How does income tax in Malaysia works
Money that is given to the government through Lembaha Hasil Dalam Negeri (LHDN) from the money you earn is income tax. The income tax is commonly paid throughout the year as you withdraw your income. In a situation of an employer and employee, the employer substracts an approximate tax amount of money from the employee’s wage that is received each month and directs it to the Lembaga Hasil Dalam Negeri in place of the employee. This procedure is better known as Potongan Cukai Berjadual (PCB) or Monthly Tax Deduction (MTD). In Malaysia, the tax year starts from Jan 1 to December 30. The dateline for personal income tax returns to be documented is before April 30 in the next year. There is an allowance of a grace period of 15 days from the original scheduled date if the E-Filing system is used for submission of tax returns. The final due date for business invidivuals for submission of filiing is by June 30. There are some forms involved including Form BE which is handed out by the Income Tax Department or LHDN and is completed by the taxpayer and Form J which indicates authorization of tax liabitlity. Form EA is another form that can be obtained from the employer for verification of your income.
Tax Rate
The personal income tax rate depends on the amount of money you earn. The less you earn, the less tax is implemented on your salary and the rate increases accordingly starting from 0% to 26%. Gross income or adjusted gross income omitting any deductions or exemptions that are permitted in the year of assessment is also known as taxable income. Taxpayers hold a right to different deductions and personal reliefs. Income that is foreign based is excused from income tax implentations. Some of the items that Lembaga Hasil Dalam Negeri specifies as taxable inome are profits and proceeds from any trade, business or profession, salary or wages, dividends, interests or discounts, property rental earnings, royalties, pensions, annuities and special classes of income.
In addition, other things that are taxable are benefits and perks that come from being employed at your company that can transformed into value of cash such as bill claims, company loans, company credit cards, sponsored tution fees, sponsored club memberships, personal driver and any other aid from the company. If your mobile phone bills amount to RM100 a month for the tax year 2015 and is paid by your company, RM24,000 in phone bills is taxable and is included to your taxable income.
Benefits in kind are benefits that are provided by your company that cannot be changed into value of cash or money and includes things like electronics, cars, lodging and home furnishing. They are also taxable. Because benefits in kind do not have monetary value, there is a formula that is used to calculate benefits in kind such as follows:
Annual value of benefit = Value of asset / Asset’s lifespan
Tax relief and deductions
A tax relief is applicable to tax payers who have personal misfortunes or load like a handicapped child or spouse, medical expenses and more. Personal tax reliefs are substracted from gross annual income and the sum of that is what makes chargeable income of resident individuals. The deduction of tax payment towards from your income towards your tax payments is not a fixed amount. The probable deduction amount is generally computed from your gross annual income devoiding your EPF deductions which is at most RM6,000 in a year.
Tax exemptions are specific money that are exempted or a personal allowance that can be claimed by the taxpayer so that the taxable income can be lessened. Tax exemptions differ to tax reliefs in that tax exemptions happen when items are totally eliminated from your taxable income while tax reliefs are deductions on your taxable income. Some examples of tax exemptions where it applies are medical and dental benefits, leave passage, retirement gratuity, compensation for loss of employment, pensions, death gratuities, scholarships, income remitted from outside of Malaysia, gratuity paid out from of public funds, gratuity paid to a contract officer, fees or Honorarium for expert services and income derived from research findings. There is an exception for interests, dividend and royalties which are categorized as taxable income to be exempted although they must fulfill certain criteria.
Chargeable Income
Chargeable income is a fragment of your income that is taxable after tax reliefs and tax exemptions are deducted. The calculation of formula for chargeable income are as follows:
Chargeable income = Taxable income – Tax exemptions – Tax reliefs
In a situation where your earnings are a sum of RM42,000 in the tax year of 2015, and your tax relief and tax exemptions have no extras other than the standard ones, the calculation for your chargeable income will be:
Taxable income : RM42,000
Tax relief: RM9,000 in individual tax relief + RM4,620 in EPF contribution tax relief (11% of RM42,000 = RM4,620).
Hence, chargeable income = RM42,000 – RM9,000 – RM4,620 = RM28,380.
The Malaysian Tax System is progressive, in that taxpayers pay the higher rate on income on top of the earlier rate tier. In this system, it is assured that your net income will not be lower after tax payments for having more earnings.
Tax deductions and tax reliefs are the same as they both enable reductions in your chargeable income. Deductions to a maximum of 7% of your taxable income for gifts to government-approved charities or organizations is permitted. For example, if your total earnings was RM42,000 last year and RM3,000 was proceeded as donations, you are entitled to deduct RM2,940, which is 7% of RM42,000 from your chargeable income.
How do you know if you are eligible to pay taxes? Since the start of 2015, individuals whose total salary in a year tally up to more than RM34,000 will need to file their taxes. If the individual is liable to pay taxes, the application be done at the nearest LHDN. The documents needed for this application are Forms EA/EC, most recent salary slip, a copy your IC or passport and a copy of your marriage certification. It is advised to keep any receipts or proof of tax reliefs carefully as you it is important to keep your records for 7 years from the date of of filing.
