Income Tax Facts In Malaysia You Should Know
The most important part of income tax is knowing how much you owe the Inland Revenue Board. The second most important part is knowing which tax reliefs apply to you; especially as new reliefs are included while old ones get removed every year.
Here, we will run down the basics of what you need to know to get through tax season.
Who needs to file income tax?
Any individual earning a minimum of RM34,000 after EPF deductions must register a tax file. This translates to roughly RM2,833 per month after EPF deductions, or about RM3,000 net. It should be noted that this takes into account all your income, and not only your salary from work.
While you must file your taxes, you may not necessarily have to pay anything due to tax reliefs and rebates.
Tax deductions, reliefs and rebates
Tax deductions. For non-business taxpayers, most of the tax deductions that apply for personal income tax are a result of Donations and Gifts. If you are filing for a business income tax, there are specific categories of expenses that businesses are allowed to claim tax deductions. Find out more about donations and gifts allowed under tax deduction.
Tax reliefs. There are personal reliefs that every taxpayer in Malaysia can deduct once their income reaches the chargeable income level. In addition, there are other reliefs that you can deduct from your chargeable income if you had spent money in that category for the year. Refer to this list of all the personal tax reliefs you can claim.
Tax rebates. This is different from tax relief because a tax rebate is deducted from the actual taxed amount. For example, zakat, fitrah and the departure levy paid for performing umrah and pilgrimage to holy places are expenses that can be included. Check how much tax rebate you can qualify.
What is a Monthly Tax Deduction (MTD)?
As of 2014, Malaysians no longer need to submit tax returns and can use Monthly Tax Deduction as their final tax payment. MTD is a mechanism in which employers deduct monthly tax payments from the employment income of their employees.
Employers rely on an employee’s personal data submitted to their Human Resource department to compute monthly MTDs. However, in order for the MTD amount to be accurate you will need to provide more information to your employers.
You will need to submit a Form TP1. It is in this form you should state other reliefs that you are entitled to, to facilitate the computation of MTD. Reliefs that can be included in the form are:
- Medical treatment, special needs and carer expenses for parents,
- Basic supporting equipment for use by the disabled employee, spouse or parents,
- Self-education fees,
- Medical expenses on serious diseases,
- Complete medical examination,
- Purchase of books, magazines and journals,
- Net deposit in Skim Simpanan Pendidikan Nasional (SSPN-i),
- Purchase of sports equipment,
- Alimony payment to ex-wife,
- Life insurance,
- Education/medical insurance,
- Deferred annuity,
- Interest on housing loan (subject to meeting stipulated conditions), and
- Zakat payment (only if not deducted through MTD already).
With all the above information provided by the employees, the employer will then remit the correct MTD amount to the Inland Revenue Board (IRB) of Malaysia every month.
Individual taxpayers must meet the following criteria in order to avoid filing for tax again when tax season comes along:
- Such employee must receive their employment income prescribed under Section 13 of the Income Tax Act 1967;
- MTD of such employee must be made under the Income Tax (Deduction from Remuneration) Rules 1994; and
- Such employee must serve under the same employer for a period of 12 months in a calendar year (i.e. January, 1 – December, 31).
- Such employee’s only source of income is the employment income
- Such employee has opted out of joint assessment with spouse
However, if you opt to file for your tax, you still do so before the deadline every year.
Joint or separate assessment?
If you are married, there are a few things you need to consider when deciding whether to file for joint or separate assessment with your spouse. Making the right decision will maximise tax savings for you and your spouse.
Choosing the appropriate filing status is a major tax decision for newlyweds. According to Section 45 of Malaysia’s Income Tax Act 1967, all married couples in Malaysia have the right to choose whether to file individual or joint taxes.
As a general rule of thumb, if both spouses are earning high incomes in the year of assessment, it is always recommended to opt for separate assessment to leverage on the tax reliefs and deductibles available.
Here are the differences between separate and join assessment:
Separate assessment
- Husband and wife will each file for their own tax assessment.
- Husband and wife will each be entitled to their own personal relief and other reliefs.
- The tax-filing spouse cannot claim spouse relief of RM3,000 – or the further relief of RM3,500 if the non-filing spouse is disabled.
- Child relief (if applicable) can only be claimed by one parent.
Joint assessment
- The decision to file together must be made in writing by April 1 each year.
- The filing must be done in either the husband’s or wife’s name. Income from both parties is combined.
- Personal relief can only be claimed once as both husband and wife are now legally regarded as a single individual.
- The best way to find out if you should file jointly or separately with your spouse is to prepare the tax return both ways. Double check your calculations and then look at the net refund or balance due from each method.
- If you use e-filing to file for your tax returns, you will be able to see the tax due for each individual and compare it with the joint assessment. This way, you will be able to see which filing status gives you the biggest tax savings.
If you still have questions, visit our income tax guide for more information on existing regulations and how they apply to you.
