Waiting for the family deduction increase

Household deduction levels need to closely follow actual spending

After 17 years of implementation, the Law on Personal Income Tax (PIT) has been amended many times, but some regulations have not yet kept up with socio-economic fluctuations. In particular, the family deduction - the deciding factor for taxable income - is becoming a topic of special interest when the Ministry of Finance drafted a replacement Law on personal income tax.

Ms. Nguyen Thi Hong, an office worker at a trading company in Hanoi, shared: Previously, I rented a house for 4 million, now it has increased to more than 5 million. My child's tuition, electricity and water bills, gasoline bills... all increased, but the family deduction of 11 million VND remained unchanged, making spending increasingly difficult to balance," said Ms. Hong.

Ms. Hong's case is not unique. Many workers working in the salary trade have reported that the current family deduction level is no longer suitable for the actual context. As living expenses are increasing, keeping the deduction threshold unchanged means that actual income is "ored", but the taxable income remains unchanged.

According to current regulations, personal income taxable income is determined by total income minus deductions, including family deductions for taxpayers themselves (11 million VND/month) and dependents (4.4 million VND/person/month). This deduction has been applied since July 2020 and has not been adjusted yet.

personal income tax policy needs a new approach

While workers are increasingly under pressure to increase living expenses, experts say that personal income tax policies need to be adjusted more flexibly to accurately reflect their ability to pay and their actual living standards.

Mr. Nguyen Quang Huy - CEO of the Faculty of Finance - Banking (Nguyen Trai University) - said that the current family deduction level is no longer suitable for income and spending fluctuations. A more flexible tax policy, which can be associated with socio-economic fluctuations, will help ensure the reasonableness and suitability with people's actual income, said Mr. Huy. According to him, the family deduction should be increased to 15 million to 17 million VND/month to approach the current living standard in urban areas.

Sharing the same view, Dr. Nguyen Ngoc Tu - former Editor-in-Chief of Tax Magazine - said that it is necessary to change the way of determining family deduction levels in a more flexible direction, instead of applying a fixed level as at present. He proposed two options.

Option one, the family deduction level is determined based on the consumer price index (CPI) plus the increase in the basic salary from July 1, 2024. According to calculations, from 2020 - the time of adjusting the family deduction to 11 million VND/month - to the end of 2024, the CPI has increased by nearly 17%. If we add the expected CPI increase in 2025 and 2026 (each year at 4%), then within 6 years, the total CPI will increase by about 25%. At the same time, from July 1, 2024, the salary of civil servants and public employees in the State sector will be adjusted to increase by 30%. From there, Mr. Tu proposed to increase the family deduction by at least 55% (including 25% CPI and 30% salary), equivalent to about 17 million VND/month.

The second option is that the family deduction is determined by 4 times the current regional minimum wage, equivalent to about 18 million VND/month. According to Mr. Tu, this is a flexible and practical option, because it is directly linked to the minimum income of workers in each region.

This mechanism can be understood as water getting on the boat. When the Government adjusts the regional minimum wage, the family deduction level will also be automatically adjusted accordingly. This will both ensure compliance with socio-economic fluctuations and reduce administrative procedures when there is no need to request each adjustment, said Dr. Tu.

In case the current deduction level is applied, he proposed to clearly stipulate the principle of annual adjustment according to the inflation rate, or assign the Government the authority to periodically adjust every 2 years, based on price fluctuations of essential commodity groups, to ensure fairness with taxpayers.