The recent epf rates has been making waves via emails. Im no tax expert but someone who knows more than me of the mechanics of how individual tax is concerned dropped me a comment on my previous posting saying that the emails being floating are half true.

So here is Mr Arrivu’s explanation :

1. According to the email, taxable income is after your EPF contribution is deducted. But the truth is your taxable income is before the EPF deduction.

2. Our Inland Revenue Board give us a tax relief of RM6,000 for EPF contribution and life insurance premium. Here is an example,

Mr. Atlee’s monthly income is RM4,000 with 1 month contractual bonus of RM4,000 and some variable pays of RM2,000. He is paying life insurance premium monthly of RM150. If your EPF contribution is
a) 11% ->
(RM4,000 X 13 + RM2,000) X 11% = RM5,940.
Insurance: RM150 X 12=RM1,800.
Total EPF and Insurance=RM7,740
Since, your tax relief is only given up to RM6,000.
So, your total taxable income will RM48,000 after the RM6,000 relief.

b)8% ->
(RM4,000 X 13 + RM2,000) X 8% = RM4,320.
Insurance: RM150 X 12=RM1,800.
Total EPF and Insurance=RM6,120.
Since, your tax relief is only given up to RM6,000.
Your total taxable income is still RM48,000 after the RM6,000 relief.

So for some reason i was not convinced that this could be the whole story and did my rounds on the internet and found this article which was by a economic and investment expert :

If your pay is about RM4,500/month, and you have no life insurance, you will actually pay more taxes if you decide to reduce your EPF contribution to 8%.

That’s because up to RM6,000 of EPF contributions and life insurance premiums are tax-deductible. Here is the calculation:

1. You earn RM54,000 per year. 11% EPF = RM5,940, which is tax-deductible. There is also RM8,000 of personal relief. So your net taxable income is RM40,060. The tax on that will be RM2,183 (tax rate is RM1,525 on the first RM35k and 13% on the next RM15k).
2. The EPF contribution is reduced to 8% = RM4,320. That is equal to RM1,620 extra in your pocket every year. Very nice? Did you realise that’s not all yours? That extra is now taxable income! So your net taxable income is RM41,680 and you will be paying RM2,393 of federal income tax.
   
3. The BN federal government will be taking an RM210 (RM2,393 vs RM2,183) of taxes from you ie 13% of that extra which you thought was all yours.

Of course, the better-paid employees with hefty life insurance premiums are already well over the RM6,000 ceiling for tax-deductibility, so they won’t be affected. But aren’t these measures supposed to help the poorer?

So there you have it! I’m still not sure how it will apply to me yet as everyone might have different variables which ultimately determine how much you will be paying or saving. I would suggest for you to head over to the IRB’s website, speak to your friends who know a thing or two about tax and find out how it would apply to you.

Thanks Mr Arrivu for the explanation but i don’t think i blindly believed what a i read on a forwarded email but posted it so i got responces like yours but maybe there was some truth in those emails?

I dont know…you tell me

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