(Yicai Global) April 13 -- China has finally decided to proceed with the introduction of tax-deferred commercial endowment insurance after a decade of research and debate in a move that ushers in a new era for China’s pension sector.
Tax-deferred pension insurance will be trialed in Shanghai, southeastern Fujian province and Suzhou Industrial Park in Eastern Jiangsu province for one year (the provisional pilot period) starting on May 1, according to a document jointly issued today by the finance ministry and banking, securities and insurance regulators.
The new product will entitle Chinese consumers of commercial endowment policies to a deduction from their taxable income. The nation’s pensions sector is now replete with all ‘three pillars’ -- the basic pension program, tax incentives for corporate annuities and tax-deferred pension insurance.
The pilot policy will apply to those earning wages, salaries or continuous labor remuneration within the trial regions, as well as self-employed persons, investors in sole proprietorships, natural-persons in partnerships, contractors and businesses operating on leased premises whose income tax withholding agencies or actual work sites lie within the pilot regions.
Money taxpayers spend on eligible commercial endowment insurance using their personal commercial pension accounts will be deducted from their taxable income up to a set limit, and personal income tax will be exempted for investment profits deposited into personal commercial pension accounts. But income tax will become payable when the taxpayer receives their pension.
The tax deduction is capped at 6 percent of the taxpayer’s monthly wages, salary or continuous labor remuneration or CNY1,000 (USD159), whichever is higher. The maximum limit is set at 6 percent of self-employed taxpayers’ annual taxable income or CNY12,000, whichever is higher.
When a commercial pension is paid to individual taxpayers, 25 percent of the total amount paid will be exempted from tax, and a 10 percent personal income tax will be charged on the remaining 75 percent.
If a taxpayer based in one of the pilot areas earns CNY15,000 a month and pays CNY900 on a commercial endowment policy, after retirement she will pay (without factoring in value appreciation) CNY67.5 (CNY900 * 75 percent * 10 percent) in personal income tax for the commercial pension that she receives, China Securities Journal noted, citing a licensed accountant.
The taxpayer would have already paid CNY1,645 in PIT upon receipt of the wages or salary, making a total of CNY1,712.5 (paid tax), which is CNY157.5 lower than the original amount (CNY1,870) before the introduction of the pilot program.
Editor: Ben Armour