Article
12 min read
Malaysia Income Tax: Rates, Exemptions, and Payroll Impact
Global payroll
Author
Shannon Ongaro
Last Update
March 27, 2025
Published
March 27, 2025
Key takeaways
- Malaysia follows a progressive tax system, where tax rates increase based on chargeable income.
- Employees can claim various tax reliefs such as personal relief, EPF contributions, and child support. Employers must correctly classify taxable and non-taxable benefits to maintain compliance.
- Deel automates tax deductions, generates required tax documents, ensures compliance with local regulations, and integrates with HR and accounting systems.
Malaysia’s income tax system can be complex, especially for employers, founders, and payroll/finance managers who must ensure compliance with local regulations.
Understanding how income tax works, employer obligations, and available tax reliefs is essential to avoiding penalties and streamlining payroll processes.
This guide breaks down key aspects of Malaysia’s income tax system, employer responsibilities, and strategies to simplify compliance.
Disclaimer: This guide is presented for informational purposes and should not be considered professional advice. Consult a professional such as a certified accountant or cross-border tax professional for help.
Malaysia income tax basics
Governing body: Inland Revenue Board of Malaysia (LHDN)
Malaysia’s income tax system is overseen by the Lembaga Hasil Dalam Negeri (LHDN), also known as the Inland Revenue Board of Malaysia.
LHDN is responsible for administering tax policies, collecting taxes, and ensuring compliance with Malaysia’s tax laws. Review LHDN’s latest tax filing deadlines, eligible reliefs, and reporting rules each year. Use e-Filing to submit accurate returns on time and avoid penalties or enforcement actions.
Progressive tax system
Malaysia follows a progressive tax system, where individuals are taxed based on their chargeable income after allowable deductions and tax reliefs.
The tax rates increase with higher earnings, ensuring a fair contribution from different income groups. The government periodically updates these tax brackets, so it is crucial to stay informed about any changes.
Employer responsibilities
Employers in Malaysia have several tax obligations, including:
- Withholding tax: Deducting the correct amount of income tax from employees’ salaries under the MTD (Monthly Tax Deduction) or PCB (Potongan Cukai Bulanan) system
- Reporting: Submitting required tax forms, such as the EA Form (CP8A) for employees and the CP39 form for tax remittances
- Remitting taxes: Ensuring timely payment of withheld taxes to LHDN by the 15th of the following month to avoid penalties
- Providing tax documentation: Issuing necessary tax documents to employees for their annual tax filing
Failure to comply with employer tax obligations can result in fines, audits, or legal consequences imposed by LHDN.
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Employee income tax rates and calculation
Below is a quick overview of Malaysia’s income tax structure, employer compliance requirements, and how Deel supports accurate, efficient payroll management.
Progressive tax brackets (2025)
Taxable income in Malaysia is subject to the following progressive tax rates:
| Chargeable Income (RM) | Tax Rate (%) |
|---|---|
| 0 - 5,000 | 0% |
| 5,001 - 20,000 | 1% |
| 20,001 - 35,000 | 3% |
| 35,001 - 50,000 | 8% |
| 50,001 - 70,000 | 13% |
| 70,001 - 100,000 | 21% |
| 100,001 - 250,000 | 24% |
| 250,001 - 400,000 | 24.5% |
| 400,001 - 600,000 | 25% |
| 600,001 - 1,000,000 | 26% |
| Above 1,000,000 | 30% |
Key deductions and tax reliefs
Malaysia offers various tax reliefs to reduce employees’ taxable income:
| Tax Relief Type | Amount (RM) | Description |
|---|---|---|
| Personal Relief | 9,000 | Granted to all taxpayers |
| EPF Contribution | 4,000 | Employee Provident Fund (EPF) contributions are deductible |
| PERKESO Contribution | 350 | Social Security Organization (SOCSO) contributions are deductible |
| Non-working Spouse | 4,000 | Relief for married taxpayers with a non-working spouse |
| Child Below 18 | 2,000 | Deduction for each child under 18 |
| Higher Education for Child | 8,000 | Relief for children pursuing higher education |
| Disabled Child | 6,000 | Additional exemption for disabled minor children |
Taxable vs. non-taxable benefits
Certain benefits provided by employers may be taxable, while others are exempt:
Taxable benefits
These are considered part of an employee's compensation and are subject to income tax. Common taxable benefits include salaries, bonuses, and commissions:
- Cash allowances (e.g., car allowance, housing allowance, meal allowance)
- Stock options and shares provided by the employer
- Company-provided vehicles for personal use
- Club memberships and other non-essential perks
- Certain types of reimbursements, unless they fall under specific exemptions
Non-taxable benefits
These benefits are exempt from taxation, often because they are related to the well-being of the employee or are necessary for work purposes. Common non-taxable benefits include medical and dental benefits provided by the employer:
- Employer’s contributions to EPF (up to the statutory limit)
- Life and health insurance premiums paid by the employer
- Per diem travel allowances** for business-related travel
- Childcare subsidies provided by the employer
- Training or education allowances related to job skills
- Certain relocation expenses for job-related move
Identify which employee benefits are taxable under LHDN rules, such as housing, vehicles, or allowances. Classify and report them correctly in payroll and annual tax forms to avoid underreporting and penalties.
