 By the end of this chapter, you should be able

to
✔ explain the purpose of collecting income tax,
✔ list down the various sources of incomes and
calculate total income for tax purposes,
✔ identify allowance deductions for income tax
purposes,
✔ determine chargeable income, use the tax
schedule to determine the tax amount,

1
 continue
✔ recognise that tax rebate is allowed for a
chargeable income of less than
RM35,000 and that zakat is an allowable
rebate,
✔ calculate tax payable.

2
 Introduction
• The main purpose of collecting income tax is to provide
financing for government expenditure.
• The government needs funds to carry out various projects.
• The government also needs revenue to achieve socially
desirable goals such as reducing poverty, reducing
unemployment, and achieving the status of a developed
country by the year 2020.
• It can also utilise income tax as a tool for economic
stabilisation.
• Personal income tax is one of the important sources of
revenue for the government.

3
 Computing income tax
• 1. Add up all the income derived in the country and
outside the country. This gives the total income.
• 2. Add up all the tax reliefs allowed for the year of
assessment.
• 3. Compute the chargeable (taxable) income by
subtracting the allowable reliefs from the total
income.
• 4. Compute the tax amount according to the tax
schedule.
• 5. The tax payable is the tax amount computed
above, less rebates allowed.
4
 Classification of incomes
Incomes can be broadly classified into six categories.
• Business incomes
Business incomes include incomes derived from sole
proprietorship and
partnership businesses or professional services.
• Employment incomes
These include wages, commission, bonus, overtime
pay, allowances and other benefits such as housing
allowances. For government employees, housing and
entertainment allowances are tax-exempt items from
2003 onwards.
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 Continue
Dividends, interests and discounts
Any dividend derived from holding stocks must
be declared in the tax form.
Interest from savings and fixed deposits must also be
declared.
• Rents, royalties and premiums
• Pensions, annuities and periodic payments
• Other income or profits not stated above

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 Continue
• A married couple can elect to be assessed
separately or jointly. If a joint assessment is
made, the incomes of the husband and wife
must be aggregated.
• Tax is now assessed on a current year basis;
that is, you have to pay tax (monthly
deduction from your salary) during the year
you are earning income.

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 Continue
• In 2005, the self assessment system was
introduced. The individual has to compute
his/her tax payable and submit the form
together with the payment before the due date.
• On line assessment is now available to tax
payers as one can fill up income tax form on line
and automatic assessment is then carried out
by computer.

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 Deductions
• Deductions allowed to a taxpayer include:
• Personal relief
• For Joint Assessment , personal relief of
RM9,000 is allowed . Relief for spouse is RM4000.
• For separate Assessments, personal relief of
RM9,000 is allowed for both the individual and the
spouse.
• For a disabled taxpayer, another RM6,000 is
allowed.

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 Deductions (continue)
• For a joint assessment of both disabled husband and
wife, the wife is allowed another RM3,500.
• Children relief
• For normal children, a tax relief of RM2,000
per child is allowed with no limit on the number of
children.
• For handicapped children, a tax relief of
RM6,000 per child is allowed with no limit on the
number of children.

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 Deductions (continue)
• For children studying full-time in a local college or
university, the maximum deduction is RM8,000 per
child (excluding matriculation and preparatory
years). For children studying full-time in an overseas
college or university, the deduction is RM8,000 per
child. Deductions for children can only be claimed by
either husband or wife but not both.
• Parents with disabled children studying in
institutions of higher learning will be allowed a total
tax relief of RM14,000 (education = RM8,000,
handicap support = RM6,000).
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 Deductions (continue)
• Employees Provident Fund (EPF) and Life Insurance
Premium (LIP)
• Maximum deduction for contributions to
approved funds such as EPF and LIP is limited to
RM6,000 for joint assessments and RM6,000 for
each husband and wife when filing for separate
assessments. The amount allowed as relief for
insurance premium is 7% of the capital sum assured
or the annual premium paid, whichever is the lower.

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 Deductions (continue)
• In addition, another RM3,000 is allowed for
health and educational insurance policies for
individual, husband, wife or children.
• Contributions to the Social Security
Organisation (SOCSO) does not qualify for
deductions against income.
• Premium on new annuity scheme or
additional premium paid on existing annuity
scheme can be claimed up to RM1000.
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 Deductions (continue)
• Cash contribution
• Any monetary contribution made to the
government and institutions approved by the
General Director of IRD (Inland Revenue
Department) can be deducted for income tax
purpose. Deduction is also allowed for contributions
to technical training colleges and semi-government
bodies.
• Also deductable are contributions up to
RM20,000 to furnish public libraries, educational
centres and reading rooms in the rural areas.

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 Deductions (continue)
• Medical expenses for parents
• A deduction of up to a maximum of RM5,000
for medical expenses for parents is allowed. Claims
must be substantiated by receipts or other
documentary evidence. For a joint assessment, only
the medical expenses of the husband’s parents are
allowed as tax relief.
• A taxpayer can also claim tax relief up to
RM6,000 for supporting items like a wheelchair for
himself/herself, husband, wife, children or parents.
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 Deductions (continue)
• Part-time education expenses
• A deduction of up to RM7,000 is allowed to
the taxpayer who studies part time in the science,
technology, technical, industrial, vocational field,
professional qualifications or accounting and law
courses.
• A deduction of up to RM7,000 is allowed for
individual who studies masters or doctorate degree
of any field.

