What You Need To Know About Income Tax Calculation in Malaysia

You have finally received your first-ever paycheck. Congratulations!

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. 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. And 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?

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 pay taxes?

According to LHDN, an individual (resident or non-resident) is taxable if he or she earns an annual employment income of at least RM25,501 (after EPF deduction). EPF stands for “Employees' Provident Fund,” which is compulsory savings and retirement plan for employees working in the Malaysian private sector.

A non-resident individual is required to pay a flat rate of 30% taxes from his or her 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 who are staying in Malaysia for less than 182 days) whose salary is not less than RM25,000 and are in higher positions (such as C-suite posts) 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

Note, however, that there are incomes exempted from tax. These are called tax reliefs, which include medical expenses, educational fees, and childcare expenses, among others. Just recently, 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, 2021. Tests for COVID-19 are also eligible for tax exemptions.

As such, 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.

What is the process of filing for taxes?

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

1. Register to the e-Daftar website to get your tax reference number.
2. Visit the LHDN office near you to get your PIN, which you will need to electronically file for your tax returns.
3. Proceed to filling out the necessary forms and filing your taxes in the LHDN website.
   • 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.

Take note that the deadline for filing your taxes online (if you are an employed individual) is on April 30, 2021. There is a grace period of 15 days, but it is encouraged that you 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.

Learning how to calculate your income tax and filing for your tax returns is equally important as knowing your benefits as an employee. If you have questions about your taxes, do not hesitate to consult your HR or accounting department.

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