It’s March, and the income tax season is here again whether you like it or not. Income tax is an annual, headache-y thing which we set once and forget about it for the rest of the year. Then comes the next year, and the headache and confusion repeats.
I will not go into the step-by-step on how to file your taxes as there are already plenty of great guides around. Such as this one and this one. Instead, in the spirit of the income tax season, I would like to share 13 common questions about income tax in Malaysia. Let’s go!
1. Tax Flow
There is a lot of jargon flying around when it comes to income tax which seems impossible to navigate through for a first-timer. Let me try to summarise the whole tax flow in this chart below, starting from your annual income up to the final taxed amount:
2. Year of Assessment (YA)
Year of Assessment refers to the period in which your income is being taxed. The typical YA period is between the 1st January to 31st December of a year. For example, YA2019 is referring to the income between the 1st January 2019 to 31st December 2019, which you will be filing for taxes in 2020.
The deadline to declare your income for an employed individual is 30th April for manual filing and 15th May for e-filing. For an individual that derived their income from businesses, the deadline is 30th June for manual filing and 15th July for e-filing.
3. What is the EA Form?
EA Form or officially, the Yearly Remuneration Statement summarises your annual compensation from your employer to you. Among the details in the form includes your salary, allowances, bonuses, and EPF deductions.
If you are an employee, you should get your EA Form for your employer before the end of February. If not, go bug your HR department, it’s their responsibility.
The EA Form is a great starting point to file for your taxes and they look like this:
4. Do I Have to Pay for My Income Tax?
So, you just started working last year and you are wondering whether you have to pay for your income taxes.
Well, if you are an individual with a minimum income of RM 34,000 after EPF deductions, you have to file for your taxes. The income here refers to any allowances, bonuses and incentives. If you are still unsure whether you exceed the RM 34,000 go check your EA Form. It should be stated there.
Filing your taxes does not necessarily mean you have to pay for anything due to the tax reliefs, rebates and deductions.
5. How Much Do I Have to Pay for My Income Tax?
Income tax is a form of progressive tax which means that the tax rate is progressively higher the more you earn. The table below shows the Malaysia income tax bracket.
It’s mind-boggling to imagine that someone out there is earning more than 1 million Ringgit per year. Yikes!
Let say Mat’s chargeable income is about RM 58,100 for the year of 2019. Here’s how we calculate Mat’s taxed amount:
So, Mat’s total taxed amount is RM 2,934. However, this is not the final taxed amount if Mat is eligible for any tax rebate.
6. Who is LHDN/IRB?
Lembaga Hasil Dalam Negeri (LHDN) or Inland Revenue Board (IRB) is a revenue collecting agency under the Ministry of Finance (MoF). They are responsible for the overall administration of direct taxes and other duties which includes:
- Act as an agent of the Government for matters related to Malaysia income tax, real property gains tax, estate duty, stamp duties and other related taxes.
- Advising the Government on matters relating to taxation.
- Act as a collection agent for any body for the recovery of loans due for repayment to that body under any written law.
Basically, they are the OG in terms of income tax and you pay your taxes to them. Follow this link to read more on LHDN/IRB.
7. What is ezHasil?
ezHasil is a platform created by LHDN/IRB for all the things related to income-tax. In this platform, you can:
1. Register as taxpayer (e-Daftar)
2. File your tax (e-Filing)
3. Set up monthly tax deduction (e-PCB)
4. Pay your taxes (ByrHasil)
Filing your taxes through ezHasil enables a faster tax refund (30 days instead of 90) and an extra 15 days to complete your filing.
8. What is Income Tax Relief?
Tax relief is an incentive from our Government which reduces your chargeable income into a lower amount. They are a great tool which you can advantage to move down the tax bracket. There are a total of 21 categories for tax relief that an individual is able to claim such as:
1. Self and dependent – RM 9,000
2. Medical treatments – Upto RM 5,000
3. Basic supporting equipment (wheelchair, crutches) – Upto RM 6,000
4. Disabled individual – RM 6,000
5. Lifestyle – Expenses for the use/benefit of self, spouse or child for the purchase of books, personal computer, smartphone or tablet. Sports equipment and gym membership and monthly bill internet subscription. – Upto RM 2,500
6. Payment of alimony to former wife – RM 4,000
7. Deferred Annuity and PRS – Upto RM 3,000
8. education and medical insurance – Upto RM 3,000
9. contribution to the Social Security Organisation (SOCSO) – Upto RM 250
For more categories on income tax relief, check here.
Keep all of your receipts as proof for the tax relief for up to 7 years. Technically, the LHDN/IRB can ask for your receipts for auditing purposes or if they suspect you of tax evasion.
But really, with all of the different categories, start to take advantage now to lower your chargeable income. Go!
9. What is a Tax Rebate?
Tax rebate is an incentive to reduce your taxable amount. Zakat and fitrah are claimable as tax rebate for up to the exact amount that you have paid.
Let’s say Mat’s income is RM 55,000 and after a tax relief of RM 15,000, Mat’s chargeable income is RM 40,000. The taxable amount for the RM 40,000 is then RM 700. If Mat has paid RM 300 for zakat, he can deduct the taxable amount by RM 300 which bring his total taxed amount to RM 400.
In addition, if your chargeable income does not exceed RM 35,000, you are automatically eligible for RM 400 tax rebate.
10. What is a Tax Deduction?
A tax deduction is another way to reduce your chargeable income through gifts and donations. Nine categories are claimable for tax deduction such as a gift of money to approved institutions, local authorities, state government and any project of national interest approved by the MoF.
There is no minimum amount required to be eligible for the tax deductions and they are calculated as 7% off of your aggregate income. For example, your total income for YA2019 is RM50,000, 7% off of RM 50,000 is RM 3,500. So, the tax deduction is RM 3,500.
11. Where is My Tax Going Into?
If we are paying for the taxes, where exactly did our money goes into?
In short, our income tax is the revenue for Malaysia. In fact, income tax makes up approximately 12% of Malaysia’s GDP (Gross Domestic Product) in 2018. That is quite a substantial amount.
Think of it like this: income tax in Malaysia is a way to shift the resources from individuals to the Government which in turns, spend it on public infrastructures. Civil servants salaries and Bantuan Sara Hidup (BSH) incentives are just a few examples stemming from income tax revenue.
12. What is a Tax Refund?
In some companies, the employer will set a monthly deduction on top of your salary which is labelled as “PCB Amount”. They are referring to “Potongan Cukai Bulanan” or Monthly Tax Deduction. It is an automatic deduction for taxes. Technically, if you provide accurate information to your employer, you don’t have to file for your taxes again.
However, this is rarely the cases as PCB/MTD did not take into account the reliefs, rebates and deductions. You may be overpaying for your taxes through your PCB/MTD.
Hence, a tax refund is a way for the Government to repay you the differences. Just provide your bank account number through ezHasil and you will be refunded within 30 days. Extra Money!
13. Um…What is Tax Evasion?
Tax evasion is an attempt to either reducing the taxable income by underreporting or misreporting the tax reliefs and rebates amount. I know that the economy is bad, but tax evasion is worse and punishable if caught.
There is a legal way to reduce your income by capitalising the tax reliefs, tax rebates and tax deductions. No need to resort to tax evasion.
ACTIONABLE TIPS: Start your tax planning for the next year, now. Make sure to take advantages of the tax reliefs, tax rebates and tax deductions to lower your taxable income.
Are you finding these 13 things helpful? Do share your thoughts in the comment section below. Also, feel free to share this post within your Twitter and Facebook circle so they also can benefit from this sharing.