Why you should not withdraw from provident fund?
It has been said that the year 2020 will be the year of golden mouse full of wealth and surplus. Until March this year, the world has been hit by the Covid-19 pandemic and impact our lives more than anyone could imagine. The pandemic creates the most serious world’s economic crisis in a century and Thailand has no exception.
When recession occurs, most businesses experience significant reduction in their sales and economic outputs. Businesses around the world are suffering or even shutting down. As a result, work and labor market is inevitably impact. Employees in many sectors have already been reduced work hours, wages or even completely lost their jobs. The reduction is expected to be continued. Many employees severely affect by their lack of income security and cash liquidity after losing their jobs.
During periods in which employees are temporarily laid off and lack of financial liquidity, employees may find Provident Fund as the source of their emergency income. But not many people know that there are withdrawals hidden costs if you decide to withdraw from the provident fund before your retirement.
First, employees must understand that the main purpose of establishing provident fund is for employer to encourage and provide financial security and stability for employee’s retirement. Employee can withdraw the fund at the age of 55 because the minimum retirement age requires by law is 55 years old. And employees must contribute to the provident fund at least 5 years. In case of fund’s withdrawal due to any circumstances except from written above, whether termination of the work or not, employees must be aware that he/she will not receive the full tax benefit (full amount of money). Employees have to pay tax for investment returns and there will not be full amount of employer’s contributions as well.
In general, provident fund consists of 4 parts.
1. Employee’s contribution: The amount of money that the member contributes to the fund which will be deducted between 2%-15% from employee’s monthly salary.
2. Employer’s contribution: The amount of money that the employer contributes to the fund each month. The contribution rate will be depending on the company’s policy
3. Returns from employee’s contribution: Investment returns generated from the employee’s contribution.
4. Returns from employer’s contribution: Investment returns generated from the employer’s contribution.
In terms of taxable amount calculation, there are divided into 2 conditions.
Condition 1: The employee leaves the provident fund without termination of work / or the employee contributes to the provident fund less than 5 years.
Taxable Amount = Employer’s contribution + Returns from employee’s contribution + Returns from employer’s contribution
Condition 2: The employee leaves the job before age 55 but contributes to the fund more than 5 years.
Taxable Amount = [(Employer’s contribution + Returns from employee’s contribution + Returns from employer’s contribution) – (7,000 x Years of Employment)] *0.5
Then, combine this amount with current year taxable income or submit tax separately to minimize personal tax expense.
For example, Mr. A has been working for the company for 15 years but he is younger than 55 years old. If he decides to get his money out of the provident fund now, the taxable amount calculation for him will fall into condition 2. When combining Employer’s contribution + Returns from employee’s contribution + Returns from employer’s contribution = THB 300,000.
Mr. A’s Taxable Amount = [(Employer’s contribution + Returns from employee’s contribution + Returns from employer’s contribution) – (7,000 x Years of Employment)] * 0.5
= [(300,000) – (7,000 x 15 (years of employment)] * 0.5
= (300,000 – 105,000) * 0.5
= 195,000 * 0.5
Mr. A’s Taxable Amount = 97,500
Then, combine THB 97,500 with current year taxable income or submit this taxable amount separately to minimize personal tax expense.
Additional, employee may not receive full amount of employer’s contribution which depends on each company’s policy. In general, the policy is usually set by calculating employee’s years of employment.
As a result, full tax benefit of contributing to the provident fund will occur only if the employee stays with the fund until the age of 55 and contributes to the fund at least 5 years.
Provident fund is one of the best financial tool to encourage employees to save up for their life after retirement. Employees must keep in mind that withdrawing money from the provident fund before retirement can reduce tax benefit and also give them a chance to spend money on unnecessary things. As a result, employee cannot reach their goal of saving for retirement.
Disclaimer:
The investors should study and understand the product (fund) feature, return condition and risk factors carefully before making an investment. Past performance is not a guarantee of future results.
