What You Need To Know About Tax Income Calculation in Malaysia

As part of the Malaysian workforce, you need to be aware of certain obligations that come with earning your own salary. One of these is paying your income tax (cukai pendapatan). But do not be intimidated; as an employee, it is your employer’s duty to remit your income taxes to the Lembaga Hasil Dalam Negeri Malaysia (LHDN) or Inland Revenue Board (IRB). However, it still pays to know the basic income tax calculation. While your employer pays your taxes for you, it is your responsibility to file your income tax returns.

But first things first: what is an income tax, and why are you required to pay it?

What is income tax (cukai pendapatan)?

An income tax is a type of tax that governments impose on businesses and individuals earning income. Money collected through taxes is used for government and community expenses, such as healthcare, infrastructure, and other developments. Taxation rates vary from country to country.

Income taxes in Malaysia are “territorial,” which means an individual or entity is taxed only on incomes earned in the country. Personal income taxes are categorised either as progressive or flat, depending on one’s type of work and tenure in Malaysia.

Who should file income taxes?

An individual (resident or non-resident) is taxable if they earn an annual employment income of at least RM34,000 (after the EPF deduction), according to LHDN. EPF stands for “Employees’ Provident Fund,” which is a compulsory savings and retirement plan for employees working in the Malaysian private sector. To fully understand how the EPF works, read this short guide for Malaysian employees.

A non-resident individual is required to pay a flat rate of 30% taxes from their total taxable income. Qualified knowledge workers, like architects, engineers, and scientists, who reside in Iskandar Malaysia, are taxed at a rate of 15% “on income from an employment with a designated company engaged in a qualified activity in that specified region,” according to Pricewaterhouse Coopers (PwC), one of the biggest international accounting firms. The same rate applies to a qualified resident individual under the Returning Expert Programme who is under employment with someone in Malaysia. The said rate is applicable for five years.

Meanwhile, non-residents (those staying in Malaysia for less than 182 days) whose salary is not less than RM25,000 and in higher positions (such as C-level positions) are taxed at a flat rate of 15% for five consecutive years. However, this benefit is limited to only five non-resident employees in each qualified company under the Pelan Jana Semula Ekonomi Negara (PENJANA) initiative, which is aimed at helping the Malaysian economy recover from the impacts of COVID-19.

How do I compute my taxes?

Your tax deduction as an employee depends on how much your salary is. The table below gives an overview of 2021 tax rates for resident individual taxpayers.

For instance, your salary is RM65,000. Given the tax rates above, you need to remit RM3,750 (at a rate of 13%). This amount is calculated as follows:

First RM50,000 = RM1,800 tax
+
Next RM15,000 at 13% tax = RM1,950
Total = RM3,750

You can try to compute your taxes using our salary calculator. 

Tax reliefs

There are incomes exempted from tax. These are called tax reliefs, including medical expenses, educational fees, and childcare expenses. 

As of writing, the Malaysian government has extended the special tax relief of RM2,500 for the purchase of work-from-home equipment such as mobile phones, computers, and tablets until December 31, 2022. Tests for COVID-19 are also eligible for tax exemptions.

In addition, there is now an expanded tax relief on mental health costs, including consultations with psychiatrists and psychologists. In light of the pandemic, the government has also listed the purchase of COVID-19 test kits as qualified for tax relief.

Those who are self-employed can get up to RM4,000 in tax relief to their EPF contributions as well. The government also announced a special tax relief for domestic tourism expenses.

The Malaysian government has listed all items qualified for tax relief in further detail. For more information, you may check the LHDN website. 

All this said, if your tax relief amounts to RM10,000, for instance, your taxable income is now reduced to RM55,000. That brings down your tax to RM2,450. Just make sure to have all your receipts on hand in case LHDN asks for proof of your tax relief claims.

Where do I file my income tax?

You can file your income tax online through the LHDN website. 

How do I file my income tax?

If it is your first time to pay taxes, here is what you need to do:

1. Register and create an account on the e-Daftar websiteto get your tax reference number. You will be asked to upload some documents for identity verification. 
2. Visit an LHDN office near you to get your PIN, which you will need to file your tax returns electronically. Alternatively, you can consult the LHDN Customer Feedback website for your PIN.
3. When you have your PIN, log in to the MyTax website. Proceed to fill out the necessary forms and file your taxes on the website. Make sure all of the information in your forms is correct before submitting!

Keep in mind that if, for instance, you have paid more than you are supposed to, you are then entitled to a tax refund. The amount to be refunded will be credited to the bank account you provided within 30 working days after you have submitted the e-forms.

When should I file my income tax?

If you are an employed individual, the deadline for filing your taxes online usually falls on April 30. There is a grace period of 15 days, but you are encouraged to file your taxes on time to avoid penalties, as per Income Tax Act 1967. Besides, getting your taxes in order before the eleventh hour has its own advantages. Do check ahead if the government has announced an extension. 

Learning how to calculate your income tax is just as important as understanding your contributions, such as the KWSP EPF and SOCSO. If you have questions about your taxes, you can consult the human resources or accounting department. 

Now that you understand and know how to file your income taxes, you are finally a step closer to the #JobsThatMatter to you. Update your profile at JobStreet and find work that will bring you passion and purpose. Download the JobStreet app on the App Store or the Google Play Store to find jobs even when you’re on the go. 

For more expert tips and advice on your rights and benefits as an employee, visit the Career Resources Hub.