Revisit to Reduction of EPF 11% to 8% Effect on Income Tax

First thing first, I did not expect that I would revisit this issue so soon.  The popularity of the previous post this issue titled "How Does Reduction of EPF Deduction from 11% to 8% Affects Your Income Tax?" had been beyond my expectation.  Therefore, it is only right for me to revisit this article.  Plus, a few readers (WeeHing, MiD, mohdnajmie, OCD, Yu Wei Lim) pointed out there were errors in the calculations.  Guys, you were right.  There were several errors in the tables.  I had only realised it today when I decided to recreate the table from scratch.



Another reason why I decided to relook into the tax computation in my article was because I am contemplating myself if the 3% reduction is worth the effort.

Let me be clear first. I had written twice on this blog why I disagree with the move to reduce EPF deduction to stimulate the economy.  You can read them here and here.  Both times, I did not back up my writings with analysis.

So let's have a look, again.  This time, we will be talking to our two friends, Ali, from the previous article, and Abu.

Ali the Ignorant Bugger
Say hi to Ali again.  Despite the previous lesson, he is still very much ignorant of his rights as a taxpayer.  He did not buy PRS (Private Retirement Scheme - launched by Govt to augment EPF savings). And he doesn't have education and medical insurance.

Ali's Income Tax at 11%

Ali's Income Tax - Effect of 8% EPF Deduction

Ali's Income Tax - Net Effect of EPF Reduction on Tax to be Paid

Abu the Smart Kid
Let's talk to Abu.  Abu is a smart kid. He knows about PRS and he knows about medical and educational insurance.  So he maximised both by investing RM3,000 into PRS and another RM3,000 into medical insurance.

Abu's Income before the EPF Reduction

Abu's Income Tax after the EPF Reduction

Net Effect of the EPF Reduction on Abu.

Analysis
As you can see, there is a marginal increase of income tax but only for those with income between RM4,000 to RM6,000.

The slight upward shift of their income had resulted in them need to pay an additional income tax between RM38.40 to RM 120.  However, this is very minimal as compared to the increase of their take-home pay.  Those with income of RM5,000 for example, has an increase of RM1,800 take-home pay versus increase of RM120 in tax.

You will notice there is a column for Loss of 6.75% EPF dividend.  This is based on EPF dividend declared for the year 2014.  Do note, that with our current economic climate, do expect this figure to be actually lower.  But that is remain to be seen.


Disclaimer 
To make your life and mine easier, these are some of the disclaimers.

1. This article is not endorsed by LHDN.  Therefore, please get your tax advise from either your personally appointed tax agent, or from LHDN.  LHDN people are very helpful, so do not worry.  They make sure the act of extracting tax from you is as painless as possible. 
2. For salaries below RM3,000, they were not deducted with RM14.75.  Instead, they are deducted against whatever amount due to SOCSO in accordance to SOCSO table.
3. Not all personal relief are included here. To know what tax relief is available for you, you may find them here.
4. I had used the Monthly Tax Deduction Schedule for 2016.  The effect of EPF deduction will only be seen in Year of Assessment 2016, which would be declared in April 2017.  You may find the table here. 
5. For EPF deduction, I had arbitrarily used 11% instead of using EPF schedule.  For the actual table, you may refer here.
6. For income tax schedule for Year of Assessment 2016, you may find it here.
7. The biggest mistake made in the previous calculation was the selection of correct income for deduction.  In my previous article, I had wrongly selected to use net income instead of the aggregated income, which is supposed to be gross income.  A better explanation can be found here. 

Conclusion

There is basically not much tax effect if one has planned their tax properly. 

Wait!!!

With proper tax planning, there is a way that you will get net zero effect of increase in income tax.  And you get to get a big tax refund cheque in April 2017.  

How? 

Instead of spending your hard earned cash buying the latest gadget, you can save your money by getting a life insurance.  

Meet Ahmad.  He's smarter than Abu and Ali.  He bought life insurance for himself.  Not only the insurance would pay to his family if something bad happens to him, it also has disability benefits, in case one day Ahmad woke up finding himself without a hand or leg. 

Ahmad - With Life Insurance

And look, Ahmad's tax refund could probably buy him a new mid-line new phone.

Ahmad's Income with Insurance Top Up

Ahmad's Income

Conclusion, again

I hope I had clarify the questions that many of us have.  It does look unbelievable that many of us are actually receiving tax refund.  But that is just the truth.  Most salaried individuals do receive tax refund.  So who is the taxpayer again?