Rental Income Exempted From Income Tax Malaysia, And Other Tax Reliefs For YA 2021!

To find out if your rental income can be exempted from income tax, first you'd need to know how it's calculated. If there's a rental loss, you’re not required to disclose that in your tax filings. There's also an exemption of 50% on the statutory income of rental received by Malaysian citizens who live in Malaysia.
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When it comes to the season of income tax in Malaysia, that’s when people tend to leave things till the last minute (are you one of them?) and then make careless mistakes out of panic.

One such mistake that’s cropping up more often involves rental.

As pointed out by MalaysiaKini reader Choong Hui Yan, it turns out that people are getting penalised under Section 113 of the Income Tax Act 1967 for under-reporting (or not reporting at all) their rental income.

There’s this misconception that rental income is classified under an investment and can therefore be exempted from any form of taxation.

Wrong!

But before we dive deeper, let’s take a closer look at what this Act is all about. According to the Inland Revenue Board Malaysia (LHDN), this involves:

“Any person who makes an incorrect return by omitting or understating any income or gives any incorrect information in relation to any matter affecting his own chargeability to tax or the chargeability to tax of any other person.”

income tax, rental income exemption malaysia 2020

If that’s too much of a mouthful, let us simplify it for you: it basically means that you’re trying to avoid being taxed by not properly declaring how much you earn from renting out your property.

But before we can even begin to touch on the topic of paying income tax on rental income, let’s get back to basics.

 

What Is Rental Income Tax?

Rental income tax is a tax imposed upon profit that you make from renting out properties.

The rental income applies to both residential and commercial properties, and even certain machinery and ships (known as movable properties).

 

Rental Income vs Business Income

But there’s a difference between rental income and business income.

Rental income is filed under Section 4(d) of the Income Tax Act 1967. If you’re renting a property for business purposes, however, your rental income is filed under Section 4(a) of the Act under business income.

income tax, rental income exemption malaysia 2020

Generally, rental income is considered non-business income that is derived relatively passively. If your rental property is managed in a very systematic manner, it can be regarded as business income.

To be fair, that’s still very vague - so let’s see how else the two differ.

Rental income

Business income

●Derived passively

●Mostly self-managed, facilities and support are not actively provided

●Derived actively

● Ample management, facilities and support are actively provided

●Commercial letting of 4 or more commercial units, floors of shophouses residential properties

 

How Is Rental Income Taxed In Malaysia?

Rental income in Malaysia is taxed on a progressive tax rate from 0 - 28%. The rental income commencement date starts on the first day the property is rented out, whereas the actual rental income itself is assessed on a receipt basis.

Rental income is valued on a net basis, which means that the net rental income can be reduced with certain deductible expenses.

 

What Expenses Can Be Deducted From Rental Income In Malaysia?

So, what are these deductible expenses for rental income? According to LHDN, they include:

  • Assessment tax
  • Quit rent
  • Interest on home loan
  • Fire insurance premium
  • Expenses incurred on rent collection
  • Expenses incurred on rent renewal
  • Expenses on repairs and property maintenance

income tax, rental income exemption malaysia 2020

Rental income expenses which are not deductible are initial expenses. These include:

  • Costs to advertise the property
  • Legal costs in preparing the rental agreement
  • Stamp duty
  • Property agent commission

 

How To Calculate Your Net Rental Income?

With all that said, here’s an example of how to calculate your net rental income.

 

Contract term

12 months

Deductible expenses

Assessment tax

RM500

 

Quit rent

RM50

 

Property repairs 

RM5,000

Net rental income

(1,000 x 12) – (500 + 50 + 5,000) 

= 12,000 – 5,550 

= 6,450

 

 

 

 Are There Any Tax Incentives For Rental Income?

Before you declare, surely you’d want to know if there are any rental income tax incentives you can benefit from, yes?

income tax, rental income exemption malaysia 2020

If you’re renting a property out commercially, good news!

Under the Economic Stimulus Package 3.0, the government is pushing for citizens to do good unto one another and offering this incentive in exchange.

From April 2020 to September 2020, landlords of business premises that offer reduction or relief on rent to SME tenants can claim a special deduction equivalent to the rental reduction amount.

What are the criteria for this tax incentive?

  • Reduction should be at least 30% of the existing rental rate
  • Eligible for all taxpayers (corporate, individual, cooperative or other business and non-business entities)
  • The rented premises must be used by the tenant for the purpose of carrying out business.
  • The landlord must be a taxpayer with rental income under subsection 4(a) and subsection 4(d) Income Tax Act 1967.

