Monday, 14 January 2013

Private Retirement Scheme (PRS), Enjoying The Benefits of Tax Relief - Part 3

The major selling point of the PRS is non other then the RM3,000 tax relief given. For investors who are have invested into PRS funds, they are eligible to a maximum of RM3,000 tax relief per year. Due to that reason alone, many investors have rushed to make the cut off date for PRS submission before the end 2012 in order to enjoy the tax relief for Year 2012. Do take note that the tax relief for investing in PRS is only available for 10 years starting from Year 2012 to Year 2021.

How does this Tax Relief Works?
I'll try to make it easy to understand by making a case study of three individuals. 

Mr. A, Mr. B and Mr. C intends to invest into PRS for 2013. Mr. A decides to invest RM350/month into a PRS Fund, Mr. B only wants to invest RM250/month and Mr. C decides that RM100/month is what he can afford.

Total Amount Invested into PRS by Mr. A for Year 2013
: RM350/month x 12 months : RM4,200

Total Amount Invested into PRS by Mr. B for Year 2013
: RM100/month x 12 months : RM3,000


Total Amount Invested into PRS by Mr. C for Year 2013 
: RM100/month x 12 months : RM1,200


According to the Tax Relief incentive from investing in PRS, an individual whom invest in PRS is eligible for Tax Relief up to a maximum of RM3000. Therefore the eligibility of Tax Relief for Mr. A, Mr. B and Mr. C are:

PRS Tax Relief for Mr. A : RM3,000 (even though Mr. A has invested a total of RM4200 for 2013)
PRS Tax Relief for Mr. B : RM3,000
PRS Tax Relief for Mr. C : RM1,200

How much can I save from paying tax if I invest in PRS?
To illustrate this point, I need to use Mr. A, Mr. B and Mr. C again. The calculation will be divided into 3 sections. Section a) is to calculate tax to be paid without PRS tax relief, Section b) is the tax to be paid after PRS tax relief and Section c) is the savings.

a) Calculating Tax to be paid by Mr. A, Mr. B and Mr. C without PRS Tax Relief
Now we are going to assume that Mr. A, Mr. B and Mr. C have same total taxable amount* of RM78,000 at the end of 2013. (*Total taxable amount = Total income minus other reliefs such as EPF contribution, personal insurance, books, broadband, etc).

Next up is for us to refer to the Tax Schedule from LHDN (2011) as shown below:
Based on the Tax Schedule above, the amount of tax to be paid by Mr. A, B or C (not including PRS Tax Relief) is calculated as:

Total taxable amount for Mr. A, B and C is RM78,000/each person

1) Tax for first RM70,000 = RM7,125
2) Tax for the remaining RM8,000 (24% of RM8,000) = RM1,920

2013 Total Tax to be paid by Mr. A, B and C : RM7,125 + RM1,920 = RM9,045/each person

b) Calculating Tax to be paid by Mr. A, Mr. B and Mr. C after deducting PRS Tax Relief
Since Mr. A, B and C have invested in PRS, they are eligible for Tax Relief according to the amount they have invested. In this case both Mr. A and Mr. B will enjoy a relief of RM3,000 while Mr. C is only eligible for RM1,200 relief.

We can now calculate the total tax amount for Mr. A, B and C for 2013!

Total taxable amount for Mr. A and Mr. B : RM78,000 - RM3,000 = RM75,000/each person
Tax to be paid by Mr. A or Mr. B after deducting PRS Tax Relief 
1) Tax for first RM70,000 = RM7,125
2) Tax for the remaining RM5,000 (24% of RM5,000) = RM1,200

2013 Total Tax to be paid by Mr. A and Mr. B is : RM8,325/each person

Total taxable amount for Mr. C : RM78,000 - RM1,200 = RM76,800
Tax to be paid by Mr. C after deducting PRS Tax Relief
1) Tax for first RM70,000 = RM7,125
2) Tax for the remaining RM6,800 (24% of RM6,800) = RM1,632

2013 Total Tax to be paid by Mr. C is : RM8,757

c) Savings from PRS Tax Relief
Savings from paying tax for Mr. A and Mr. B : RM9,045 - RM8,325 = RM720
Savings from paying tax for Mr. C : RM9,045 - RM8,757 = RM288

I believe you can use the method above to calculate your own expected tax savings from investing in PRS. As a rough guideline, you can also refer to the table below to approximate how much you can save based on  your annual income range and that you qualify for the maximum value of RM3,000 PRS tax relief.

What can you do with that savings from the tax relief?
Let's take the case of Mr. B who have contributed RM 3,000 per annum into a PRS Fund. Savings of RM720 ringgit can be used by him to reimburse:

1. The sales charge fee of 3% 
2. The RM10 fee for opening of a PPA Account
3. The additional charges such as opening account fee with a PRS Provider

Well that's all for part 3 on the series of articles about PRS, I hope you've enjoyed reading the write-up on PRS.

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