Navigating through the rules and regulations associated with income tax Malaysia could be daunting. However, it is essential to understand tax-related matters in order to comply with Malaysian tax regulations.
Irrespective of whether you are a businessman or an employee, knowledge of income tax laws could play a critical role while complying with income taxation in Malaysia. We have created this comprehensive guide to help you better understand income tax in Malaysia.
By the way, If you are interested in knowing about individual income tax Malaysia, we have created a seperate FAQ Guide on Personal Income Tax Malaysia 2023.
Hence, it would be easy for you to gain a clear overview of the key aspects associated with Malaysian income tax. So, without any further delay, let’s dive in!
Table of Contents
- Introduction to Income Tax Malaysia
- Purpose and Importance of Income Tax
- Role of the Malaysian Government
- Overview of the Income Tax System in Malaysia
- Income Tax Act 1967 Malaysia
- Tax Residency and Obligations
- Determining Tax Residency Status
- Types of Income Subject to Malaysian Income Tax
- Tax Obligations for Residents and Non-Residents
- Income Tax Registration
- Income Tax Eligibility in Malaysia
- First-Time Income Tax Requirements in Malaysia
- Taxable Income
- Understanding the Concept of Taxable Income
- Deductions, Allowances, and Reliefs Available
- Income Tax Assessment Process
- Income Tax Rates and Calculation
- Progressive Tax Rate Structure
- Income Tax Percentage in Malaysia
- Minimum Income Tax Requirements in Malaysia
- Filing and Payment Procedures
- Tax Filing Deadlines
- Income Tax Incentives and Exemptions
- Overview of Tax Incentives for Individuals and Businesses
- Income Tax Planning and Strategies
- Legal Ways to Minimize Tax Liability
- Understanding Tax-Saving Investments and Schemes
- Seeking Professional Advice for Tax Planning
- Penalties and Consequences
- Late Filing and Payment Penalties
- Non-compliance and Tax Evasion Consequences
- Importance of Maintaining Proper Records
- Frequently Asked Questions (FAQs)
1. Introduction to Income Tax Malaysia
Income earned or derived from Malaysia is considered taxable. Furthermore, residents are also bound to pay taxes on income generated outside Malaysia.
Listed below are the major classes of income that are charged with income tax:
- Profits or gains from a business
- Dividends, discounts, or interest
- Rents, premiums, or royalties
- Gains or profits from an employment
Malaysia relies on a self-assessment system, which suggests that it is the responsibility of the taxpayer to determine the correct income tax payable.
Purpose and Importance of Income Tax
The revenue generated through the collection of incometax help the Malaysian government to manage and govern its development expenditures. Hence, income tax collection is essential for any country’s overall growth and prosperity.
The government utilizes the tax collected in a variety of ways. A few of these include:
- National security,
- Physical development (roads, hospitals, schools),
- Economic and social development
Role of the Malaysian Government
Since tax collection is among the major sources of revenue for Malaysia, the Inland Revenue Board of Malaysia (IRBM) proves to be a critical part of the government’s machinery. IRBM performs various duties, such as administration, assessment, and collection of taxes.
To streamline the tax collection process, IRBM launched the E-Filing mechanism in 2004. This involves the online filing of tax returns without the hassle of visiting an IRBM branch. By doing steps like these, the Malaysian government is trying to enhance the effectiveness of tax administration and increase tax revenue.
Overview of the Income Tax System in Malaysia
For the purpose of tax collection, income is assessed based on the prevailing or current year. The Year of Assessment, commonly known as YA, is the calendar year. For instance, the YA 2023 ends on 31 December 2023. The basis period for any cooperative, company, or trust body is the financial year (FY), which ends with a particular YA.
Hence, the basis period for the YA 2023 is 30 June 2023, and the FY ends on 30 June 2023. This is the period during which a company must close its accounts. On the other hand, a person’s income is assessed on a calendar year basis.
