Malaysia's Recent Reduction in EPF Deduction

Malaysia recently announced a 3% EPF deduction starting January 2009 until Dec 2010. This 2-year programme was meant to inject more money into consumers hand in order to spur spending and revive the economy.

However, while this is good news for most people, it is not good news to the high income earners if they opt for the deduction as they stand to lose more money to the tax man.

Here's a simple example. It's not meant to be conclusive but shows what I mean.

Assume a monthly basic salary of RM4000.

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

- However, if your monthly EPF contribution is 8% (RM320), then your taxable income increases to RM3680, and your income tax payable increases to RM109.

So, depending on your tax bracket, you might be ending up paying more or less income tax to the government as a result of the 3% reduction in your monthly EPF deduction.

So the question remains, is this a good move by the government to inject more liquidity into the market? What else could the government have done to stimulate the economy?