 

How To Declare Rental Income In Malaysia?

Let’s make sure you know how to declare yours properly. Individuals who own a property in Malaysia (that isn’t used for business purposes) and receive a rental income are subject to income tax.

This is explained in greater detail under Section 4(d) of the same Act. So, the first thing you need to take note of is how the income from your property rental is calculated.

income tax, rental income exemption malaysia 2020

Its valuation is on a net basis, which means that the amount you earn can be reduced by permitted expenses incurred.

Some of these permitted expenses include the cost of ordinary repairs to maintain the property in its existing state, insurance premium on fire/burglary, assessment tax and quit rent, as well as mortgage interest on loan obtained.

Assessment tax is just a fancy term for a type of compulsory payment that the local authorities would charge on every home and land owner. The money that’s collected will finance the construction and maintenance of all public infrastructure.

How it’s calculated will be based on the estimated annual rental value of the property, multiplied by a set of rates determined by local authorities (so it can really vary).

Once you’ve done that, any net gain would need to be filed.

You can do so under the ‘Statutory income from rents’ when making an online submission; and part B2 (in the BE form) or part B7 (in the B form) when making a manual submission.

If, however, you come up with a rental loss, then you’re not required to disclose that in your tax filings.

income tax, rental income exemption malaysia 2020

 

Are There Any Tax Exemptions On Rental Income In 2020?

Yes, you read that right! Ever since January 1, 2018, the rental income was evaluated on a progressive tax rate.

This rate ranged anywhere from 0% to 28% and it didn’t come with any tax incentive or exemption.

But because the Malaysian government now wants to encourage Malaysian residents to rent out their residential accommodation at more reasonable charges to those who’re really in the need, they’ve decided to offer a little extra incentive.

During the tabling of Budget 2018, it was stated that there’ll be an exemption of 50% on the statutory income of rental received by Malaysian citizens who live in Malaysia.

What are the criteria to be eligible for this rental income tax exemption?

Now, there are certain requirements which need to be met first before you can be qualified for this income tax exemption. They are as follows:

  1. The property in question is under a ‘residential’ status and must be rented out under a legal tenancy agreement between the owner (landlord) and the tenant.
  2. Monthly rental received (from each property) is less than RM2,000. This exemption is not restricted to just one residential property, but to as many properties that one individual owns.
  3. The tenancy agreement must be stamped by LHDN and executed on or after January 1, 2018, and is only given for a maximum period of three consecutive years of evaluation from 2018 to 2020.

income tax, rental income exemption malaysia 2020

There Are, Of Course, Mixed Reactions To This News...

While it can be agreed that the time frame for this incentive is quite short, it at least allows owners with a property rental (who depend solely on their passive income) to enjoy a brief window of additional money to add to their life savings.

In addition, some people are of the opinion that this tax incentive should be given to the renters who are the ones needing the most help in finding an affordable place to live, and not to the landlords who can afford to purchase investment properties in the first place.

Other people, however, believe that this is the right move in encouraging those in the higher-income tax bracket to consider purchasing more investment properties and renting them out, thus helping to ease the pressure from unsold/overhang units in the market.

Now that you have a rough idea on how to manage and declare your rental income, here comes the next step: filing your income tax!

 

How Do I File My Income Tax ?

Before finding out the step-by-step on how to file your tax , you’ll first have to find out if you even need to pay income tax at all. You're eligible as a taxpayer if:

  • Your annual income after EPF deduction is RM34,000 and above (approx. RM2,833.33 per month)
  • You have been in Malaysia for at least 182 days within the year

After you’ve determined that you're in fact, obligated to file income tax, you’ll then need to find out how much income tax you need to pay based on your chargeable income.

income tax, rental income exemption malaysia 2020

Filing for income tax usually begins in the first quarter of the year for the previous Year of Assessment (YA). This means that in 2021, you’ll be filing your taxes for YA 2020 that ends on 31 December 2020.

You’ll only be given a few months to file your income tax, so be sure to keep all your payslips, EA Forms, and receipts as you’ll need them to file your taxes.

If you only manage to file your income tax after the deadline, you will have to pay a penalty. The same also goes if you overstate your tax reliefs or misreport your earnings, so be honest!

Filing for income tax can be done online via ezHASIL or manually at the Lembaga Hasil Dalam Negeri (LHDN).

 

How Do I Find Out My Chargeable Income?