Income Tax Act 1967 Malaysia
The Income Tax Act 1967 (Malay: Akta Cukai Pendapatan 1967) deals with the imposition of income tax. The income tax act Malaysia 1967 contains 156 sections provided in 10 Parts. In addition, 9 schedules also include 77 amendments.
For detailed information about the income tax act Malaysia, don’t forget to visit the following link. https://phl.hasil.gov.my/pdf/pdfam/Act_53_20190101.pdf
2. Tax Residency and Obligations
Tax residency is a status that determines whether an individual can claim allowances and tax rebates. Resident status is determined with reference to the number of days a person is physically present in Malaysia.
Determining Tax Residency Status
The determination of tax residency status is essential for tax purposes. It is determined depending on the duration of a person’s stay in Malaysia.
Section 7 of the Income Tax Act mentions 4 different circumstances under which an individual can qualify as a tax resident in Malaysia:
- Physically present in Malaysia for 182 days or more in a basis year.
- Physically present in Malaysia for less than 182 days in a basis year.
- Physically present in Malaysia for 90 days or more in a basis year.
- Isn’t living in Malaysia or physically present in Malaysia for a period of less than 90 days in the basis year.
Types of Income Subject to Malaysian Income Tax
Listed below are the different types of income subject to Malaysian income taxation:
- Business Income
- Employment Income
Tax Obligations for Residents and Non-Residents
According to the rules related to income tax in Malaysia, both non-Residents and Residents are subject to incometax on income received through a Malaysian source. The tax rates for non-Resident and Resident individuals are different.
Hence, it is essential to identify the status of a person with reference to Malaysian tax laws. The resident individual is subject to normal income tax rules in Malaysia. On the other hand, the income tax rate is slightly higher for a Non-Resident living in Malaysia.
Income Tax Registration
It is necessary to register with the Inland Revenue Board of Malaysia (LHDN) for filing tax returns. After registration and filing the tax returns, the individual is assigned a unique registration number. To get a registration number, the individual must fill out and submit the form (either a hard copy or a soft copy).
The hardcopy form is available at LHDN’s branches, and the softcopy form can be easily downloaded from the LHDN’s website.
Below are the two steps required for income tax registration in Malaysia:
Step 1: If registering for the first time, make sure to register for an income tax reference number.
Step 2: You must submit the following documents during the process of income tax registration:
- Latest salary statement /Payslip
- Identification card
- Marriage certificate (if applicable)
- Police IC
- Army IC
- International passport
Note: If you are applying for registration for the first time income tax Malaysia, you also need to apply for a Personal Identification Number (PIN) by visiting an LHDN branch.
Income Tax Eligibility in Malaysia
Individuals earning at least RM34,000/year (RM2,833/month approx. or RM3,000 net income after deduction EPF) income from all sources are eligible to file tax returns in Malaysia.
First-Time Income Tax Requirements in Malaysia
When filing your income tax returns for the first time, you must provide the relevant documents. Here are the income tax requirement in Malaysia:
- Income statement
- Reference number
- Receipts for claiming tax rebates, reliefs, or exemptions
- Employees’ Provident Fund (EPF) statement
3. Taxable Income
Taxable income is also known as chargeable income. It is the total income minus all the tax reliefs and tax exemptions, which a person is entitled to avail.
Understanding the Concept of Taxable Income
Calculating taxable income involves deduction tax exemption or tax deductions from the total annual amount of income. For instance, if your annual salary is RM60,000 and you also receive a rental income of RM4000.
In addition to this, you also gained an interest amount from a local bank’s fixed deposit of RM 2500. So, your total annual income is calculated by adding all the money you have received during a year.
In the above example, the total sum of annual income is calculated in the following way.
Annual Salary + Rental Income + Interest Amount = Total Annual Income
RM60,000 + RM 4000 + RM 2500= 66,500
Now that you know the total annual income, let’s find the taxable income or annual income tax in Malaysia. For this purpose, we need to deduct the amount of tax exemptions. In the above-mentioned scenario, the fixed deposit interest is considered a tax exemption. So, the taxable income is calculated in the following way.
