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Income Tax facts in Malaysia you should know
Income tax savings require planning and being proactive throughout the assessment year. Even with the lower income tax rates when you file for your income tax next year, it doesn’t hurt to put in a little more effort in planning your expenditure to maximise your tax savings.
You can get these savings by knowing what tax reliefs are available and make a point of planning your purchases.
Tax reliefs and rebates
There are 21 tax reliefs available for individual taxpayers to claim. You just need to be aware of these reliefs and make a point of keeping the receipts when you expend money in these areas. Some of the easiest tax reliefs to leverage on are:
- Complete medical examination. Under this relief you can claim maximum of RM500 a year. Why not be on top of your health when you can claim tax for it? There’s no reason why you shouldn’t be proactive in taking care of your health.
- Purchase of books, journals, magazines and publications. This is the easiest to claim. Need to buy a gift for your friends and family? Just get them a book, keep the receipt and you can claim up to RM1,000 a year!
- Purchase of personal computer, including a laptop, every three years. Technology gets updated in months, and it’s quite rare to use the same laptop for years. Now you can claim tax when you upgrade your computer, up to RM3,000. This does not include tablets like iPad or the Samsung Galaxy Tab though.
- Purchase of sports equipment. This relief is capped at RM300, and again if you not into sports, you can still make use of this by buying gifts for friends who love to play sports.
Some of the reliefs that are not applicable anymore are:
- Interest expended in the first three years of a residential property, with the Sales & Purchase Agreement signed between March 10, 2009 and December 31, 2010. This was a sweet perk for first time homebuyers, but it expired on December 31, 2013. The amount is limited to a whopping RM10,000 a year.
- Another relief sorely missed by Malaysians is the subscription fee for broadband, which lasted till Year of Assessment 2012. The maximum amount for this relief was RM500.
- Premium on new annuity scheme or additional premium paid on existing annuity scheme from January 1, 2010 ended in Year of Assessment 2012, and will not be reinstated until Year of Assessment 2021. The amount was capped at RM1,000.
Monthly Tax Deduction (MTD)
With the announcement made in Budget 2014, Malaysians no longer need to submit tax returns and can use Monthly Tax Deduction (MTD) as the final tax, starting from tax assessment year 2014.
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 (HR) department to compute monthly MTDs.
However, in order for the MTD amount to be accurate, and does not require you to file tax when April comes along, 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 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,
- Purchase of personal computer (once every 3 years),
- Net deposit in Skim Simpanan Pendidikan Nasional (SSPN),
- 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).
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 your tax savings for you and loved one.
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.
For couples with child(ren), they can maximise their tax savings through the child relief, if the spouse with the higher income claim for child relief.
Here are the differences between separate and join 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 shall not be entitled to claim spouse relief of RM3,000 and a further relief of RM3,500 if the non-filing spouse is disabled.
- Either husband or wife can claim child relief (if applicable); but not both parties.
- Election must be made every year in writing by April, 1.
- Can elect in the name of the husband (i.e. wife’s income is aggregated with husband’s) or wife (i.e. husband’s income is aggregated with wife’s).
- Personal relief can only be claimed once as both husband and wife are now regarded as 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.
With our income tax calculator, you can roughly estimate how much tax savings you will be able to make when you file for your tax in 2016. There’s still time for you to carefully plan your purchases to maximise your tax reliefs!
If you need more help with income tax in Malaysia, here are some relevant articles that will clear the air for you!