Have you tried to prepare and file your own income tax in Malaysia? For most people, it is a very challenging and stressful experience every year. However, you will find that it is not as difficult as it sounds when you understand how the income tax system works in Malaysia.
First of all, do you know the answers to the following questions?
- Do you know how to calculate your income tax?
- Are you aware that Malaysia uses a progressive income tax rate system?
- Do you know what tax exemptions, tax reliefs, tax rebates, and tax deductibles are, and the differences between them?
- Do you know how you can get higher income tax return?
If your answer is no to most of the questions, then you do not know how to plan your income taxes well. This is dangerous because, without planning, you will not be able to enjoy the tax reliefs and tax savings that you are entitled to.
Nevertheless, with this simple and easy to understand guide on how to prepare and file your income tax in Malaysia for 2017, you will be filing your income tax like a pro before April ends.
What Is Chargeable Income?
Before we go any further, you need to first understand what and which type of income is considered an income by the Lembaga Hasil Dalam Negeri or the Inland Revenue Board of Malaysia. Is it just your monthly salary from your employer or does it also include other types of income?
Starting from 2016, any individual in Malaysia that earns an annual gross income of RM25501 after deducting his or her EPF has to register a tax file. The types of income that are taxable include:
- Interests except for bank deposit interests
- Rental fees collected
- Perquisites including bill claims, company credit cards, loans from company, sponsored club memberships, sponsored children tuition fees, personal driver, and other benefits given by your employer that can be converted into cash.
Please see the example below to calculate your total annual income.
Assuming if you have a salary of RM60000 and has other sources of income such as interest earned from your fixed deposit, dividends earned from ASB, rental income, and an income for part time job.
Salary – RM60000
Interest from Fixed Deposit – RM1300
Dividends from ASB – RM1400
Rental Income – RM9600
Part Time Job Income – RM12000
Your total annual income is RM84300
So, with your total annual income of RM84300, we will now find out what your chargeable income is. A chargeable income is also known as a taxable income. It is calculated by taking your total annual income minus all of the tax exemptions and tax reliefs you are eligible for.
Using the example above, we will now calculate the chargeable income amount.
Total annual income – RM84300
Tax Exemption: Interest from Fixed Deposit – RM1300
Tax Exemption: Dividends from ASB – RM1400
Tax Relief: Self & Dependent – RM9000
Tax Relief: EPF & Life Insurance of up to RM6000 – RM6000
Tax Relief: Medical Insurance – RM750
The chargeable income amount is RM84300 – RM1300 – RM1400 – RM9000 – RM6000 – RM750 = RM65850
What Is A Tax Exemption?
The good news for tax payers in Malaysia is they do not have to pay the full tax on their total income because certain portions of their income can enjoy tax exemptions. These tax exemption can work both ways. It can either reduce the tax amount or completely remove your obligation to pay the income tax. The list below will show each and every tax exemptions in detail.
A leave passage is a vacation time paid by your employer. This leave passage is divided into local and oversea categories. If you do not exceed three times a year for leave passage within Malaysia, an one leave passage that is out of Malaysia and not exceeding RM3000, you are then entitled for the leave passage tax exemption.
Medical and Dental Benefits
Any medical benefits that your employer provides you are exempted from any form of taxes. Starting from year of assessment 2008, this list of medical benefits has also included maternity expenses and traditional medicine such as ayurvedic and acupuncture without any limits.
The full amount of retirement gratuity that the employee receives from the employer are exempted from income tax if they fulfil the following conditions:
- The Direct General of Inland Revenue must be convinced that the retirement is due to illness
- If the employee retires on age 55 or beyond that and the employee has worked at least 10 years with the same employer or companies within the same group of companies
- If the retirement is on the compulsory age of retirement in accordance to a contract of employment or collective agreement at age 50 and before 55 and the employment must be 10 years with the same employer or companies within the same group of companies.
Gratuity Paid out of Public Funds
Gratuity that is paid out of public funds on retirement is also exempted from income tax under the written law.
Gratuity Paid To a Contract Officer
This includes gratuity that is paid out using public funds to a contract officer during the termination or contract of employment despite whether the company will renew the contract or not.
