One biggest selling point about VHIS is that the policyholders are eligible for annual tax deductions of up to HK$8,000. Before filing your taxes, here is what you need to know about VHIS tax deductions. (Last updated April 2021)
One of the selling points of VHIS (Voluntary Health Insurance Scheme) is that the premiums are tax-deductible.
Tax returns are usually sent out in early May. Before you fill out and submit your tax returns, here are the 7 key points to take note of:
- How to calculate the VHIS tax deduction?
As outlined in the Inland Revenue Ordinance, VHIS policyholders can claim deductions up to HK$8,000 for qualifying premiums paid. According to a study by the insurance comparison site imSure, 81% of respondents do not have a clear understanding of
VHIS tax policy, including a common misconception that VHIS tax deductions meant direct tax savings of HK$8,000.
Here is how the tax deduction is calculated:
VHIS Premium x Tax Rate = Tax Deduction
If you paid HK$5,000 for premium and the tax rate is 2%, the tax-deductible amount would be HK$100. If the tax rate for your income level is 17%, the tax-deductible amount would be HK$850.
Your tax allowance determines your tax savings
How Salaries Tax is calculated: Salaries Tax payable = ( Total Income – Deductions – Allowances ) x Tax Rate
For example, if your annual income is HK$180,000 with a tax allowance of HK$132,000^ and VHIS tax deduction of HK$5,000, then your salaries tax payable for year 2020/21 would be:
（HK$180,000 – $5,000 – 132,000）X 2% = HK$860
^
Assuming the individual tax allowance for the year 2020/21 is HK$132,000
- What forms do you have to fill in?
Starting from the tax year 2019/20, married persons could claim the tax deductions for qualifying premiums paid by him/her or spouse.
If you are filing your tax return through eTAX online platform, remember to check the box for ‘Qualifying Premiums Paid under Voluntary Health Insurance Scheme Policy’ that comes after the Salaries Tax part (circled in red in below screenshot).
If you are claiming for yourself only, you only need to complete item (1) Qualifying premiums paid for self (circled in red in the below screenshot).
If you paid the premiums for your relatives, you need to complete item (2) Qualifying premiums paid for specified relative(s) (circled in blue in the screenshot below).
In the event you forget to file a claim for your VHIS tax deductions in your tax returns in May, you can submit form IR1121 for Application for Holdover of Provisional Tax after receiving your Tax Payment Notice.
- What documents do you need?
When you file your tax return, you do not need to attach documents to support your claim. However, you should retain documentary evidence (e.g. Premium receipts and annual premium statement) for 6 years after the expiration of the relevant year of assessment for verification when required.
- Who is the ‘Specified Relative’?
The ordinance states that only the qualifying premiums for specified relatives are eligible for tax deductions. Therefore, it is important to understand the definition of a ‘specified relative’ which includes:
spouse and children of the taxpayer
siblings, parents, and grandparents of the taxpayer
siblings, parents, and grandparents of the spouse of the taxpayer
The older the insured person, the higher the tax-deductible amount. This is because the premiums for older persons are higher, therefore tax deductions are also higher.
Hence, it is important to discuss with your siblings who should purchase VHIS for your parents and who will be claiming the tax deductions to avoid filing a duplicate claim.
- How much can you claim for VHIS on taxes?
According to a media report, the Food and Health Bureau announced on March 29, 2019, that the average premium for VHIS Standard is HK$4,000, which is 20% lower than the estimated HK$4,800 in 2017.
If you purchase VHIS for yourself only, you would not reach the tax deduction limit. If you want to save more on taxes, you can purchase VHIS for your specified relatives and the premiums for each relative are eligible for tax deductions. There is no limit on the number of specified relatives.
If you purchased VHIS for yourself and three specified relatives, your tax deductions can be up to HK$8,000 x 4 = HK$32,000.
In a family of 8 including the husband and wife who are both 40 years of age, their parents who are above 60 years of age, and 2 children approximately 20 years of age, they have a total household income of HK$960,000.
According to information from the Inland Revenue Department, Married Person’s
Allowance is HK$264,000, Child Allowance is HK$120,000 each, and Dependent
Parent Allowance is HK$50,000 each.
Case 1: No family member has purchased VHIS*
Net Chargeable Income:
HK$960,000 – HK$264,000 – HK$120,000 X 2 – HK$50,000 X 4 = HK$256,000
Tax payable for the first HK$200,000 is HK$16,000
Tax payable for the remaining is HK$56,000 X 17% = HK$9,520
Case 2: Only the husband/father has purchased VHIS and no other family member has VHIS
VHIS Tax Deduction: HK$3,900 (based on the above average premiums)
Net Chargeable Income:
HK$960,000 – HK$264,000 – HK$120,000 X 2 – HK$50,000 X 4 – HK$3,900 = HK$252,100
Tax payable for the first HK$200,000 is HK$16,000
Tax payable for the remaining is HK$52,100 X 17% = HK$8,857
Case 3: Husband/father purchased VHIS for the entire family (all 8 members)*
VHIS Tax Deduction: HK$3,900 X 2 + HK$2,000 X 2 + HK$8,000 X 4 = HK$43,800 (based on above average premiums)
Net Chargeable Income:
HK$960,000 – HK$264,000 – HK$120,000 X 2 – HK$50,000 X 4– HK$43,800 = HK$212,200
Tax payable for the first HK$200,000 is HK$16,000
Tax payable for the remaining is HK$12,200 X 17% = HK$2,074
As illustrated above, the tax savings can reach above HK$7,400 if the entire family purchased VHIS. This is equal to an 83% discount on the VHIS premiums!
*The above case does not account for tax Deductions for Expenses of self-education, Elderly Residential Care Expenses, Properties Interest Payments, Mandatory Provident Fund (MPF) contributions, and approved charitable donations.
- Why are some plans not eligible for tax deduction?
VHIS was launched on April 1, 2019, and insurance companies need to clearly state which products are Certified Plans under VHIS. There are 2 types of Certified Plans, namely Standard Plan and Flexi Plan. Currently, only these 2 plans are eligible for tax deductions.
Insurance companies may try to sell you a package that includes their Flexi Plan with another insurance product. If you purchase the package, it is important to take note that only the premiums for the Flexi Plan are eligible for tax deductions.
Since Home Insurance is not a Certified Plan under VHIS approved by the Food and Health Bureau, the premiums for this product are not tax-deductible.
- Can I apply for tax deduction during ‘Premium Grace Period’?
Most insurance companies offer a 30-day ‘Premium Grace Period’. If the policyholder misses a monthly payment, the policy will still be in effect if the premium is paid within the Grace Period.
If you paid your premiums for the past 11 months but did not pay the premium for March and instead paid premiums for both March and April at the same time in mid
April, you would be able to claim for only the premiums paid prior to March 31 since that is the tax year cut-off date. The premiums paid in April will be applied to the following tax year.
If the monthly premium is HK$200, the tax deduction would be HK$2,200 ( HK$200 x 11 months ).
If you have uncertainties about the tax deductions from your VHIS premiums, it is recommended to request for an annual premium statement from your insurance provider as supporting document for your claim.
Lastly, Bowtie team would like to remind you that the intended purpose of VHIS is to provide protection for unexpected medical expenses. Apart from tax savings considerations, it is important to consider whether or not the protection is suitable for you before purchasing.
Original Article: https://www.bowtie.com.hk/blog/en/vhis-tax-deductions/