What You Should Understand About Monthly Tax Deduction in Malaysia?
After all the calculation, and if you are still shocked with the amount of tax you would have to pay, don’t worry. You may be eligible to get an income tax return after the Monthly Tax Deduction (MTD), also known as PCB.
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. Therefore, these monthly deductions are net of personal relief, relief for spouse with no income, child relief and zakat payments.
For employment income, a monthly tax deduction (MTD) system is in operation, whereby employers deduct monthly tax payments from the employment income of their employees. Employers, who do not use computerised payroll software, can calculate the MTD using the Schedule of Monthly Tax Deductions, issued by Inland Revenue Board of Malaysia (IRBM).Â
Moreover, it can be calculated using Computerised Calculation Method, computerised payroll system, or in-house/customise payroll system, which has been verified by the IRBM. Employers rely on employee’s personal data, submitted in order to compute monthly MTDs.Â
What Is Monthly Tax Deductions (MTD)?
MTD stands for Monthly Tax Deduction, also known as Potongan Cukai Bulanan (PCB). Â Hence, you may realise that MTD and PCB can be used interchangeably. This mechanism is designed to avoid the issues that come with requiring payment of a large sum of income tax when the actual tax amount has been determined.
Employee shall provide their personal data to employers by Form TP1 (Individual Deduction And Rebate Claim Form). Therefore, these monthly deductions are net of all possible tax relief, tax rebate and zakat payments.
Started from Malaysia income tax year of assessment 2014 (tax filed in year 2015), employees are not required to file their income tax return if such Monthly Tax Deductions (MTD) constitute their final tax. However, there are some criteria must be met:
Employee derives employment income only;
MTD has been remitted on the employment income;
Employee has served under the same employer for a period of 12 months in that year of assessment;
Tax is not borne by the employer; and
Employee has not elected for joint assessment.
If you meet the above conditions and have not submitted a tax return by the deadline for submission (April 30th) you will be deemed to have made an election not to submit a return.
Monthly Tax Deduction (MTD) as final tax?
MTD as final tax means that a Malaysian employer is mandated to calculate and ensure that the MTD remitted to the MIRB on employment income is equal to the total tax liability payable by the employee for the year of assessment. This comes as no surprise as many tax authorities are already moving towards real time tax reporting like those implemented in Ireland (Real Time Reporting) and Australia (Single Touch Payroll) to promote greater compliance, transparency and efficiency in payroll tax administration.  Â
In complying with MTD as final tax, employers have to consider the following when calculating MTD:
Tax residency status of the employee in order to determine the correct tax rates to be applied on the employment income earned;
Tax rebates, tax deductions and reliefs applicable to the taxpayer as allowed by the MTD formula set up by the MIRB; and
Information in relation to the MTD deducted from the previous employment in the current year when the employee joins the company.Â
To ensure your MTD is your final tax, you may need to request for other reliefs to be deducted. To do so, you will need to submit Income Tax Form TP1, where you can state other tax reliefs that you are entitled to, to facilitate the computation of MTD.
Reliefs that can be included in the form includes:
- 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, smartphone or tablet
- Net deposit in Skim Simpanan Pendidikan Nasional (SSPN),
- Purchase of sports equipment,
- Alimony payment to ex-wife,
- Life insurance,
- Education/medical insurance,
- Deferred annuity, and
- Zakat payment (only if not deducted through MTD already).
Employer’s Responsibilities for MTD
Employer’s responsibilities under the Monthly Tax Deductions (MTD) Rules are as follows:
1. Deduct the Monthly Tax deductions (MTD) from the remuneration of employee in each month or the relevant month in accordance with the schedule of Monthly Tax Deductions or Computerised Calculation Method and pay to the Director General.
2. Make additional deductions from employee’s remuneration in accordance with the direction given by the Director General under Rule 4 of Monthly Tax Deductions (MTD) Rules.
3. Employer shall pay to the Director General, not later than the fifteen day of every calendar month, the total amount of tax deducted or should have been deducted by him from the remuneration of employees during the preceding calendar month.
4. Furnish a complete and accurate employee’s information of the following in a return when submitting Monthly Tax Deductions (MTD) payments/additional deductions:
– income tax number (if any);
– name as stated on identity card or passport;
– new and old identity card number/police number/army number or passport number (for foreign employee);Â
– Monthly Tax Deduction (MTD)/additional deductions amount.
How Does Monthly Tax Deduction Works?
Income Tax Form TP1 is where your employer has to indicate your tax reliefs. The employer will need to refer to the employee’s data that was submitted to the Human Resource (HR) department at the start of the employee’s employment. From there, the employer will then need to key in the relevant details into the form.Â
Then, the employer will need to submit the form to LHDN. Thereafter, the employer must remit the amount deducted to LHDN every month. In other words, your employer should help you request deduction for other reliefs, to ensure your MTD is part of your final tax.
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