Most of us have heard that CPF gives 2.5% interest in the Ordinary Account (OA) and 4% in the Special and MediSave Accounts (SA/MA). True — but few realise your actual return is higher than 2.5% or 4%, thanks to tax savings.
CPF is not just a retirement account. It’s a government-sponsored, tax-advantaged savings vehicle. In short, CPF has a double tax advantage:
- Tax-deductible in (for employee’s contribution and top-ups)
- Tax-free out
Let’s break it down.
(And no, this is not a sponsored post.)
Tax-Deductible Contributions: You Save Upfront
If you’re a Singaporean or PR employee, your monthly CPF contributions — 20% from you, 17% from your employer for those aged 55 and below — don’t count as taxable income.
Think of it this way: if your employer gave you the full amount in cash instead, that money would be taxed. But since it goes into CPF, you get to keep the full contributions, untaxed.
In fact, your CPF contribution goes to reduce your chargeable income, which means a lower tax bill. Let’s illustrate this.
Meet Savvy Sam
Sam earns $7,000/month = $84,000/year. (Let’s exclude bonuses and other forms of income to keep the example simple.)
His 20% employee CPF contribution = $1,400/month = $16,800/year.
That brings his chargeable income down to $67,200.
Here’s how that affects his taxes:
| Chargeable Income and tax rate | Taxes without compulsory CPF contribution | Taxes after compulsory CPF contribution |
| $84,000 chargeable income | $67,200 chargeable income | |
| First $20,000 at 0% | $0 | $0 |
| Next $10,000 at 2% | $200 | $200 |
| Next $10,000 at 3.5% | $350 | $350 |
| Next $40,000 at 7% | $2,800 | $1,904 |
| Next $40,000 at 11.5% | $460 | $0 |
| Total tax | $3,810 | $2,454 |
Tax savings = $1,356.
That’s $1,356 more in Sam’s pocket — just for contributing to CPF, which he’s already obligated to do anyway.
Tax Savings Can Be Invested Too
Savvy Sam now sees the benefit and decides to top up another $1,356 to his CPF Special Account (SA) to lower his taxes even further.
His new chargeable income becomes $65,844, saving him another $95 in taxes (7% of $1,356). Not a life-changing amount — but it’s real money, and it compounds.
What if Sam does this every year?
If Sam tops up $1,356 yearly (assuming no pay raise or bonuses) and earns 4% interest (CPF SA interest rate), over 30 years that grows to:
$80,449
This is retirement money built just from using his tax savings smartly. This amount, diligently invested over a long period of time, can either boost your retirement income or serve as a travel fund for you to go overseas in your golden years. Assuming each trip costs $5,000, this amount alone is enough for you to go for 16 trips!
But What If He Doesn’t Want to Save It In CPF?
That’s okay too. Even if Sam invests the same $1,356 yearly outside CPF, and earns a similar return (say, 4% from an investment product), he’ll also end up with ~$80,000 after 30 years.
Singapore doesn’t tax capital gains or dividends for individuals — so the real edge CPF has is letting you avoid income tax at the start, not necessarily on the investment growth.
Whether you reinvest your tax savings in CPF or outside of it — the point is: the tax relief is real and usable.
Tax-Free Withdrawals: CPF Lets You Keep It All
Finally, when you retire and start drawing from CPF – whether as monthly CPF LIFE payouts or if you withdraw a lump sum (like the portion you can take out from age 55) – those amounts are not considered taxable income.
For instance, if you start getting, say, $1,000 a month from CPF LIFE in retirement, that full $1,000 is yours to use, with no tax payable on it. Essentially, CPF treats your money as your money, even at the exit point.
This contrasts with the Supplementary Retirement Scheme (SRS) in Singapore. You get tax relief when putting money in, but your withdrawals from SRS are taxable (albeit at a partial rate of 50%). CPF, on the other hand, doesn’t tax you at withdrawal at all. It’s an incredibly tax-friendly structure from start to finish.
Let’s compare the tax on withdrawals:
| SRS withdrawal with 50% taxable | CPF withdrawal with no taxation | |
| Withdrawal amount | $50,000 (50%) | $0 |
| Taxes | First $20,000 not taxed Next $10,000 = $200 Next $10,000 = $350 Next $10,000 = $700 Total tax to be paid = $1,250 | $0 |
As you can see, SRS withdrawals can incur tax if the amount is larger than $40,000. You still save on taxes for SRS as it is deferred and only 50% of the withdrawal is taxable. But CPF withdrawals are best — no tax at all!
The Secret Power of CPF Is the Tax Savings
Most people look at CPF’s interest rates but they forget:
● You contribute pre-tax dollars
● You get a lower tax bill upfront
● You get to withdraw everything tax-free
Benjamin Franklin famously said, “Nothing is certain except death and taxes.”
Well… CPF bends that rule — at least on the tax part.
So here’s my suggestion: Track how much tax you’ve saved through CPF via your compulsory contributions. Then treat that as your minimum amount to invest every year. Whether it’s in CPF or outside, don’t let that invisible benefit go to waste.
Lastly, even for the self-employed, I hope you can see the tax advantages you get when you contribute to CPF. So don’t just look at your money getting locked up or just the interest rates — look at the tax savings too.
Your future self (and your travel fund) will thank you.
