Debunking: EPF 8% Means Paying More Income Tax!!???

I have been receiving some forwarded emails titled, 'EPF 8% Means Paying More Income Tax (For high income group)'. People stop forwarding this type of email and creating panic. Whatever written on it is only half the truth. Here's why?

Before I start to explain, lets see what they wrote,

"Assume monthly basic salary is RM4000.

- If your monthly EPF contribution is 11% ( RM440 ), taxable income = RM3560, income tax payable = RM77.

- If your monthly EPF contribution is 8% ( RM320 ), taxable income = RM3680, income tax payable = RM109.

Conclusion : If you choose to contribute 8%, you will end up paying more income tax to the government,

which will make the government richer. Finance Minister Najib said this measure is meant

to boost up the slow-down market, but from this example wee see that the money does not

go into the market. Instead the money goes direct into the government's pocket through

the greater amount of income tax that we will have to pay. Obviously this measure does not

help the market at all. Do we still want this kind of government that doesn't have the best interest

of the people in mind?"

So, let me start with your income tax.

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.

(Note: Other reliefs are not included for simplification)

As you can see from the calculation, the higher your salary, you won't see any effect of 8%. Only those who with lower salary or/with no insurance might get affected. If you follow my advice as I mentioned in 'EPF: 11% or 8%? and choose to take 8%, even if you need to pay income tax (for those with lower income especially) it's still worth it to settle your credit card debts.

I hope I have cleared your doubts. Next time, don't blindly believe all forwarded emails, as many of them aren't true.