Toward the end of the year, there is always a rush by middle to upper-income earners to invest in Retirement Mutual Funds (RMF) and Long Term Equity Funds (LTF) to obtain the greatest tax savings possible for the current year and, at the same time, to maintain the previous year's tax exemption privilege.
While RMF and LTF investments offer both an exemption on taxable income equal to the amount invested, as well as a capital gains tax exemption upon future disposition, there are complicated conditions to fulfil. Failure to comply with those conditions may leave you with a bill for tax payments retroactive to the year in which the investment took place, plus surcharges, and/or disentitlement from the capital gains tax exemption.
Thus, before making a hasty investment, take a careful look at the details of the relevant conditions. Investing in a fund with conditions that you may not be able to fulfil could eventually result in negative consequences rather than tax saving.
For an RMF, you need to invest a minimum of 3% of your annual income or 5,000 baht, whichever is lower. However, the tax exemption will be given only for the maximum amount of 15% of annual income or 500,000 baht, whichever is lower. Bear in mind that this 15% is not calculated only on your monthly salary but all taxable fringe benefits that are includable in the tax return.
For instance, if you have total annual income of 2 million baht, you need to purchase RMF units worth at least 60,000 baht. A purchasing below that amount will not be eligible for tax privileges. However, if you purchase, say, 400,000 baht worth of RMF units, you will be entitled to a tax exemption of only 300,000 baht, which is the maximum 15% of 2 million.
One thing you should not forget is that the threshold includes your contribution to a provident fund, Government Pension Fund or Aid Fund under the Private School Law. Therefore, all of your investments are consolidated in order to calculate the total investment amount.
The key factors also include the condition that you must purchase the investment units in the RMF at least once a year, and the blank period between each purchase must not exceed one year. RMF units must be held for at least five years, and are redeemable after you turn at least 55 years old, without any distributions or borrowing from the RMF. Recently, the Revenue Department announced a rule making the same holding condition applicable to provident funds.
Tax exemptions on investments in LTFs are granted without a condition minimum investment condition. However, the same maximum exemption as in an RMF will apply. Thus, if you purchase both LTF and RMF units (including contributions into s provident fund, Government Pension Fund or Aid Fund, where applicable), the maximum tax exemption you could get will be 1 million baht, depending on your total annual income.
It is interesting to note that the holding condition for an LTF is somewhat more relaxed than for an RMF. Although you are required to hold an LTF for at least five years, there is no need to wait until you are 55 years old. Further, there is no requirement to invest in an LTF consecutively every year.
What is the consequence if the conditions are breached? Tax payments will be required for the years in which the exemption was claimed, but no longer than five years. For an RMF, provided that such tax payment is made by the end of March following the year in which the breach takes place, the surcharges for the deficient tax amount will be exempted. For an LTF, the 1.5% surcharge per month will be imposed immediately without an exemption.
Later, when the investment units in an RMF are disposed, tax will be exempted for capital gains (if any) if all the above conditions are fulfilled. However, you are not required to hold the investment units until age 55. This means that, if you dispose of the RMF investment units after holding them for five years, you will not have to pay any tax on capital gains from the disposal, even though you are younger than 55 years old.
In the case of an LTF, you will be entitled to tax exemption on capital gains by following the same conditions. If the conditions are not fulfilled, tax payments for the claimed exemption as well as tax on capital gains (if any) will be required together with the 1.5% surcharge per month.
Although the tax incentives for investments in RMFs and LTFs are tempting to individual taxpayers and are given to everyone irrespective of nationality or tax residency status, the rules are considered highly complex for most people. In any case, if you can comply with the rules, the tax saving is quite generous.
Prepared by Rachanee Prasongprasit and Professor Piphob Veraphong. They can be reached at admin@lawalliance.co.th