What’s income tax in Malaysia?
In Malaysia, income tax is a duty levied on individuals and companies, on all income generated. It’s charged at different rates depending on what source of income it relates to. Individuals and companies are required to submit their tax filing within a specified deadline to pay any owed taxes or to receive a refund for overpaid tax.
Income tax is collected by the government to pay for virtually anything under the sun for the development of our country. For instance, it’s used for the salaried government staff, country’s infrastructure and facilities, scholarships, amenities such as public recreational parks, education institutes, healthcare initiatives, national defence and security, pensions, as well as science and medical research.
Do I need to pay income tax?
After taking company allowances, bonuses, commissions, and benefits into consideration, residents in Malaysia with an annual income of more than RM34,000 after EPF deductions, or more than RM38,200 before EPF deductions, are obliged to register a tax file and pay their income tax.
Resident individuals are taxed based on a progressive tax rate from 0% to 30% on chargeable income, while non-resident individuals are based on a flat rate of 30%. You don't have to pay taxes in Malaysia if you have been employed in the country for less than 60 days or for income that is earned from outside Malaysia.
You may ask, “Who are considered residents in Malaysia?” and the answer to that is pretty straightforward. Under the current tax legislation in Malaysia, if you are staying in Malaysia for no less than 182 days, you are a resident – no matter which country you are from.
You are considered a non-resident when you stay less than 182 days and will be taxed on a different scale. It’s important to know that those 182 days are not restricted to a consecutive stay. Aside from the mentioned groups of people, seniors over 55 years who are looked after well with Malaysian pension are exempted from taxation.
What is chargeable income?
|Chargeable Income (RM)||Tax Rate 2020||Tax Rate 2021|
|1 - 5,000||0%||0%|
|5,001 - 20,000||1%||1%|
|20,001 - 35,000||3%||3%|
|35,001 - 50,000||8%||8%|
|50,001 - 70,000||14%||13%|
|70,001 - 100,000||21%||21%|
|100,001 - 250,000||24%||24%|
|250,001 - 400,000||24.5%||24.5%|
|400,001 - 600,000||25%||25%|
|600,001 - 1,000,000||26%||26%|
|1,000,001 - 2,000,000||28%||28%|
While Malaysia is regarded as one of the countries with the lowest income tax, you’ll still be delighted to get extra savings from your income tax. Therefore, after having learnt the basics, let’s move on to determining your chargeable income.
Most people think that taxable income equals chargeable income. But wait for a second – they’re not quite the same. Chargeable income is derived from taxable income, and as a result, it’s vital to know your taxable income before anything else.
So here’s the simple formula:
Chargeable Income = Taxable Income – Personal Tax Reliefs – Tax Deductions – Tax Exemptions
You see, no rocket science here. According to the latest information on the LHDN website, the following types of income are considered taxable:
- Business or profession
- Dividends and interests (excluding interests from bank deposits)
- Passive rental collected
- Royalties, premiums, pensions, annuities
- Car loans or housing loans from your company, bill claims, company credit cards, child tuition fee sponsored by the company, and all other company’s benefits that are given to you in monetary form – all these are grouped into “Pre-requisites”.
How do you calculate your chargeable income then? Again – very easy.
For example, if you have an annual salary of RM50,000, a passive rental income of RM3,000, and interest gained from a local bank’s fixed deposit of RM1,500, by taking the sum of those amounts, you’d have a total annual income of RM54,400.
You can then find out your chargeable income by using the formula above. Since a fixed deposit interest is deemed a tax exemption, and you don’t have any tax relief at the moment (we will talk more about tax relief and tax exemption later), the calculation would look like this:
RM54,400 – RM1,500 = RM52,900
(Total Taxable Income – Tax Exemption = Chargeable Income)
What are tax exemptions, tax reductions, tax rebates and tax reliefs?
To make sure your tax prep is running smoothly, it’s vital to understand the difference between these terminologies. Tax deductions, tax exemptions and tax reliefs all serve to lower your chargeable income, while tax rebates reduce what you owe in taxes – the actual taxed amount. These are all valuable terms to take note of so that you can maximize your tax return.
Tax exemptions in Malaysia include the following:
- Leave passage
- Medical and dental benefits
- Death gratuities
- Income remitted from outside Malaysia
- Income from research findings
- Compensation for loss of employment
- Interests and dividends earned from particular governments and organisations
Tax deductions work the same as tax exemptions but are more specific. You can only claim a tax deduction for gifts or donations made directly to the government or government-approved charities. The good news is, you are not limited to just one charity or organisation you make donations to. Multiple claims for tax deductions are allowed if you make several contributions to different organisations.
We know, there’re so many tax terms you need to pick up. Bear with us as we’re almost done. What are tax reliefs then? Tax reliefs apply to activities that are considered necessities or strongly recommended by the Malaysian government – life insurance and EPF, education insurance, medical expenses of parents, lifestyle purchase of books and breastfeeding equipment and child relief, to name a few. Therefore, they are factors to alleviate your financial burdens.
Lastly, tax rebates take a portion of your total tax out and make it even lower. They include Zakat/Fitrah (only applicable for Muslims), and spouse tax rebate of RM400 if he or she has a chargeable income of no more than RM35,000.
How to file your income tax?
Thanks to advances in technology, now you can do all your registration and e-filing online while sitting comfortably in your living room with a cup of coffee.
If you are a first-time taxpayer, you’d need to register yourself at the LHDN website under “borang pendapatan online”, then:
- Fill in all the information in the registration form and you’ll get an application number.
- Upload a copy your of identify card (IC).
- LHDN will confirm your application by sending you a PIN within a week.
- Go to the LHDN website again, go to MyTax and insert your identity card number and password under the “First-Time Login”.
- Now you’re all set to file your tax online!
You can now proceed with your e-filing process on the LHDN website:
- Prepare your salary statement (EA form). Make sure you get your EA form from your employer if you haven’t received one by the end of February as you can’t start filing for your tax return beginning on March 1.
- Choose the correct income tax return form (E, BE, or B). If you are an individual resident who does not run a business, BE form is what you need.
- Fill in all information required, and remember to crosscheck with your EA form.
- You will then see a summary of your info and the system will provide your total tax due automatically. Make sure your info is correct.
Voila! Now you can sit back, relax and your refund (if any) will roll in within 30 days. Not such a tough job as you would have imagined, huh?
Important note: You need to provide your bank account details if you wish your refund to be deposited directly.
So, that’s about all for our income tax guide 2022. We hope this article helps you and makes your tax-filing process a little less complicated than you thought – especially if this is your first time filing income tax. And if you need more tax-related information to allay your fears, we have more helpful tips available at our Learning Centre!
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*The above article is intended for informational purposes only. Loanstreet accepts no responsibility for loss that may arise from reliance on information contained in the articles.