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Employer responsibilities for withholding and filing
Malaysian employers are legally responsible for deducting and reporting employee income tax. This includes monthly withholding through the PCB (MTD) system, submitting annual forms, and staying compliant with deadlines.
Monthly tax deduction (MTD/PCB) system
Employers must calculate, withhold, and remit employee income tax monthly under the PCB system.
- Tax is deducted on a pay-as-you-earn basis from employee salaries
- The deduction amount depends on factors such as salary, bonuses, previous months’ tax adjustments, and any applicable tax reliefs
- Employers must remit the withheld tax by the 15th of the following month
- Failure to remit the deducted tax on time may result in penalties, fines, and legal repercussions imposed by LHDN
- Employers must keep accurate records of tax deductions and provide employees with their EA Forms for annual tax filing
Filing deadlines and penalties
- Tax year: January 1 - December 31
- Annual tax return filing deadline: April 30
- Employer tax filing deadline: March 31 for the previous year’s payroll information.
- Penalties for non-compliance:
- Late filing: Failure to submit tax returns on time may result in fines ranging from RM200 to RM20,000 or imprisonment
- Late payment: A penalty of 10% of the outstanding tax amount will be imposed if payment is delayed
- Underreporting income: If discrepancies are found, additional fines and back taxes may be levied, along with potential legal action by LHDN
Employer tax reporting obligations
Employers must submit the following forms to comply with tax regulations:
- CP8A (EA Form): Issued to employees by the end of February each year. This form provides a summary of their total remuneration and tax deductions, which they need for filing personal tax returns
- E/BE Form: The annual tax return form for resident individuals, which must be submitted by April 30
- CP39: A mandatory form for employers to declare and remit employees' monthly tax deductions to LHDN. This form ensures that all income tax withheld from salaries is reported and paid accordingly
- Form E (Borang E): Employers must submit this form by March 31 each year, summarizing all employees' income and tax deductions
- TP1 and TP3 Forms: Employees can use these forms to declare additional tax reliefs and deductions, which employers must consider when calculating Monthly Tax Deduction (MTD/PCB)
Failing to submit these forms on time can result in fines and penalties imposed by LHDN.
Additional considerations for employers
Beyond monthly deductions and annual filings, employers must also understand how tax rules apply to expatriates, government incentives, and common payroll risks.
Tax treatment for expatriate employees
Hiring foreign employees adds complexity to payroll. Employers must determine each worker’s tax residency status, understand applicable exemptions, and check for double taxation agreements to ensure correct withholding.
- Residency status matters:
- Residents (182-day rule): Taxed progressively and eligible for reliefs.
- Non-Residents: Taxed at a flat 30% rate with no reliefs.
- Foreign-sourced income is tax-exempt in Malaysia
- Special tax exemptions may apply to expatriates in specific industries such as finance or manufacturing
- Double taxation agreements (DTAs) between Malaysia and other countries can help expatriates avoid being taxed twice on the same income
Employer tax incentives and relief programs
Malaysia offers tax deductions and incentives to employers who invest in local talent, training, or innovation. Taking advantage of these programs can reduce overall tax liability while supporting strategic growth.
- Tax deductions for hiring specific employee categories (e.g., disabled workers, returning women workforce, and senior citizens)
- Incentives for training and upskilling employees, including claims under HRDF (Human Resources Development Fund)
- Special tax benefits for companies operating in certain economic corridors, such as Iskandar Malaysia and East Coast Economic Region
- Deductions for R&D activities, provided they align with Malaysia’s national innovation policies
Common payroll compliance mistakes to avoid
Payroll errors can trigger audits, fines, or employee dissatisfaction. Spot and fix common compliance gaps—especially around deadlines, benefits, and recordkeeping—to reduce risk and stay aligned with LHDN expectations.
