In the majority of the countries, individuals and businesses need to pay some portion of their earnings as Income Tax to the government. These taxes along with others are collected for smoothly running the country as well as for developing it. In this article, we would be sharing some tips on how you can save and reduce your income tax. But before we get into that let’s understand how is income tax calculated in Singapore.
Income tax is charged on all income earned in or derived from Singapore by a tax resident in a financial year. This income can be earned from different sources like employment, trade, business, profession or vocation, property or investments, and some other sources like annuities, royalties, or estate or trust income. Overseas income earned in Singapore is generally not taxable. Your winnings from lotteries and capital gains are also not taxable.
Singapore follows a progressive income tax structure that means individuals pay tax as per the tax bracket they fall under based on their earnings. The more an individual earns the higher tax they need to pay. As per the current structure, the minimum tax one needs to pay is 2% on total earnings of the first $30,000 and a maximum of 22% on total earnings exceeding $320,000. To see the current and most updated resident tax rates visit the IRAS website.
Singapore government provides certain tax reliefs to individuals annually. The income tax is calculated after deducting these tax reliefs i.e. on the total chargeable income and not on the total income earned. Our focus in this article is going to be around these tax reliefs provided by the government that you can use to your advantage to reduce your chargeable income legally.
9 Tips to reduce income tax legally
1. Voluntary top-up to your CPF or family’s CPF account
Every Singaporean citizen and PR who is working in Singapore needs to make a compulsory CPF contribution of a maximum of 20% of their earnings (employees’ contribution). CPF helps an individual to save for their retirement and secure their future. You can make a voluntary top-up to your CPF account to enjoy some tax relief. A contribution made to your parents’, in-laws’, spouse, children, or sibling’s CPF account would also give you a dollar for a dollar tax relief. The mandatory contribution and the voluntary contribution to the CPF account cannot be more than the CPF Annual Limit of $37,740.
2. Voluntary top-up to your Medisave account
A portion of your CPF contribution is contributed to your Medisave account every month. But to secure your health and also to get some tax benefits you can make a voluntary contribution too to your Medisave account. The maximum amount you can have in your account i.e. Basic Healthcare Sum (BHS) adjusts yearly till you turn 65 years, post which it becomes fixed. Your voluntary contribution cannot exceed the BHS for tax benefits.
3. Life Insurance Relief
If your total contribution both compulsory and voluntary to CPF and Medisave is less than $5000 in an assessment year, you can claim tax reliefs for the insurance premium paid for your life insurance policy. You can claim the difference between your CPF contribution and $5000 or 7% of the insured value of your life, or the amount of insurance premium paid, whichever is lower. A married man can also –claim the insurance premiums paid by him for his wife’s life insurance policy.
Donations in the form of cash or kind like artifacts, land, building, or public shares are all tax-deductible. You can claim a tax deduction of 250% of the amount of donations made provided its made to an approved Institution of a Public Character (IPC) or part of the Singapore Government.
5. Sign-up for a course – Course Fee Relief
Singapore Government encourages its workforce to continuously upgrade their skills to meet the market demand. To promote this, you can claim relief on the fees you incurred during the assessment year for any course, seminar, conference, or examination, if you are currently employed or have been employed previously. You can claim up to $5500 per year irrespective of the number of courses, seminars, or conferences you attended.
6. Contribute to Supplementary Retirement Scheme (SRS)
Supplementary Retirement Scheme (SRS) is a voluntary scheme where you can contribute maximum a sum of 15% of your Absolute Income Base* if you are a Singapore Citizens / SPRs and up to 35% of your Absolute Income Base* for foreigners. This contribution can be withdrawn after you reach your statutory retirement age (prevailing when you made your first SRS contribution) or earlier for medical reasons. Any contribution made to SRS provides tax relief provided it is within the maximum limit for the year. You would only need to pay tax on 50% of the amount withdrawn at retirement from SRS.
*The Absolute Income Base is calculated on 17 months of the CPF monthly salary ceiling.
7. Parenthood Tax Rebate (PTR)
Parenthood Tax Rebate (PTR) is a one-time tax rebate offered to Singapore tax residents for every child born or adopted by them. To qualify for this rebate, you need to be married, divorced, or widowed in the relevant year as well as the child needs to be a Singapore Citizen at the time of birth or within 12 months thereafter. You can get a rebate of $5000 for your first child, $10,000 for your second child, and $20,000 for your third and subsequent child.
8. Deductions on Rental Property Expenses
If you own a property that you have rented out, you can claim tax relief for expenses incurred to produce the rental income and during the period of the tenancy. Expenses like interest paid on loan and mortgage taken to purchase the property that is rented out, property tax incurred while the property was rented, premiums paid for fire insurance, repairs and maintenance, and internet and utility charges paid on behalf of the tenant. You can either claim tax relief on the actual rental expenses incurred or deemed rental expenses calculated based on 15% of the gross rent plus the mortgage interest.
9. Parent Relief Scheme
If you support your parents, parents-in-law, grandparents, or grandparents-in-law you can claim for the parent relief for up to two dependents. If you are staying with the dependents you can claim up to $9,000 per dependent and if you stay separately you can claim up to $5,500 per dependent, provided they have an annual income of less than $4,000. If they are physically or mentally disabled and staying with you, you can claim up to $14,000 per dependent and if you stay separately you can claim up to $10,000 per dependent.
Being smart about filing your taxes is the key to reduce your chargeable income and eventually pay less tax. And the best part is, it’s all legal plus some of these funds/schemes give you a certain % of yearly interest too. While these tips would apply to most of the Singapore tax residents there are few other tax reliefs and rebates offered to a certain group of people to promote specific social and economic objectives. For example, additional reliefs are given to female taxpayers like Foreign Maid Levy Relief, Working Mother’s Child Relief and NSman (Wife) Relief and to married, divorced, or widowed taxpayers like NSman (Parent) relief, Qualifying/ Handicapped Child Relief, and Spouse/ Handicapped Spouse Relief. To know more and get a view of the complete list of tax reliefs and deductions visit the IRAS tax deductions page. Another thing to keep in mind is that there is a cap of $80,000 on the total personal reliefs one can claim in a financial year that excludes donations and deductions on rental property expenses. You can contribute more than $80,000 in various reliefs but that would only help you save for your future.