Filing your taxes is something that no one looks forward to, but ends up doing every year (even if you don’t earn enough to pay anything). Although the whole process might seem tedious and dull, it’s still something that we have to do, for the betterment of our country.
Truth be told, although it can be said that the whole process of filing your taxes can be confusing, there is one aspect of tax filing that most people spend the most time ruminating; tax relief.
Which is why in this article, we’re going to explore just what tax relief is, what can be applied for tax relief, and ultimately, how it really affects you.
What is tax relief?
The answer is pretty simple, tax reliefs are purchases or spending that you can use to reduce the amount of tax you pay to the government.
Usually, categories of tax reliefs are set by the government to encourage specific spending habits or behaviour. For example, the lifestyle tax relief set by the government is there to incentivise Malaysians to buy books, sporting equipment, or a personal computer for personal growth.
How does tax relief work?
A common misconception on how tax relief works is that people think that the amount they spent on any of the tax relief categories will be refunded to them, or deducted from the amount of tax they pay.
This leads to people trying to maximise their so-called tax reliefs, by spending more on the categories allowed for tax relief.
However, this could not be further from the truth. Instead, tax relief reduces your taxable income based on the amounts that you spend in each category (up to the limits set by the government).
How do you calculate your taxable income? Here’s the formula
Taxable income – tax exemption – tax reliefs = Chargeable income.
Malaysian personal income tax is divided into several brackets based on how much chargeable income you have. The more chargeable income you have, the higher on the bracket you go.
Category Chargeable income Calculations (RM) Rate % Tax (RM)
A 0 - 5,000 On the First 5,000 0 0
B 5,001 - 20,000 On the first 5000
Next 150001 0
150
C 20,001 - 35,000 On the first 20,000
Next 15,0003 150
450
D 35,001 - 50,000 On the first 35,000
Next 15,0008 600
1,200
E 50,001 - 70,000 On the first 50,000
Next 70,00013 1,800
2,600
F 70,001 - 100,000 On the first 70,000
Next 30,00021 4,400
6,300
G 100,001 - 250,000 On the first 100,000
Next 150,00024 10,700
36,000
H 250,000 - 400,000 On the first 250,000
Next 150,00024.5 46,700
36,750
I 400,001 - 600,000 On the first 400,000
Next 200,00025 83,450
50,000
J 600,001 - 1,000,000 On the first 600,000
Next 400,00026 133,450
104,000
K 1,000,001 - 2,000,000 On the first 1,000,000
Next 1,00,00028 237,450
280,000
L Exceeding 2,000,000 On the first 2,000,000
Next Ringgit30 517,450
.....
So how does tax relief affect you?
In the section above, we have discussed how tax relief deducts from your total income, which will make your chargeable income lower.
Here’s an example to help you visualise it;
Rahman has a total income of RM45,000. In the year of assessment 2023, Rahman also bought a laptop which cost RM2,500.
So what is Rahman’s taxable income? Let’s calculate
RM45,000 – RM9000 (individual tax relief) – RM2500 (lifestyle tax relief) = RM33500
So from the calculations, we now know that Rahman’s taxable income is RM33,500.
Which places him in category C of the tax bracket.
This means that for the current year of assessment, Rahman will be paying RM595 in taxes.
But what if Rahman didn’t claim his tax relief from buying the laptop? Let’s have a look;
Rahman has a total income of RM45,000. His only applicable tax relief is the automatically applied individual tax relief of RM9,000 and nothing else.
RM45,000 – RM9000 = RM36000
With a taxable income of RM36,000, Rahman is now placed in category D of the tax bracket.
So how much taxes will Rahman have to pay now? RM608.
From these two examples, we can see that maximising your tax relief can make a difference in the total amount of tax you have to pay in the end, but only if it takes you down to a lower tax bracket.
Should you maximise your tax relief?
Technically, yes. Every bit that goes into tax relief reduces your chargeable income, which means that ultimately you are paying less in taxes overall. It’s an extra bonus if you manage to claim enough relief to find yourself in a lower bracket.
However, this only applies to things that you would normally spend on; like medical checkups or child care expenses. It doesn’t quite make sense to go on a shopping spree in an attempt to claim more in tax relief.
If we take Rahman’s example from above, yes the purchase of the laptop took him down to a lower tax bracket, but the difference in tax that he has to pay is only RM13.
Which means that Rahman spent RM2500, only to save RM13 in taxes.
So our advice for you will be, if there’s any necessary purchase that you can make that you can claim tax relief on, then go ahead and file it in.
But if it’s not a necessary purchase, and you’re just buying it to maximise your tax relief, you might be losing more money than you’re saving in the long run.