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 Deductions (continue)
• Complete medical examination
• A tax payer can claim up to a maximum of RM500 for complete
medical examination
• Lifestyle:
• The lifestyle tax relief at a limit of RM2,500 yearly is allowed on:
• i. purchases of books, magazines,journals or publications (except
newspapers) for self, husband/wife or children.
• ii. Purchase of a personal computer, smartphone or tablet for self, spouse
or child.
• iii. Purchase of sports equipment for any sports activity as defined under
the Sports Development Act 1997 (excluding motorized two-wheel
bicycles) and gym membership self, spouse or child.
• Iv. Payment of monthly bill for internet subscription.

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 Royalty, gratuity, golden handshake income
and pensions eductions (continue)
• Royalty from writing books or original drawing or
music is tax-free up to RM20,000.
• An income of up to RM12,000 derived from
translation of books is also tax-free.
• Retirement gratuity is tax-free income for
compulsory retirement or retirement on medical
grounds. In any other situation, it is not tax-free.
• Golden handshake income received prior to
compulsory retirement at the age of 55, 56 or 58
years is tax-free. For those who enjoy more than one
pension, only the highest pension is not taxable.
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 Rental income
• Rental income received by a taxpayer is
considered a non-business income and is
taxable. Expenses that are allowed against
rental income include house insurance,
replacement cost, agency payment and
interest paid on loan taken to purchase the
house.

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Tax rate schedule for personal income
Taxable Income Tax Calculation Tax Rate (%) Tax Amount

RM 0 to 2500 On the First 2,500 0 RM 0

RM 2,501 to 5,000 Next 2,500 0 RM 0

RM 5,001 to On the First 5,000 RM 0

20,000 Next 15,000 1 RM 150

RM 20,001 to On the First 20,000 RM 150

35,000 Next 15,000 5 RM 750

RM 35,001 to On the First 35,000 RM 900

50,000 Next 15,000 10 RM 1,500

RM 50,001 to On the First 50,000 RM 2,400

70,000 Next 20,000 16 RM 3,200

RM 70,001 to On the First 70,000 RM 5,600

100,000 Next 30,000 21 RM 6,300

RM 100,001 to On the First 100,000 RM 11,900

250,000 Next 150,000 24 RM 36,000

RM 250,001 to On the First 250,000 RM 47,900

400,000 Next 150,000 24.5 RM 36,750

RM 400,001 to On the First 400,000 RM 84,650

600,000 Next 200,000 25 RM 50,000

RM600,001 to On the First 600,000 RM 134,650

1,000,000 Next 400,000 26 RM 104,000

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 Tax rebates
• Rebates are amounts that can be deducted from the tax
amount. These rebates are listed below.
• Rebate on a chargeable income of not more than RM35,000
• A rebate is allowed to the taxpayer whose chargeable income
is not more than RM35,000. The amount of the rebate is as
follows.
Joint Assessment Separate Assessments
Self RM400 Self RM400
Husband/Wife RM400 Husband/Wife RM400

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 Zakat
• Zakat (Religious tithes)
Zakat or other Islamic religious dues are granted
as rebates. Such payments must be evidenced
by receipts issued by the relevant authorities.

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Summary of income tax
assessment

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 Example 1
• Ms. Sharmila’s income for the year 2017 was
RM36,000. Her contribution to EPF was
RM2,700. Assess
• (a) her chargeable income,
• (b) her tax payable.

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 Solution
(a) Assessment of chargeable income
Income RM36,000
Less deductions
Personal 9,000
EPF and LIP 2,700 (11,700)
Chargeable income 24,300
(b) Assessment of tax payable
Chargeable income Rate Tax
on the first RM20 000 150
on the next RM4300 @2% 215 +
Tax 365
Minus tax rebate
(taxable income less than RM35 000) 400 -
Tax payable = -RM35

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 Example 2
• Kelvin Tan’s total income for the year 2017
was RM60,000. He contributed RM4,800 to
EPF and paid RM3,000 for his insurance policy.
His wife is a housewife. They have four
children who are all attending school. Assess
his tax payable.

26
 Solution
• Assessment of chargeable income
Income RM60,000
Less deductions
Personal 9,000
Wife 4,000
Children 8,000
EPF and LIP 6,000 (27,000)
Chargeable income 33,000

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Assessment of tax payable
Chargeable income Rate Tax
on the first RM20,000 150.00
on the next RM13,000 5% 650.00 +

_____
Tax 800.00
Minus tax rebate for individual and wife 800.00 –
_______
Tax payable RM0
Kelvin Tan does not have to pay any tax.
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 Exercise 1:
John and his wife have four children. All the children are schooling.
Particulars regarding their incomes are as follows. Assess their tax
payable if they select separate assessments.

Income and John Wife

Expenses

Salary RM5,200 per month RM2,860 per month

EPF RM5,000 RM2,770

LIP RM1,500 RM2,000

Cash Donations RM100 -

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 Exercise 2:
• Particulars regarding the incomes of Borhan and his wife are as follows. They have
three children. All the children are schooling. Assess their tax payable if they select
a. separate assessments
b. joint assessments

Income and Expenses Borhan Wife

Salary RM85,000 RM25,000

EPF RM6,800 RM2,000

LIP RM5,000 RM1,200

Books and Magazines RM800 -

Zakat RM200 RM20

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 Exercise 3
• Particulars regarding the incomes of Johari and his wife are as follows. They have
six children. Four of the children are schooling and the other two are studying in
local universities. Assess their tax payable if they select
a. separate assessments
b. joint assessments
Income and Expenses Johari Wife

Salary RM69,000 RM72,000

EPF RM5,600 RM5,760

LIP - RM3,000

Sports equipment RM300

Medical expenses on RM800 RM2,000

parents
Zakat RM1000 RM100

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