The revised Budget 2016 has announced that the Employee’s Provident Fund (EPF) will be reduced by 3% beginning March 2016 to December 2017 as part of.
What will you choose – 8% or 11%?
There are many factors need to be taken into consideration before making a decision whether the 3% reduction is worth taking such as losses on dividend from EPF, opportunity to invest in higher yield investments, tax implications and etc
Reduction in Employees’ EPF Contribution Rate 2016 in Malaysia
Following Prime Minister YAB Datuk Seri Najib Tun Abdul Razak’s 
announcement during the presentation of the revision of Budget 2016 today, the Employees Provident Fund (EPF) announces the reduction in the employees’ monthly statutory contribution rate from 11% to 8% for members below age 60 and 5.5% to 4% for those age 60 and above, effective March 2016 until December 2017 salary.
However, members can opt to maintain the current contribution rate of 11% by completing the KWSP 17A (Khas2016) – Notice to Contribute More Than Statutory Rate (Employee’s Share) and submit to their respective employers, who will then forward it to the nearest EPF branch.
There is no change to the employers’ statutory contribution rates i.e. 12% for employees earning above RM5,000 and 13% for employees earning RM5,000 and below.
Tax Implication for 3% EPF Reduction
There are many factors need to be taken into consideration before making a decision whether the 3% reduction is worth taking such as losses on dividend from EPF, opportunity to invest in higher yield investments, tax implications and etc.
3% EPF Reduction may not be resulting in higher income tax payable, please refer to the summary of tax implications arising from 3% EPF Reduction below:-
- Non-Taxpayer
There will be no tax implication for non-tax payer1. This means that non-tax payer will get an additional 3% of gross salary.
- Tax Payer
There is annual tax relief amounting RM6,000 for life insurance and EPF. Any reduction in EPF may increase the chargeable income and hence the income tax payable. But this is applicable only to those salary below RM6,250 (EPF tax relief RM6,000 / 8%)2.
If your salary is above RM6,250, the 3% EPF reduction would not reduce your entitlement for EPF tax relief as you have hit the maximum relief of RM6,000 and hence no tax implication.
Please refer to the illustration below:-
| Old EPF 11% | New EPF 8% | |
| Annual Salary (RM6,250 x 12) | 75,000 | 75,000 |
| Employee’s EPF | 8,250 | 6,000 |
| Tax Relief for Life Insurance & EPF (restricted to RM6,000) |
6,000 | 6,000 |
Please also take into consideration whether you have purchased any life insurance, that also entitled for the tax relief of RM6,000. If the reduction in tax relief arisen from 3% EPF relief could be claimed by your existing life insurance premium, there will be no tax implication.
| Old EPF 11% | New EPF 8% | |
| Annual Salary (RM6,000 x 12) | 72,000 | 72,000 |
| Employee’s EPF | 7,920 | 5,760 |
| Life Insurance Premium | 1,000 | 1,000 |
| Tax Relief for Life Insurance & EPF
(restricted to RM6,000) |
6,000 | 6,000 |
Notes:-
- As per Malaysia Inland Revenue Board (IRB’s) 2015 tax brochure, Individual receiving annual income more than RM30,672 per year (after EPF deduction) & Married Individual with non-working spouses receiving an annual income of more than RM40,344 per year(after EPF deduction) are tax payer.
- Only take into consideration the tax implication arising from tax relief reduction due to 3% EPF reduction.
FREQUENTLY ASKED QUESTIONS
(Source: http://www.kwsp.gov.my)
1. What does it mean by the reduction of employees’ statutory contribution rate as announced by the Government on January 28, 2016?
It is a reduction in the statutory rate for the employees’ share which starts from March 2016 (contribution for April 2016) wage/salary until December 2017 (contribution for January 2018).
2. Why reduce the employees’ EPF contribution rate?
The reduction is to be in line with the Budget Recalibration 2016 as announced by the Prime Minister on January 28, 2016.
3. What is the percentage of the reduction in employees’ statutory rate?
The statutory reduction involves two categories of workers as follows: –
- Employees/members who have not reached age 60
The employees’ contribution rate is reduced 3 per cent from 11 per cent to 8 per cent; subject to the Third Schedule Amendment 2016. - Employees/members age 60 to 75
The employees’ contribution rate is reduced by 1.5 per cent from 5.5 per cent to 4 per cent; subject to the Third Schedule Amendment 2016.
4. Where can employers / employees find the Third Schedule Amendment 2016?
The amended Third Schedule Amendment 2016 can be obtained from the EPF website at www.kwsp.gov.my starting from 16 February 2016.
5. What is the duration of the reduction of contribution rate?
The reduction in contribution rate will take effect starting March 2016 (contribution for April 2016) salary/wages until December 2017 (contribution for January 2018).
6. Will the employers’ share be reduced?
No. the employers’ contribution rate remains at the current rate.
7. Can employees / members maintain the current rate of employees’ share?
Yes, by completing Form EPF 17A (Khas2016), which is the Notice to Contribute More Than Statutory Rate (Employee’s Share) and submit to respective employers, who will then forward it to any EPF branches.
8. Where can the Form EPF 17A (Khas2016) be obtained?
The form can be downloaded from EPF website at www.kwsp.gov.my starting 2 February 2016.
9. Where can the employer / employee send the Form EPF 17A (Khas2016) to?
The form can be submitted to any EPF counter or mail it to any EPF branches.
10. Can the employee / member revoke the option after the Form EPF 17A (Khas2016) had been sent to the EPF?
No. The option will apply to the March 2016 (contribution for April 2016) wage/salary until December 2017 (contribution for January 2018).
11. How can this option be terminated?
It can be terminated in the following circumstances:
- starting January 2018 (contribution for February 2018) wage/salary;
- change of employee’s/member’s
