any amendments will be clearly highlighted. Let's work together in getting this clarified.

    ReplyDelete
  9. Been receiving quite a few comments asking me on this post. Rest be assured I will try to get this answered. As I don't want anyone get into trouble for filing the wrong tax return, I've decided to ask my contacts in LHDN to vet through my interpretation. Any amendments will be clearly highlighted. Let's work together in getting this clarified.

    ReplyDelete
  10. I have 1 question. What about the 11%. How much will he get tax refund from the government.

    ReplyDelete
  11. I have 1 question. What about the 11%. How much will he get tax refund from the government.

    ReplyDelete
    Replies
    1. Hi all,

      I had reviewed my article and a new post is up to reply all (I hope) of your queries.

      http://themalaysianpatriot.blogspot.my/2016/02/revisit-to-reduction-of-epf-11-to-8.html

      Delete
  12. I believe there's a mistake in the third table under Scenario for Payable Tax at 8% for monthly income group between 6,000 to 7,500? It doesn't tally with the first table which compares 11% and 8% side by side.

    ReplyDelete
    Replies
    1. Hi all,

      I had reviewed my article and a new post is up to reply all (I hope) of your queries.

      http://themalaysianpatriot.blogspot.my/2016/02/revisit-to-reduction-of-epf-11-to-8.html

      Delete
  13. Hi all,

    I had reviewed my article and a new post is up to reply all (I hope) of your queries.

    http://themalaysianpatriot.blogspot.my/2016/02/revisit-to-reduction-of-epf-11-to-8.html

    ReplyDelete
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    ReplyDelete
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    ReplyDelete