Compensation for Loss of Employment
Compensation for loss of employment is a payment that the employer pays to the employee as a way to compensate for the loss of employment before or after the date of determination. This type of income is also exempted from income tax. However, the compensation of a Director of a Control Company is fully taxable.
Any pensions that fulfil the conditions listed below are also exempted from income tax:
- Tax payer who retires at age of 55 or at compulsory age of retirement under the written law
- If the retirement is caused by ill health
- If the pensions is given by the government or an approved pension scheme
However, for an employee working in public sector that chooses the optional retirement, his pension will not be exempted until he reaches the age of 55 or the compulsory age of retirement under the written law
In the case where the tax payer receives more than one pension, the exemption will only be given on the highest pension that he or she receives.
Income received as a form of death gratuity are fully exempted from income tax.
Any income from a paid scholarship is exempted from income tax.
Income that an individual received for cultural performances that are approved by the Minster is also exempted from tax.
Any form of interest income received by individuals from the money they deposited with the list of institutions below is also exempted from income tax starting from August 30, 2008.
- A bank or licensed finance company under the Banking and Financial Institutions Act 1989
- A bank licensed under the Islamic Banking Act 1983
- A development financial institution under the Development Financial Institutions Act 2002
- The Lembaga Tabung Haji that was established under the Tabung Haji Act 1995
- MBSB, the Malaysia Building Society Berhad that was incorporated under the Companies Act 1965
- The Borneo Housing Finance Berhad that was incorporated under the Companies Act 1965.
The following dividends are also exempted from income tax:
- Dividends from exempt accounts of companies
- Dividends from co-operate societies
- Dividends from a unit trust approved by Minister of Finance such as the Amanah Saham Bumiputra
- Dividends from a unit trust approved by Minster of Finance where 90% or more of the investment is invested in government securities
Royalty fees that exceed the limits listed below are not exempted from income tax:
- Publication of artistic works / recording discs / tapes – RM10000
- Translation of books / literary works – RM12000
- Publication of literary works /original paintings/musical compositions – RM20000
However, these exemption limits do not apply if the payment received is part of the tax payer’s payment for official duties.
Income From Out of Malaysia
Starting from Year of Assessment 2004, any income generated outside of Malaysia and remitted into Malaysia by a resident individual is exempted from income tax. A good example is you take up a job while you are in overseas and only receive that payment for the job when you come back to Malaysia.
Fees or Honorarium for Expert Services
Starting from Year of Assessment 2004, any fees or honorarium received by an individual for the services he or she provides to validate, moderate or accredit franchised education programmes in higher educational institutions are also exempted. The Malaysian Qualifications Agency (MQA) needs to verify and acknowledge this individual before and the exemption will not apply if the payment is received as a form of his salary for the official duties.
Income from Research Findings
Any income received from bringing a scientific research finding to commercialization is given a maximum tax exemption of 50% on the income in the basis year for a year of assessment. This will last for 5 years from the date when the payment is made. The individual scientist that receives this payment must be a citizen and a resident in Malaysia. In addition, Ministry of Science, Technology, and Environment in Malaysia must also verify on the research findings.
Company Special Service Awards
If your company special service cash or prize awards are RM1000 and below, you are entitled for the tax exemption.
Any travelling allowances of up to a maximum of RM6000 for petrol and tools are given tax exemption if the employee uses his or her own vehicle. These allowances refer to claims made by employees who are performing their official duties using their own personal vehicles.
Benefits In Kind Exemptions
Certain benefits in kind related to consumable services are not eligible for income tax exemption. Examples of these consumable services include dental care, child care benefits, food and drinks, special arranged transportation for pick-up points, special discounts for food, toiletries and other consumable products that cannot be resold.
What Is A Tax Deduction?
After deducting the tax exemptions and tax reliefs from your gross annual income, you can still reduce your chargeable income further by using tax deductions.
In Malaysia, a tax deduction works the same way as a tax relief, where it helps to reduce your chargeable income. Tax deductions apply to gifts and donations you made.
A donation is only tax deductible if you make that donation to a charitable organization that is approved by the Malaysian Government or if you make a donation to the Malaysian Government directly. As a donor, you need to keep the receipt of that donation.