Total Taxable Income – Tax Exemption = Taxable Income
RM66,500 – RM1500 = RM65,000
Deductions, Allowances, and Reliefs Available
Tax reliefs are applicable to activities that are referred to as necessities. A few of the tax reliefs include education insurance, life insurance and EPF, lifestyle, medical expenses of parents, purchase of books and breastfeeding equipment, etc.
Listed below are a few of the most common tax exemptions in Malaysia:
- Individual Reliefs
- Medical, Lifestyle, & Related Equipment
- Child Relief
Tax deductions are somewhat identical to tax exemptions. However, tax deductions tend to be more specific. This suggests you can only claim tax deductions for donations and gifts made either to government-approved charities or directly to the government. If you make several contributions to different charity organizations, it is possible to claim all such tax deductions.
Mentioned below are the Tax Reliefs for individuals and dependents while filing your tax returns:
- Individual & dependent relatives
- Medical treatment, special needs, and carer expenses for parents
- Purchase of basic supporting equipment for disabled self, spouse, child, or parent
- Disabled individual
- Education fees (Self)
- Medical expenses
- Lifestyle expenses (self, spouse, child)
Income Tax Assessment Process
As far as the income tax assessment process is concerned, it is assessed through a self-assessment system. During this process, a taxpayer is responsible for calculating his/her income tax payable. It is also necessary to pay the outstanding tax balance. E-filing of tax returns has been introduced to streamline the process.
4. Income Tax Rates and Calculations
The income tax rate in Malaysia starts from 0% and goes up to 30%. The tax rate is calculated based on the chargeable income of an individual for the prevailing Year of Assessment (YA).
Progressive Tax Rate Structure
Regarding income tax structure in Malaysia relies on a progressive tax rate system. This suggests that the tax increases with an increase in an individual’s income. You can also take advantage of special tax rates for specific types of income, such as capital gains or dividends.
Income Tax Percentage in Malaysia
Here is a table showing the income tax rates for individuals in Malaysia for the Year of Assessment (YA) 2022:
|Category||Chargeable Income||Calculations (RM)||Rate %||Tax(RM)|
|A||0 – 5,000||On the First 5,000||0||0|
5,001 – 20,000
|On the First 5,000
20,001 – 35,000
|On the First 20,000
35,001 – 50,000
|On the First 35,000
50,001 – 70,000
|On the First 50,000
70,001 – 100,000
|On the First 70,000
100,001 – 250,000
|On the First 100,000
250,001 – 400,000
|On the First 250,000
400,001 – 600,000
|On the First 400,000
600,001 – 1,000,000
|On the First 600,000
1,000,001 – 2,000,000
|On the First 1,000,000
|On the First 2,000,000
Minimum Income Tax Requirements in Malaysia
Talking about minimum income tax Malaysia, if a person is earning a minimum of RM34,000 annually, he/she is bound to pay income tax in Malaysia. This income isn’t only limited to salary and includes various other income sources for the current Year of Assessment Year (YA).
5. Filing and Payment Procedures
E-filing is the simple and quickest way of filing tax returns. On the other hand, you can also choose to submit your tax file by visiting the nearest branch of LHDN.
When it comes to paying income tax in Malaysia, you can choose a wide array of methods.
A few of these methods include:
- Pay tax via online FPX services (Financial Process Exchange)
- Credit card payment
- Via LHDN Agents
- Through selected ATMs
- Via Tele-banking
- Though Cash Deposit Machine (CAM)
- Via Cheque Deposit Machine (CDM)
Tax Filing Deadlines
The tax filing deadline for manual forms is April 30 (non-business taxpayers). This date is May 15 via E-Filing. Resident and non-resident individuals with business income must file their tax returns by 30 June.
