Whenever the tax season rolls around (that’s 1st March to 30th April), there is inevitably a sense of worry amongst the public because there are many financial, technical and even legal considerations to be taken into account when filing in at Lembaga Hasil Dalam Negeri (LHDN or Hasil) or online.
One of our most popular guides on this site last year, the Malaysia Personal Income Tax Guide 2013 – Rates, Exemptions, Rebates is now updated for this year.
This guide was written for the January – December 2013 tax year, but we will be sure to update this whenever the Government decides to make any changes throughout 2014. Remember that you file in March/April 2014 for the 2013 calendar year of income and expenses.
Malaysia Personal Income Tax Rates 2014
Two key things to remember:
- Tax rates are Progressive, so you only pay the higher rate on the amount above the rate (i.e. you will never have less “net income after tax” by earning more!).
- Tax rates are on Chargeable Income, not salary or total income. Chargeable income is calculated after tax exemptions and tax reliefs (more below).
First off, we start with the table for personal income tax rates in Malaysia for the Assessment Year 2013, so everyone would be able to cross-check the tax bracket and the amount of tax needed to pay.
Budget 2014 update: 1-3% reduction in tax rates but only after 2015!
Many would have heard about the announcement in the Malaysia Budget 2014 (on 25th October 2013), where personal income tax rates are being reduced across the board by 1-3% for the assessment year 2015 (filing in March/April 2016). As it doesn’t affect Assessment Year 2013 (or even 2014) tax returns, we’ve put it in this accordion, but we’ll come out with a full guide once its closer to the date.
|Chargeable Income||Tax Rate (2013 and 2014)||Cumulative Tax||Tax Rates (2015 - )||Cumulative Tax||Saving|
|From RM1 - RM5,000||0%||RM0||0%||RM0||-|
|From RM5,001 - RM20,000||2%||RM300 (RM0 after RM400 rebate)||1%||RM150 (RM0 after RM400 rebate)||-|
|From RM20,001 - RM35,000||6%||RM1,200 (RM800 after RM400 rebate)||5%||RM900 (RM500 after RM400 rebate)||RM300|
|From RM35,001 - RM50,000||11%||RM2,850||10%||RM2,400||RM450|
|From RM50,001 - RM70,000||19%||RM6,650||16%||RM5,600||RM1,050|
|From RM70,001 - RM100,000||24%||RM13,850||21%||RM11,900||RM1,950|
|From RM100,001 - RM250,000||26%||RM52,850||24%||RM47,900||RM4,950|
|From RM250,001 - RM400,000||26%||RM91,850||24.5%||RM84,650||RM7,200|
|RM400,001 and Above||26%||25%|
The SaveMoney Malaysia Income Tax Calculator 2014
Our very nerdy web team has created a simple calculator (Android and Online App, iOS app coming soon!) which helps you calculate your tax based on how much you earn (or hope to earn!). Many people may be paying the wrong amount of tax!
For those who prefer worksheets, you can also download the Excel version here.
How Much Do I Have To Earn Before Paying Income Tax?
For most residents of Malaysia, the key figure to take note of is about “RM36,704 per year (about RM3,060 per month)” which is inclusive of all benefits, allowances, bonuses, overtime and commissions. If you’re earning anywhere below that figure, then there’s no need for you to open up a file for tax to be deducted from your income (while the con is that you’re not earning as much as you’d like, the pro is that there’s less hassle from a tax perspective!).
How did we determine that any income below RM36,704 (about RM3,060 per month) is not taxable? Take a look at our quick guide to the tax cut-off point for Malaysia below.
However, if you do earn above that, you need to have a tax file opened with your income tax automatically deducted from your income (welcome to the world of big money!).
Some extra notes about income tax that you may find interesting:
1) For non-residents of Malaysia (people who have been living in the country for less than 182 days per year), the tax rate has been set at 26% on all the income that has been earned in Malaysia. regardless of your citizenship or nationality. However, there are some exceptions to the matter. Certain professions such as public entertainers (15%) as well as those who receive payments for services in connection with the use of property or installation, payments for technical advice and rent (10%) are taxed differently.
2) You may still be overpaying or underpaying on your tax, even if you are a salaried worker or civil servant under a Potongan Cukai Bulanan (PCB), a Monthly / Schedular Tax Deduction (MTD) system or if you are self-employed / own your own business.
What is Chargeable Income in Malaysia?
As mentioned before, the tax rates above are effected on a person’s Chargeable Income (rather than salary or total income, in fact, the amount of the chargeable income is usually much lower). Now I’m sure many of you first-timers may be wondering what your “Chargeable Income” is.