For example, if your chargeable income is RM55000 and you have donated RM2500 as a donation to a Malaysian Government approved charitable organization, you are then allowed to deduct 7% of your aggregate income in order to reduce your chargeable income. The calculation for this is listed below:
= RM55000 (Chargeable Income) – (RM55000 * 7%)
= RM55000 – RM3850
For a list of contributions under donations and gifts, please see the following list:
- Giving money to the Government, State Government or Local Authorities
- Giving money to Government Approved Institutions or Organizations: the amount is limited to 7% of your aggregate income
- Giving money or contributing to any kind of Government approved sports activity or sports body: the amount is limited to 7% of your aggregate income
- Giving money or contributing to any kind of Government approved project of national interest that is approved by Ministry of Finance: the amount is limited to 7% of your aggregate income
- Giving artefacts, manuscripts or paintings
- Giving money for Library Facilities or to Libraries
- Giving money or contributing to improving facilities in public places to benefit disabled persons
- Giving money or providing medical equipment to any healthcare facility that is approved by the Ministry of Health
- Giving paintings to the National Art Gallery or any State Art Gallery
It is important to note that you are not just limited to one deduction. If you make donation to multiple things listed above, you can also deduct them accordingly.
What is A Tax Relief?
According to LHDN or Inland Revenue Board of Malaysia, this tax relief is for certain activities or behaviours that the Malaysian Government encourages you to do. If you plan your tax reliefs properly, you can save quite a lot in paying the income tax.
For example, let us assume that a tax payer would have been asked to pay a tax of 10% of his total chargeable income of RM84300 if he did not claim any tax reliefs.
If his tax relief for self and depending is RM9000 and his insurance and EPF tax relief is RM6000, his total chargeable income is now only RM69300 so he will only need to pay 8% tax on his chargeable income.
For more different types of tax reliefs, refer to the list below:
- Self and dependent – RM9000
- Life Insurance and EPF – RM6000
- Deferred Annuity and Private Retirement Scheme from year assessment 2012 to year assessment 2021 – RM3000
- Insurance premium for education or medical benefit – RM3000
- Contribution to the Social Security Organization (SOCSO) – RM250
- Husband, Wife or Alimony payments – RM4000
- Medical expenses for parents or parent – RM5000 or RM3000 with limited RM1500 for only one mother and father
- Individual education fees – RM7000
- Medical expenses for serious diseases – RM6000
- Complete medical examination – RM500
- Purchase of books, magazines, journals, and publications – RM1000
- Purchase of sports equipment for sport activities – RM300
- Disabled individual – RM6000
- Disabled husband or wife – RM3500
- Basic supporting equipment for disabled self, spouse, child or parent – RM6000
- Ordinary child relief – RM2000
- Full time education for each unmarried child of 18 years and above for A level, certificate, matriculation or preparatory courses – RM2000
- Full time education for each unmarried child 18 years and above receiving further education in Malaysia for diploma or higher excluding matriculation or preparatory courses – RM8000 per child
- Full time education for each unmarried child of 18 years and above for degree or equivalent such as Master or Doctorate – RM8000 per child
- Full time education for each unmarried child of 18 years and above to study in an educational established approved by the relevant government authority – RM8000 per child
- Disabled child – RM6000 per child
- Additional exemption per unmarried disabled child age 18 years old and above who are pursuing diplomas or above qualification in Malaysia – RM6000 per child
- Additional exemption per unmarried disabled child age 18 years old and above who are pursuing bachelor degree or outside Malaysia in a programme in a higher education institute that is accredited by the related government authorities – RM6000 per child
- Net saving in Skim Simpanan Pendidikan National starting from year assessment 2012 until year assessment 2017 – RM6000
If you plan your tax filing right, you can save from paying thousands in taxes every year by using these tax reliefs.
