Personal Income Tax: Concepts, Roles, and How PIT Is Calculated

Vu Khoi

Author at Wotech Electronics Blog

Personal income tax plays an important role for each individual in particular and for society as a whole. This type of tax reflects fairness in the distribution of income across society. Therefore, the tax each person must pay differs depending on income and deductions. Let's explore the role of this tax and how it is calculated in the article below.

What is personal income tax?

Personal income tax is the amount withheld from wages or other income that workers must pay to the state budget. In English, personal income tax is called personal income tax. Though the wording differs between languages, the nature of this tax does not change whether in English or Vietnamese. Tax collection is built on the principle of fairness, so it does not burden those with low incomes. Those liable to pay this tax include individuals residing in Vietnam or non-residents who have taxable income. For residents, taxable income includes income arising both inside and outside Vietnam's territory.

The role of personal income tax

Tax collection plays an important role both for society and for taxpayers themselves. First of all, it is an important source of revenue for the state budget. It also serves to narrow the gap between rich and poor in society. In a market economy, the class divide between rich and poor is one of the social issues deserving attention. Therefore, setting different tax rates for different income levels helps ensure fairness in society. Moreover, income tax has a macro-regulating effect, encouraging saving and investment in directions beneficial to society. When society develops stably and sustainably, every individual benefits as well.

However, many people do not clearly understand the role of this tax, leading them to look for loopholes or not pay personal income tax at all. In such cases, businesses and the relevant authorities play an important role in reporting, controlling, and handling violations. But above all, the state still needs to raise public awareness so that citizens pay their taxes voluntarily.

How is personal income tax calculated?

In essence, the tax payable is calculated by multiplying taxable income by the tax rate. Based on the latest 2021 personal income tax legislation (under the law), there are 3 ways to calculate the tax rate for 3 different groups:

• Withholding under the partial progressive tax schedule: For residents with labor contracts of 3 months or longer

• 10% withholding: For residents with labor contracts under 3 months

• 20% withholding: For non-residents

How many types of personal income tax are there?

Because this tax is calculated differently for each group of people, many readers struggle to know how much PIT they must pay. Below are the tax amounts for 4 groups.

PIT during probation

For those on probation, the tax payable is calculated the second way — 10% withholding on pre-tax total income — since probation contracts last less than 3 months. For example, someone earning 15 million VND per month would owe 10% of 15 million, which is 1.5 million. So the after-tax take-home salary is 13.5 million.

PIT for contracts of 3 months or longer

For those signing contracts of 3 months or longer, personal income tax is calculated on the partial progressive schedule. Under this progressive schedule, there are 7 brackets:

• Taxable income of 5 million/month or 60 million/year: the corresponding rate is 5%

• Taxable income over 5 to 10 million, or over 60 to 120 million/year: the corresponding rate is 10%

• Taxable income over 10 to 18 million, or over 120 to 216 million/year: the corresponding rate is 15%

• Taxable income over 18 to 32 million, or over 216 to 384 million/year: the corresponding rate is 20%

• Taxable income over 32 to 52 million, or over 384 to 624 million/year: the corresponding rate is 25%

• Taxable income over 52 to 80 million, or over 624 to 960 million/year: the corresponding rate is 30%

• Taxable income over 80 million, or over 960 million/year: the corresponding rate is 35%

Personal income tax for foreigners

For foreigners working in Vietnam, this tax is calculated by multiplying taxable income by the 20% rate. The taxable income of a non-resident is calculated the same way as for a resident. For example, a non-resident earning 18 million VND has a taxable income of 7 million. Accordingly, the tax payable would correspond to 10% of 7 million, which is 700,000 VND.

Personal income tax paid on behalf of employees by the company

Where a company signs labor contracts stipulating that the salary paid to employees excludes PIT, the company's tax accountant must provide and submit complete records and documents proving the tax has been paid on the employees' behalf.

What is a personal income tax refund?

Alongside taxable income, the law also provides for tax deductions for those in difficult circumstances. This policy helps guarantee social security and supports workers in making ends meet.

Personal income tax personal deduction

Before July 2020, the personal deduction was set at 9 million VND per month per individual, equivalent to 108 million per year. However, after July 2020, each person is exempted on 11 million per month, equivalent to 132 million VND per year. Where a taxpayer has income from multiple sources, they may only claim the personal deduction at one company.

Personal income tax dependents

Anyone earning 11 million or more who has dependents must register them with the company. After consolidating the information, the company submits the tax registration declaration and the dependent registration declaration to the tax authority. Those earning under 11 million do not have to register dependents. Each dependent qualifies for a deduction of 4.4 million VND. A dependent must fully meet one of the following two requirements:

• A minor, disabled, or unable to work

• Someone with no income or income not exceeding the regulated level, such as a child in university, elderly parents, or a spouse unable to work

Conclusion

Paying personal income tax plays an important role for workers and for society. Every individual in society needs to clearly understand its role in order to pay taxes conscientiously. Each person's tax differs depending on income and contract duration: the higher the income, the higher the tax payable. However, the state always facilitates tax refunds for those in especially difficult circumstances.

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