6. Income Tax Incentives and Exemptions
Income in Malaysia isn’t taxed based on the total income of a taxpayer. This is so, as there are specific areas of income that are exempted from tax. Generally, tax exemptions minimize the amount of tax payable.
Listed below are the most common tax exemptions:
- Leave Passage
- Medical and dental benefit
- Retirement gratuity
- Cultural performances
- Traveling allowances
- Income derived from research findings
- Gratuity paid out of public funds
- Gratuity paid to a contracting officer
- Fees or honorarium for expert services
- Compensation for loss of employment
- Death gratuities
- Income remitted from outside Malaysia
Overview of Tax Incentives for Individuals and Businesses
Malaysia provides an array of tax incentives to individuals and businesses. Generally, tax incentives are offered to tax resident companies. For instance, Pioneer Status (PS) is an incentive offered to companies, which produce promoted products or take part in promoted activities (for 5 or 10 years).
Investment Tax Allowance (ITA) serves as an alternative to the PS. This incentive is granted based on the capital expenditure incurred on plant, machinery, and industrial buildings used for the production of promoted products or activities. ITA is also awarded for a period of 5 or 10 years.
Below are the major industries that are offered specific tax incentives:
- New Company: 70% to 100% tax exemption for 5 to 10 years.
- Existing Company: ITA of 60% set-off against 70% of SI for 5 years.
- PS with a tax exemption of 70% of statutory income (SI) for 5 years.
- ITA of 60% on qualifying expenditure (QE) set-off against 70% of SI for 5 years.
- 10% allowance of the value of increased exports, which is deducted against 70% of SI.
- Income tax exemption for the production of EEV of NxGV.
- Income tax exemption that is equivalent to ITA for 5 to 10 years.
Cold Chain Facilities
- New companies offering cold chain facilities can avail PS with a tax exemption of 70% of SI for 5 years.
- ITA of 60% on QE set-off against 70% of SI for 5 years.
Income Tax Planning and Strategies
Laws associated with income tax Malaysia offer a wide range of incentives and reliefs to the taxpayers. This helps to lower the tax burden on the individual taxpayer. Plan your tax matters if you want to lower your tax amount and increase your income.
Mostly, the tax savings earned through proper planning might not be huge, yet even a small amount does count. If not appropriately planned, income tax payable could exceed drastically. So, don’t hesitate to spare time and engage an experienced tax expert.
Legal Ways to Minimize Tax Liability
Mentioned below are the legitimate ways to minimize taxable income.
- Make sure to claim all tax deductions that you can avail
- On-time submission of tax payable can reduce the hassle of paying penalties
- Don’t forget to apply income tax Malaysia for relevant tax incentives and exemptions
Understanding Tax-Saving Investments and Schemes
There are certain types of income that are exempted from tax. So, you can increase your income and minimize the income tax payable by earning tax-free income. For this purpose, you can invest in bonds, deposit your money with a licensed bank, or invest in the shares market.
Seeking Professional Advice for Tax Planning
Hiring a professional tax advisor like Yhtan & Associates saves time and helps you lower your net tax payable and receive maximum refunds. This is because a tax advisor or agent could suggest certain deductions and tax exemptions depending on your income type.
7. Penalties and Consequences
Not paying your income tax in Malaysia is dealt with strict measures, including penalties and unfavorable consequences. Anyone guilty of tax evasion or not paying tax could receive punishments including imprisonment, fine, or both.
Late Filing and Payment Penalties
- If you don’t file your tax returns within the due date, you could be liable to pay a 10% increment from the tax payable.
- Misreporting LHDN about your true income could result in payment of a fine of up to RM10,000.
- Overstating tax reliefs could result in a fine of up to RM10,000 and 200% of the tax undercharged or imprisonment.