Next, I will show you how to calculate the amount of tax you need to pay for last year’s assessment. Look at the list below:
- For chargeable income from RM0 to RM5000, 0% will be imposed on the first RM2500
- For chargeable income from RM5001 to RM20000, 0% will be imposed on the first RM5000 and 1% will be imposed on the next RM15000 and the tax amount for that is RM150
- For chargeable income from RM20001 to RM35000, RM150 will be imposed on the first RM20000 and 5% will be imposed on the next RM150000 and the tax amount for that is RM750
- For chargeable income from RM35001 to RM50000, RM900 will be imposed on the first RM35000 and 10% will be imposed on the next RM15000 and the tax amount for that is RM1500
- For chargeable income from RM50001 to RM70000, RM2400 will be imposed on the first RM50000 and 16% will be imposed on the next RM20000 and the tax amount for that is RM3200
- For chargeable income from RM70001 to RM100000, RM5600 will be imposed on the first RM70000 and 21% will be imposed on the next RM30000 and the tax amount for that is RM6300
- For chargeable income from RM10001 to RM250000, RM11900 will be imposed on the first RM100000 and 24% will be imposed on the next RM150000 and the tax amount for that is RM36000
- For chargeable income from RM250001 to RM400000, RM47900 will be imposed on the first RM250000 and 24.5% will be imposed on the next RM150000 and the tax amount for that is RM36750
- For chargeable income from RM400001 to RM600000, RM84650 will be imposed on the first RM400000 and 25% will be imposed on the next RM200000 and the tax amount for that is RM50000
- For chargeable income from RM600001 to RM1000000, RM134650 will be imposed on the first RM600000 and 26% will be imposed on the next RM400000 and the tax amount for that is RM104000
- For chargeable income more than RM1000000, RM238650 will be imposed on the first RM1000000 and 28% will be imposed on the next ringgit after it
Let us use an example to calculate the total tax from the total chargeable income. Assuming that the chargeable income is RM63850 in this example. The calculation is displayed below:
- First RM5000 – 0% tax rate = RM0 in taxes
- Next RM15000 – 1% tax rate = RM150 in taxes
- Next RM15000 – 5% tax rate = RM750 in taxes
- Next RM15000 – 10% tax rate = RM1500 in taxes
- Next RM15850 – 10% tax rate = RM3200
In this example, the person will have to pay a total tax of RM5600 for a total chargeable income of RM65850. If you find this to be too much mathematics for you, you can look for a Malaysia income tax calculator online.
How to File Income Tax?
If this is your first time, follow the simple instructions below:
- Go to LHDN Malaysia official website to do your e-filing
- Click on Borang Pendapatan Online
- Follow the instructions displayed on the page
- Fill up the form
- Press confirm
- You will be given your application number after you pressed confirmed
- Note down your application number and keep it in a safe place for future reference
- Scroll down from your application number until you see Muat Naik Disini
- Click on Muat Naik Disini
- Upload your identity card or MyKad within 14 days
- You must scan the front of your identity card and it must show your name and I.C number clearly
- The file format must be in .gif format
- The file size cannot be more than 60kb and must be between 40kb to 60kb
- The file name must be in alphanumeric only
- Lastly, just wait for the confirmation from LHDN Malaysia and they will give you your PIN to create an account for e-Filing
- The confirmation from LHDN usually takes around 1 week of working days
How to Pay Income Tax?
You can pay your income using several methods including e-banking, LHDN collection agents, through bank ATMs, bank branches, credit cards, using bank draft if you are overseas, and etc.
Late Payment Penalties
If you are late or fail to make the full payment by 30th of April, you will be imposed a penalty charge of 10% on the balance of the tax that is not paid. If you still fail to pay after 60 days, you will be imposed with another penalty charge of 5% on the total amount that you owe including the penalty charge of the first 10%. See the example listed below:
Balance of tax not paid after 30th of April – RM700
First late penalty charge of 10% – RM70
Total tax payable – RM770
Second late penalty charge of 5% – RM38.50
Total tax payable – RM808.50
Tax Payer Responsibilities
As a tax payer, you have the responsibility to keep the following documents for at least seven years from the end of the year when you file your income tax return form. The documents are:
- EA/EC Form
- Original dividend vouchers
- Insurance premium receipts
- Books purchase receipts
- Medical receipts
- Donation receipts
- Zakat receipts
- Children’s birth certificates
- Marriage certificates
- Working sheets if there are any
- Other supporting documents
This is very important because LDHN Malaysia has the right to request for any of these documents at any given time. If you fail to furnish these supporting documents to LHDN Malaysia during a tax audit, you will be imposed with a tax penalty from RM300 to RM10000 or imprisonment or even both. So, remember to always keep these documents safely and near you if you are filing for tax reliefs.
We hope that you have found this basic guide on income tax in Malaysia helpful.