You take the following equation and apply where necessary:
Chargeable Income = Taxable income – Tax exemptions – Tax Reliefs
Check out the example below for a general idea:
You are earning a RM40,000 salary, you have a RM2,000 local bank interest income as well as RM13,000 from property rental income a year. That should bring your chargeable income to RM55,000 correct? Nope, that’s not the way to go about it. Even without taking into account the many tax reliefs available, every taxpayer gets the standard RM9,000 individual tax relief as well as a maximum relief of RM6,000 for EPF contributions. That means your EPF contribution is calculated at 11% of RM40,000, i.e. RM4,400. Also, while “interest” is taxable income (more on this below), all local bank interest income is tax exempted (lucky us!).
Therefore, your Chargeable Income (by applying the aforementioned formula) will actually be:
RM55,000 – RM2,000 – (RM 9,000 + RM4,400) = RM39,600.
And there you have it! A much lower figure than which you initially thought would be the amount!
Taxable Income in Malaysia
Taxable income actually refers to the “base upon which an income tax system imposes tax”. In general, the Lembaga Hasil Dalam Negeri (LHDN) organisation includes all kinds of earnings which the Malaysian taxpayers have to pay for, but which is reduced by expenses and other deductions. Some of them include the following:
1) Business or Profession
4) Interest (except bank deposit interest)
Tax Exemptions on Income in Malaysia
Tax exemptions in Malaysia come in many forms, and can be defined as “a personal allowance or specific monetary exemption which may be claimed by an individual to reduce taxable income”.
Generally speaking, it means they are income items which can be omitted from (we refrain from using the word deductions here, because tax reliefs are also ‘deducted’ from your taxable income) the individual’s paycheck. Below you will find a full list of those items along with their respective descriptions, so that you will get a general idea of what to expect:
1) Leave Passage
Leave passage within Malaysia not exceeding three times in a year and one leave passage outside Malaysia not exceeding RM3,000.
2) Medical and dental benefit
With effect from the year of assessment 2008, medical benefits exempted from tax is expanded to include maternity expenses and traditional medicine like ayurvedic and acupuncture without limit.
3) Retirement gratuity
The full amount of gratuity received by an employee on retirement from employment is exempt if:
i. The Director General of Inland Revenue is satisfied that the retirement is due to ill health;
ii. Retirement on or after reaching the age of 55 years/compulsory age of retirement and the individual has worked 10 years continuously with the same employer or companies within the same group;
iii. The retirement takes place on reaching the compulsory age of retirement pursuant to a contract of employment or collective agreement at the age of 50 but before 55 and that employment has lasted for 10 years with the same employer or with companies in the same group.
4) Gratuity paid out of public funds
Gratuity paid out of public funds on retirement from an employment under any written law.
5) Gratuity paid to a contract officer
Gratuity paid out of public funds to a contract officer on termination of a contract of employment regardless of whether the contract is renewed or not.
6) Compensation for loss of employment
This is payment made by an employer to his employee as compensation for loss of employment either before or after the date of termination.
This compensation is exempted from tax. If compensation received is due to ill health. Compensation received in other cases:
i. Termination before 1st July 2008 – exemption of RM6,000 for every completed year of service with the same employer or with companies in the same group.
ii. Termination on or after 1st July 2008 – exemption of RM10,000 for every completed year of service with the same employer or with companies in the same group
Compensation received by a director (not service director) of a Control Company is fully taxable.
Pensions received by an individual are exempt under the following conditions:
i. He retires at the age of 55 or at the compulsory age of retirement under any written law; or
ii. If the retirement is due to ill health and the pension is received from the government or from an approved pension scheme.
For an employee in the public sector who elects for optional retirement, his pension will be taxed until he attains the age of 55 or the compulsory age of retirement under any written law. Where an individual receives more than one pension, the exemption is restricted to the highest pension received.
8) Death gratuities
Monies received as death gratuity is fully exempted from income tax.
Any monies paid by way of scholarship to an individual whether or not in connection with an employment of that individual is exempted from income tax.
10) Cultural performances
Money received under this category is exempted from tax on condition it is approved by the Minister.
Income in respect of interest received by individuals resident in Malaysia from money deposited with the following institutions is tax exempt with effect from 30 August 2008:
i. A bank or a finance company licensed or deemed to be licensed under the Banking and Financial Institutions Act 1989;
ii. A bank licensed under the Islamic Banking Act 1983;
iii. A development financial institution prescribed under the Development Financial Institutions Act 2002;
iv. The Lembaga Tabung Haji established under the Tabung Haji Act 1995;
v. The Malaysia Building Society Berhad incorporated under the Companies Act 1965;
vi. The Borneo Housing Finance Berhad incorporated under the Companies Act 1965.
