What is 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, and
- 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 pensions are exempted from taxation.
NOTE:
The revised Budget 2023 has announced a decrease in tax rates for certain taxable income ranges, namely RM35,000 to RM50,000, RM50,001 to RM70,000, and RM70,001 to RM100,000. This reduction in tax rates is particularly beneficial for middle-income (M40) households as it leads to a rise in their disposable income and fosters wealth creation.
Moreover, taxpayers earning between RM100,000 to RM250,000 will now have a uniform tax rate of 24%, while those earning more than RM600,001 will face an increased tax rate of 28%.
What is chargeable income?
| Chargeable Income (RM) | Tax Rate 2022 | Tax Rate 2023 |
|---|---|---|
| 1 - 5,000 | 0% | 0% |
| 5,001 - 20,000 | 1% | 1% |
| 20,001 - 35,000 | 3% | 3% |
| 35,001 - 50,000 | 8% | 6% |
| 50,001 - 70,000 | 14% | 11% |
| 70,001 - 100,000 | 21% | 19% |
| 100,001 - 250,000 | 24% | 25% |
| 250,001 - 400,000 | 24.5% | 25% |
| 400,001 - 600,000 | 25% | 26% |
| 600,001 - 1,000,000 | 26% | 28% |
| 1,000,001 - 2,000,000 | 28% | 28% |
| Exceeding 2,000,000 | 30% | 30% |
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
- Employment
- Dividends and interests (excluding interests from bank deposits)
- Discounts
- 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 benefits that are given to you in monetary form – all these are grouped into “Pre-requisites”.
How do you calculate your chargeable income?
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 lower your chargeable income, while tax rebates reduce what you owe in taxes – the actual taxed amount. These are all practical terms to take note of so that you can maximize your tax return.
Tax Reliefs
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.
Here is the list of tax exemptions in Malaysia for YA 2022:
1. Individual Relief
- Individual and dependent relatives: RM9,000
- Individuals with disabilities: RM6,000
- Disabled husband or wife: RM5,000
- Husband/wife/alimony to ex-wife: RM4,000
- Education fees (self): RM7,000
2. Lifestyle, Medical & Related Equipment
- Medical treatment, special needs and carer expenses for parents (Medical condition certified by a medical practitioner): RM8,000
- Basic supporting equipment for disabled self, spouse, child or parent: RM6,000
- Lifestyle: RM2,500
- Purchase of sports equipment, and gymnasium membership fees: RM500
- Purchase of personal computers, smartphones and tablets: RM2,500
- Domestic travel expenses: RM1,000
- Purchase of breastfeeding equipment: RM1,000
- Medical expenses for serious illness & fertility treatment expenses: RM 10,000 (including full medical treatment, COVID-19 detection test, mental health examination, and vaccination allowed limited to RM1,000)
3. Child Relief
- Child under 18 years: RM2,000
- Child 18 years and above: RM2,000 (unmarried/studying full-time)
- Child 18 years and above: RM8,000 (unmarried / studying at IPT)
- Registered daycare/kindergarten fee: RM3,000
- A child with disabilities: RM6,000
- Additional for a child with disabilities RM8,000 (studying at IPT – Diploma / above)
4. Contributions
- Life Insurance and EPF: RM7000
- EPF / Approved Scheme: RM4000
- SOCSO: RM350
- Deferred retirement and annuity scheme: RM3000
- Medical and education insurance (individual/spouse/child): RM3000
- SSPN (net savings): RM8000
SIDE NOTE: For women returning to the workforce, there’s a women-centric career comeback incentive for you! Eligible women returnees are entitled to income tax exemptions for five consecutive years of assessment (YA) from 2022 to 2028.
This exemption is implemented to attract and retain female talent in the workforce, providing them with much-needed social and financial dignity. Aside from solidifying women’s presence in the work world, the national budget also helps to bridge the gender gap in employment.
Tax deductions
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. Multiple claims for tax deductions are allowed if you make several contributions to different organisations.
Tax Rebates
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 a 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?
To those who just started ‘adulting’, you first need to register yourself as a taxpayer via LHDN before you are set to file your tax online.
Read this article, for the step-by-step process: Avoid LHDN's 300% Tax Penalty. How to Declare Income Tax (YA 2023)
So, that’s about all for our income tax guide 2023. 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.
