How to Reduce Your Income Tax

As the year draws to a close, other than making plans for your vacations (to the limited options of countries) or preparing for Christmas, there is something else that you may want to take note of – reduce your income tax for the next Year of Assessment.

There are a few ways to reduce your income tax. This article will focus on 2 strategies to maximize your personal tax reliefs.

1. Supplementary Retirement Sum (SRS) contribution

The Supplementary Retirement Scheme (SRS) is a voluntary scheme to encourage individuals to save for retirement, on top of their CPF savings. Contributions to SRS are eligible for tax relief, up to $15,300 per annum for Singaporeans and Permanent Residents. For foreigners, it is $35,700 per annum. Contributions need to be made by 31 Dec every year to enjoy tax relief for the following Year of Assessment. In order to make SRS contributions, you need to have a SRS account opened with any of the 3 agent banks – UOB, DBS or OCBC.

Contributions to SRS can only be withdrawn after the statutory retirement age, currently set as 62. There is a 5% penalty for early withdrawal. At the same time, 100% of the amount withdrawn will also be subject to tax for that year. The retirement age will be increased from 62 to 63 in 2022. This will be further increased to 65 by 2030. What this means is, if you want to withdraw your SRS money at the retirement age of 62, your first contribution to your SRS account has to be done before 2022.

The interest rates on SRS funds are fixed at 0.05% per annum, just like most bank savings account. Hence it is imperative to invest your SRS funds to generate potentially higher returns so that the value of your SRS funds will not be eroded by inflation. You can explore investment options such as single premium insurance endowment, Unit Trusts or Exchange Traded Funds (ETFs). By investing your SRS funds, you can also build up your retirement funds, on top of saving tax. So it is killing 2 birds with one stone. Investment returns are tax-free before withdrawal and only 50% of the withdrawals from SRS are taxable at retirement.

2. CPF Cash Top Up Relief

This is essentially topping up your own CPF Special/Retirement Account or those of your family members to meet basic retirement needs.

The maximum CPF Cash Top-up Relief per Year of Assessment is $14,000, up to $7,000 for self, and up to $7,000 for family members. However there are 2 limitations:

(a) Topping up for spouse or siblings can only be done if their annual income is $4,000 or less. Of course, if you are topping up for the following family members, there are no limitations:

• Parents/Parents-in-law
• Grandparents/Grandparents-in-law
• Handicapped* spouse
• Handicapped* siblings

* Incapacitated because of physical or mental infirmity.

(b) There is a limit on cash top-up amount.

For those who are below age 55, the limit is Current Full Retirement Sum (FRS) – Special Account Savings – Amount withdrawn from SA for investments.

The Current FRS is $186,000. For example, if you have $100,000 in your SA and have invested $85,000 of your SA, you can only top up $186,000 – $100,000 – $85,000 = $1,000.00

For those who are age 55 and above, the limit is Current Full Retirement Sum (FRS) – Retirement Account (RA) Savings

For example, if you have $180,000 in your RA, you can only top up $186,000 – $180,000 = $6,000.00

There are people who choose one strategy over the other, or even both to optimize their tax reliefs. It is entirely up to individual’s preference. However, it seems that there are more constraints when it comes to topping up CPF. Another thing to take note is that you can still have access to your SRS funds should you run into financial distress. The only downside is that you have to pay the 5% penalty for early withdrawal, and 100% of the withdrawal will be subject to tax. However, for CPF Top Up, your money will be locked up in CPF. Based on current CPF Regulations, you may have very limited or no access to your money.

You may download the tax calculator from IRAS website: https://www.iras.gov.sg/quick-links/calculators and key in your numbers to see how much tax you can potentially save. If you need help, our consultants will be happy to assist you.