The following dividends are exempt from tax:
i. Dividends received from exempt accounts of companies.
ii. Dividends received from co-operative societies.
iii. Dividends received from a unit trust approved by the Minister of Finance such as Amanah Saham Bumiputra.
iv. Dividends received from a unit trust approved by the Minister of Finance where 90% or more of the investment is in government securities.
Royalties received in respect of the use of copyrights/patents are taxable if they exceed the following exemption limits:
However, the exemption stated above does not apply if the payment received forms part of his emoluments in the exercise of the individual’s official duties.
14) Income Remitted from Outside Malaysia
With effect from the year of assessment 2004, income derived from outside Malaysia and received in Malaysia by a resident individual is exempted from tax.
15) Fees or Honorarium for Expert Services
With effect from the year of assessment 2004, fees or honorarium received by an individual in respect of services provided for purposes of validation, moderation or accreditation of franchised education programmes in higher educational institutions is exempted.
The services provided by an individual concerned have to be verified and acknowledged by the Malaysian Qualifications Agency (MQA). However, the exemption does not apply if the payment received forms part of his emoluments in the exercise of his official duties.
16) Income Derived from Research Findings
With effect from the year of assessment 2004, income received by an individual from the commercialization of a scientific research finding is given tax exemption of 50% on the statutory income in the basis year for a year of assessment for 5 years from the date the payment is made.
The individual scientist who received the said payment must be a citizen and a resident in Malaysia. The commercialized research finding must be verified by the Ministry of Science, Technology and Environment.
What Are Tax Reliefs?
What about a tax relief? It is defined as “an amount that can be deducted from a person’s annual income to reduce the amount on which tax is paid”.
To describe it in a more clear and concise manner, it is actually a way for you to lessen your chargeable income.
Let’s say you took home a monthly paycheck of RM40,000 from your company in 2013 and if there were no tax exemptions or reliefs, your chargeable income will remain the same and your tax for the year would have been in the 11% bracket.
Now say the Government decides that all Residents of Malaysia should get a personal tax relief of up to RM9,000 per year. Your chargeable income will now be RM31,000 which means that your tax would be in the 6% bracket.
These are the following reliefs available for Malaysian Residents:
|Included in MTD system||RM|
|Self and Dependent||9,000|
|Life insurance and EPF||6,000|
|Ordinary Child relief (per child)||1,000|
|Not usually included in MTD / PCB system but relevant to most taxpayers||RM|
|Interest expended in 2013 to finance purchase of residential property dated 2010 (but interest payments starting in 2011 only)||10,000|
|Net saving in SSPN's scheme||6,000|
|Education Fees (Individual)||5,000|
|Updated: PRS Voluntary Contribution||3,000|
|Purchase of personal computer (every 3 years)||3,000|
|Insurance premium for education or medical benefit||3,000|
|Special relief for tax payers earning an income of up to RM8,000 a month (RM96,000 anually). Only applicable for the 2013 year of assessment.||2,000|
|Purchase of books, journals, magazines and publications||1,000|
|Complete medical examination||500|
|Purchase of sport equipment for sport activities||300|
|Not included in MTD system but relevant to certain taxpayers||RM|
|Basic supporting equipment (for disabled self, spouse, child or parent)||5,000|
|Medical expenses for serious diseases||5,000|
|Medical expenses for parents||5,000|
|Child age 18 years old and above, not married and pursuing diplomas or above qualification in Malaysia @ bachelor degree or above outside Malaysia in program and in Higher Education Institute that is accredited by related Government authorities||6,000|
|Disabled Wife / Husband||3,500|
|Child age 18 years old and above, not married and receiving full-time tertiary education||1,000|
|Premium on new annuity scheme or additional premium paid on existing annuity scheme commencing payment from 01/01/2010 (amount exceeding RM1,000 can be claimed together with life insurance premium)||1,000|
Tax Deductions vs Tax Reliefs
Most of the time people get confused between Tax Deductions and Tax Reliefs, and its easy to see why. They are for the most part the same thing, as they both allow you to reduce your Chargeable Income (that is, before you even start looking at tax rate tables). In fact most people worldwide use both terms interchangeably, and LHDN goes one step further and classifies Tax Deductions as a reduction in your Chargeable Income as a result of Gifts or Donations.
