Personal reliefs are generally allowed as deductions from the total income of an individual in arriving at the chargeable income. It is governed under Section 45A to Section 49 of the Income Tax Act, 1967 (ITA). Simply put, personal reliefs will reduce how much you pay in taxes by lowering your taxable or chargeable income. Pursuant to Section 7(1) of the ITA, there are four (4) categories in which an individual is a tax resident in Malaysia. If the individual does not fall within these four (4) categories, he/she is a non-tax resident. Generally, an individual is considered a tax resident if he/she is present in Malaysia for 182 days or more in a calendar year. Even if the individual is present in Malaysia for part or parts of that day, he/she is deemed to be present in Malaysia for a day.
Here is a simple scenario to describe the tax impact of claiming tax reliefs:-
Let’s say you have a total annual income of RM100,000, and you are a single person and also a tax resident in Malaysia. You can claim a total of RM13,000 in personal reliefs i.e. RM9,000 for the self-relief and RM4,000 for the contributions to an approved pension fund [Employees Provident Fund (EPF)] which brings your chargeable income down to RM87,000. Consequently, you will pay a total of RM8,170 in taxes.
On the other hand, if you are a non-tax resident, your total income of RM100,000 will be taxed at a flat rate of 30% without the entitlement to claim any personal reliefs. As a result, you will pay a total of RM30,000 in taxes as compared to RM8,170 i.e. a difference of RM21,830 (RM30,000 - RM8,170).
How do you claim the tax reliefs?
There are two (2) types of tax reliefs for a tax resident individual:-
- Tax relief that is given not based on an expense incurred but based on a fixed amount - This is the easiest way to claim the tax relief as it is a fixed amount granted automatically by the Inland Revenue Board of Malaysia (IRBM) and you do not have to provide any documentary evidence; and
- Tax relief that is given based on an expense incurred and claimed by an individual but restricted to an allowable amount. This requires more work but it is worth the effort as you can claim additional deductions on top of the automatic tax relief to lower your taxable income.
There is also no time apportionment in claiming the personal reliefs i.e. personal reliefs can be claimed as long as you qualify for the relief at any time during a basis year for a year of assessment (YA). Even if you work for less than a year, the amount of tax relief will not be time-apportioned but will be allowed full deduction on your total income for the YA.
What are the personal reliefs that can be claimed?
The IRBM has recently issued a Public Ruling (PR) No.8/2020 dated 9 October 2020 in relation to the personal reliefs under the title of Taxation of a Resident Individual Part 1- Gifts or Contributions and Allowable Deductions. Many examples were provided therein and each type of the tax relief described in detail which helps the taxpayers to understand and identify the nature of allowable expenses. There are twenty one (21) types of tax reliefs that are available for individual tax residents to claim on their tax returns and the lists are published on the IRBM’s website as reference for the assessment years starting from the YA 2010 up to and including YA 2020.
Is it worth it to make these claims?
Let's see the illustration in the next page on how you can save on taxes by claiming the personal reliefs described above for the YA 2020: -
Below are the assumptions made in preparing the calculations:-
- Scenario 1 – M40 is a tax resident of Malaysia and earnsRM70,000 a year. M40 is married and has a child under 18 years of age during the calendar year 2020. M40 opted for a separate assessment and only claimed the standard reliefs on his tax return for the YA 2020.
- Scenario 2 – Same as Scenario 1 but M40 had claimed most of the common deductions to maximise his personal tax reliefs for the YA 2020.
- Scenario 3 – T20 is a tax resident of Malaysia and earnsRM119,000 a year. T20 is married and has a child under 18 years of age during the calendar year 2020. T20 opted for a separate assessment and only claimed the standard reliefs on his tax return for the YA 2020.
- Scenario 4 – Same as Scenario 3 but T20 had claimed most of the common deductions to maximise his personal tax reliefs for the YA 2020.
Based on the illustration, Scenario 2 shows that M40 does not have to pay any tax after his chargeable income is reduced to RM27,250 as compared to Scenario 1. Otherwise, he would have to pay a total of RM2,465 in taxes at the tax rate of 14%. In comparison, T20’s chargeable income is reduced to RM76,250 from RM103,750 with a decrease of 3% tax rate showing the tax payable being reduced to RM5,912.50 from RM11,800.
In short, by maximising personal reliefs for the basis year for the YA 2020, M40 and T20 can make a significant difference to their taxes with potential tax savings of up to thousands of ringgit.