- Failing to remit PCB tax deductions on time, leading to fines and potential legal actions
- Misclassifying taxable vs. non-taxable benefits, which can result in compliance audits
- Missing the April 30 tax return deadline, causing unnecessary penalties
- Incorrectly calculating tax reliefs and deductions, leading to overpayment or underpayment of taxes
- Not keeping proper payroll records, which is mandatory under LHDN regulations for at least seven years
- Failing to comply with employer EPF and SOCSO contributions, which can trigger audits and backdated contributions
How to simplify payroll and tax compliance in Malaysia
For businesses operating in Malaysia, managing payroll compliance can be challenging, especially when navigating tax regulations. Deel provides a reliable solution to ensure compliance and simplify payroll management.
- Automated Monthly Tax Deduction (MTD/PCB) remittances: Deel ensures all employee tax deductions are automatically calculated and remitted in compliance with LHDN requirements, reducing manual errors and late payment penalties
- Real-time tax updates aligned with LHDN regulations: Deel actively monitors, flags, and provides regulatory updates and workforce insights for 150+ countries
- Seamless integration with accounting and HR software: Deel integrates with existing HR and accounting platforms, making payroll processing more efficient and reducing administrative burdens
- Flexible payroll options: Employers can use—and trust—Deel to run payroll in Malaysia via Deel Global Payroll (if they have an entity set up) or Deel EOR (Employer of Record) if they don’t have an entity yet, ensuring full compliance without the need to establish a local entity
Book a demo today to learn how Deel can streamline your Malaysia payroll and help you stay compliant with ease.
FAQs
How much is income tax in Malaysia?
Malaysia follows a progressive tax system, meaning the more you earn, the higher your tax rate. Individual tax rates range from 0% to 30%, depending on your chargeable income. For example:
| Income | Tax rate |
|---|---|
| RM 5,000 and below | 0% |
| RM 20,001 - 35,000 | 3% |
| RM 50,001 - 70,000 | 13% |
| Above RM 1,000,000 | 30% |
Taxpayers can reduce their taxable income through tax reliefs (e.g., EPF contributions, medical expenses, and education fees). If you earn RM 50,000 annually, your estimated tax (before deductions) is around RM 1,800.
What is the 182-day rule in Malaysia?
If you stay in Malaysia for 182 days or more within a calendar year, you qualify as a tax resident and enjoy lower tax rates and reliefs. The 182 days do not have to be consecutive if linked to Malaysia.
- Tax Residents: Taxed at progressive rates (0%-30%)
- Non-Residents (Less than 182 days): Flat 30% tax on Malaysian income
Temporary absences (work trips, vacations) may still count toward the 182 days. Non-residents cannot claim reliefs, deductions, or rebates.
Do foreigners pay income tax in Malaysia?
Yes, foreigners working in Malaysia are taxed based on their residency status:
- 182 days or more (Tax Resident): Taxed at progressive rates (0%-30%) and eligible for reliefs.
- Less than 182 days (Non-Resident): Flat 30% tax with no deductions.
Some foreigners may be exempt under tax incentives (e.g., short-term business visitors, specialized professionals, Double Taxation Agreements). If a foreigner arrives in January and stays until August (over 182 days), they are tax residents and taxed progressively.
What income is not taxable in Malaysia?
Certain income and benefits are tax-exempt, including:
- Medical benefits, EPF withdrawals (age 55+), retirement gratuities
- Per diem allowances, long-service awards (up to RM 2,000)
- Capital gains from shares and property (except Real Property Gains Tax)
- Dividends from Malaysian companies (taxed at the corporate level)
- Foreign-sourced income (some exceptions apply)
For example, a retiree withdrawing RM 200,000 from EPF pays no tax, and a freelancer earning dividends from a Malaysian company doesn’t need to declare them.
About the author
Shannon Ongaro is a content marketing manager and trained journalist with over a decade of experience producing content that supports franchisees, small businesses, and global enterprises. Over the years, she’s covered topics such as payroll, HR tech, workplace culture, and more. At Deel, Shannon specializes in thought leadership and global payroll content.