As a rule of thumb, you can deduct up to 7% of your Taxable Income for gifts to charities and institutions which are approved by the government (not all charities are approved, so be sure to find out before you donate away!), unless you are giving to a few selected government-related bodies, where there is less restrictions on the amount deductible from your income.
For example, if you earned RM60,000 this year, and donated RM5,000 to an approved charity, you may deduct RM4,200 (ie. 7% of RM60,000) off your chargeable income, in addition to all those reliefs above.
What are the Tax Rebates in Malaysia for 2014?
Some people will be having the question of how is a tax rebate different from a tax relief? A tax relief is a reduction in your chargeable income (ie. before you calculate tax) whereas a tax rebate is a reduction in your tax expense after you have calculated your tax for the year.
Tax rebates (or also known as “tax refunds” but done automatically rather than actually refunded to you). Simply put, there are income tax rebates for Malaysian taxpaying citizens who are having a chargeable income of less than RM35,000 which is RM400. There is also an additional RM400 rebate for married couples who have a chargeable income of less than RM35,000 per year and are eligible for the RM3,000 wife / husband / alimony relief.
To give a quick calculation example for tax rebates:
Taxable Income: Salary of RM45,000 a year
Chargeable Income: RM45,000 – RM9,000 Personal Relief – RM2,000 One-off 2014 relief – RM4,950 EPF relief = RM29,050.
Tax calculated using Income Tax Tables (without counting any rebates): RM843
Tax Payable: RM843 – RM400 rebate = RM443
In the above example, you were eligible for the RM400 tax rebate because your Chargeable Income was less than RM35,000 (it was RM29,050 in that example).
Another type of tax rebate, but which is only applicable for Muslim citizens, is the zakat / fitrah. Zakat is a compulsory payment for charity and considered to be compulsory as it is one of the five pillars in Islam. It can be calculated via the Muslim taxpayer’s acquired wealth or income. Zakat Fitrah, on the other hand, can be considered to be a small, compulsory levy that is imposed upon Muslim taxpayers only. It used to be calculated in the olden days using a pack of rice grains (one pack is equivalent to approximately 2.7 kg) but in the modern days, it is calculated based on the equivalent price of this pack rice grains. You can read all about Zakat and the various types that exists in our guide Zakat in Islam.
So… why is RM36,704 the cut-off point to pay tax?
Assuming that you made RM36,704 in 2013…
Your Chargeable Income = Your taxable income – (Standard RM9,000 individual tax relief + 11% EPF Contribution of your salary + Special tax relief of RM2,000 per month)
Your Chargeable Income = RM36,704 – (RM9,000 + RM4,037 + RM2,000) = RM21,667
Based on the tax rate table above, RM21,667 would be taxed RM300 on the first RM20,000 and RM100 on the remaining RM1,667 which brings it up to about RM400 in tax.
After taking into account the RM400 rebate for those with a chargeable income of RM35,000 or less, you’ll be paying
RM400 – RM400 = RM0 (no tax, yay!)
PCB / MTD System: Has your employer paid too much tax for you?
First off, do you know what the words “PCB / MTD” mean? The words are actually acronyms for “Potongan Cukai Bulanan / Monthly Tax Deductions”.
How this works is that your employer will automatically deduct a certain amount from your salary every month to pay for tax on your behalf, going towards paying your tax for the year. This type of deduction is different from the basic Employees Provident Fund (EPF) and Social Security Organization (SOCSO) monthly deductions.
Therefore, one can sum up that the MTD is calculated from one’s gross salary minus the EPF deductions of up to RM6,000 per year. If you were to take a closer look at the sum of the total MTD for the year, you will realise that the figure will be very close to your actual tax expense for the year, but given that your company has no idea of your additional reliefs other than being married or having children (such as Books, Sporting equipment etc.), they are very likely to have been overpaying for you.
Even without taking into account those extra reliefs, the PCB/MTD schedules aren’t 100% accurate (and typically overpay tax on your behalf), as we will see shortly below:
The 2013 tax assessment year follows the calendar year, so the 2013 tax year is effective from 1st January 2013 to 31st December 2013.
Taxpayers can start submitting their income tax return forms for the year of assessment 2013 through e-filing as well. The due date for the submission of return forms are as follows:
1) Employers (Form E) is 31 March 14
2) Residents and non-residents with non-business income (Form BE and M) is 30 April 14
3) Residents and non-residents with business income (Form B and M) is 30 June 14
4) Partnerships (Form P) is 30 June 14
Finally, do take note that you must keep records for 7 years from the date of filing so don’t throw away any receipts or evidence of tax reliefs, keep them in a file sorted by tax year.
Got a tax question? Ask us below and we’ll see if we can get answers for you.