Many of you may have received some forwarded emails on how the government is playing us out by "offering" lower EPF deduction. By lowering of EPF deduction, we end up paying more taxes. However, these forwarded emails may not be entirely true.
To begin with, the idea of reducing the EPF deduction is simply to put more cash into the hands of the consumers to spur domestic spending and hence economic activity. Any incremental tax you paid is still small comparable to the additional cash "freed up" by the reduction in EPF contribution. The objective of the government is still intact. For those who find it tough to make ends meet, they may welcome this temporary "relief".
However, this post is not to recommend that you take up or reject the "offer" to reduce your EPF contribution. Instead, this post is intended merely to clear some misunderstandings on the forwarded emails and to provide you with a tool to make an informed decision.
The background to the allegations in those forwarded emails is based on the tax deductability of all EPF contributions and life insurance premiums. However, what these emails failed to mention is that the cap for this category of tax deduction is only RM6,000 per annum (for the combined amounts of EPF contributions and life insurance premiums).
Put it simply, there will be no impact on your total tax payable if your EPF contributions and life insurance premiums totalled more than RM6,000. Otherwise, you may be affected. For example, let's say your annual salary is RM30,000 and you have no life insurance policy. So your EPF contribution has been reduced from RM3,300 (@11%) to RM2,400 (@8%) per annum. Consequently, your taxable income net of all deductions has increased by RM900. The result is you will have to pay RM27 more tax than before.
In conclusion, only a small group of existing tax payers will be hit by higher taxes and the amount could be negligible.
To see if you will be paying more taxes by reducing your EPF deduction, click here.