Non-compliance and Tax Evasion Consequences
Below are the tax offenses and penalties mentioned in Income Tax Act.
|Tax Offences||Fine/ Penalties|
|Failure to submit an Income Tax Return Form without any reasonable excuse||Fine up to RM20,000 or imprisonment or both|
|Understating any income or filing incorrect tax returns||Fine up to RM10,000 and 200% of the tax undercharged|
|Giving false information that could affect the tax liability of a person||Fine up to RM10,000 and 200% of the tax undercharged|
|Willfully evade or assist an individual to evade tax||Fine up to RM20,000 or imprisonment or both and 300% of the tax undercharged|
|Attempting to go outside Malaysia without paying tax||Fine up to RM20,000 or imprisonment or both|
Importance of Maintaining Proper Records
All taxpayers (businesses or Individuals) residing in Malaysia are bound to maintain proper records in compliance with income tax Malaysia laws and regulations. Section 82 of the Income Tax Act 1967 states that taxpayers must keep proper documents like receipts and pay slips. This helps to maintain the accounts for better tax assessment.
8. Frequently Asked Questions (FAQs)
What is the minimum salary to pay income tax in Malaysia?
An individual living in Malaysia must register a tax file if he/she is earning a minimum of RM34,000 (after deducting EPF). Roughly, this amount tends to be RM2,833/month after EPF deductions. Income tax is also applicable to any other income source besides your salary.
When to file income tax in Malaysia?
The deadline to file tax returns is 30 April for non-business income. On the other hand, filers with business income must submit their returns no later than 30 June. Online filing or E-filing of tax returns is a hassle-free way to file tax returns if you have internet access.
How can I check my income tax account in Malaysia?
Please visit https://ett.hasil.gov.my to check your Virtual Account (VA) number.
Who is exempt from paying income tax in Malaysia?
Amount received as death gratuity falls under the list of income tax exemptions. In addition, a scholarship paid to an individual is exempted from income tax. It doesn’t matter whether or not such an amount is paid in connection with the employment of such as individual. Money earned through cultural performances (approved by the Minister) is also exempted from income tax.
What is the penalty for late payment of income tax Malaysia?
A 10% penalty is imposed if the tax payable is not paid within the due date. If a company disagrees with such a penalty, it can submit a written appeal to the nearest IRBM branch within 30 days of the statement of account issuance.
Do I need to file income tax if no income?
Yes, you need to file your tax returns every year after registering your tax file. This is so, as the unemployment compensations offered to an individual are considered taxable income. However, some of these compensations are exempted from income tax.
Do retirees need to file income tax in Malaysia?
Even after retirement, gratuity and pension received by a retiree are also considered taxable income. However, retirees living in Malaysia are not bound to pay income tax on their pension or gratuity payments.
What is the minimum salary to pay PCB in Malaysia?
Listed below is the minimum salary to pay PCB in Malaysia:
- Single Individual – RM2,851 (after EPF deduction)
- Unemployed Spouses and Married Individuals – RM3,851 (after EPF deduction)
What is the difference between PCB and income tax?
PCB (Potongan Cukai Bulanan) is commonly known as Monthly Tax Deduction (MTD). MTD/PCB is a tax deduction system that involves the deduction of the monthly earnings of the employees by their employees. This is done with a view to minimizing the amount of income tax that employees need to pay every year. For this purpose, LHDN decides the deduction rates as well as the schedules.
No doubt, understanding the income tax Malaysia is essential for business owners and employees residing in Malaysia. In this income tax Malaysia guide, we have tried to explain relevant topics such as taxable income, deductions, tax rates, and exemptions available. Apart from this, you can also go through our FAQs sections to get expert answers to your most common questions related to Malaysian income taxation.
Although this guide offers basic information regarding income tax in Malaysia, handling tax matters on your own won’t be a good idea. To handle complex individual tax matters, it would be appropriate to seek professional advice from an expert and qualified tax consultant.
*YH Tan & Associates PLT Only provides auditing, financial consultancy, and advisory services independently. Other services are provided by independent associates other than YH Tan & Associates PLT. The above content is for information only.