Income tax is chargeable on most types of income, such as:

  • Gains from a business
  • Gains from employment
  • Dividends, interests and discounts
  • Royalties, premiums and rent

income tax, rental income exemption malaysia 2020

The amount you end up with after you’ve added together all your various incomes will then be used to determine your respective tax rate. Refer to this link for the latest tax rates (YA 2020 ).

As you can see – the lower your chargeable income, the lower your tax rate and the less income tax you’ll have to pay.

 

What Are The Tax Reliefs For YA2020 ?

Here’s where tax reliefs come in. Essentially, tax reliefs are certain portions of your income that don’t have to be included in the sum of your total chargeable income.

This means they help to reduce your total chargeable income - so make sure you keep those receipts and always be in the know of the latest tax relief updates!

Below is a list of personal income tax reliefs for filing in 2021 . You can also refer to the official LHDN list here.

In light of the Covid-19 pandemic, the government announced several new tax relief measures for YA2020 as part of the nation’s Short-Term Economic Recovery Plan (PENJANA) to help and support employees working from home. We’ve compiled those below, so read on!

Type of relief

Amount exempted (RM)

Self and Dependents

Self

9,000

Husband/Wife/Payment of alimony to ex-wife

4,000

Child (below 18 years old)

2,000

Child (above 18 years old)

●      "A-Level", certificate, matriculation or preparatory courses

2,000

Child (above 18 years old)

●      Diploma level and above in Malaysia

●      Degree level and above outside Malaysia

8,000

Parental care relief (father)

 1,500 

1,500

 

5,000

Disabilities

Disability (self)

6,000

Disability (spouse)

3,500

Disability (child)

6,000

Disabled child (above 18 years old)

●      Diploma level and above in Malaysia

●      Degree level and above outside Malaysia

14,000

Basic supporting equipment for disabled self, spouse, child or parent

6,000

Insurance and Contributions

SOCSO Contribution

250

Insurance premiums for educational or medical benefits

3,000

Deferred Annuity and private retirement schemes

3,000

Life Insurance and Employee EPF contributions

7,000

Net savings in SSPN

8,000

Medical

Medical expenses for self, spouse or child suffering from serious disease, for fertility treatment for self or spouse, and complete medical examinations for self, spouse, or child (restricted to 500) 

6,000

Education and Lifestyle

Education fees (self)

●      Any degree at Masters or Doctorate level

●      Degree related to law, accounting, Islamic financing, technical, vocational, industrial, scientific or technological skills and qualifications

7,000

Breastfeeding equipment

1,000

Kindergarten/Child  care centre fees

3,000 

Purchase of books, journals, magazines, printed newspaper, personal computer, smartphone, tablet, sports equipment, gym memberships, and internet subscription monthly bill 

2,500 (for self, spouse or child)

New Tax Reliefs for YA 2020

Domestic travel expenses from 1 March - 31 December 2020

1,000

Additional: Purchase of personal computer, smartphone, or tablet from 1 June - 31 December 2020

2,500 (for self, spouse or child)

 

As part of PENJANA, the Real Property Gains Tax (RPGT) will also be exempted for the disposal of properties. Said properties must be residential homes, sold between 1 June 2020 to 31 December 2021, and limited to only 3 units per individual.

income tax, rental income exemption malaysia 2020

 

What Are The Abolished Tax Reliefs In 2020?

Each assessment year might see a few changes in the tax reliefs, so it’s worth keeping an eye on them, so you don’t end up paying more than you’d actually have to.

Some examples of previous tax reliefs that have already been abolished include:

  • RM500 for complete medical examination is now claimed together with medical expenses for serious diseases instead of separately.
  • Interest up to RM10,000 expended to finance purchase of residential property for the first three years was abolished in 2013.
  • Lifestyle tax reliefs such as books and gym memberships are now claimed together under lifestyle expenses - altogether RM2,500.

 

What About The Tax Rebates For 2020?

Say you’ve deducted every tax relief you’re eligible for... but the final income tax amount still comes out a hefty sum.

This where you may be able to reduce the amount of income even further with tax rebates.

Tax relief = deducted from chargeable income. Tax rebate = deducted from total tax payable.

The list of tax rebates for 2020 are as below:

Type of rebate

Amount (RM)

Individual chargeable income less than RM35,000

400

Husband and wife (separately assessed) and each chargeable income does not exceed RM35,000

400

Husband and wife (jointly assessed) and joint chargeable income does not exceed RM35,000

800

Rebate for Zakat/Fitrah

Actual amount paid

Departure levy rebate for Umrah/religious travel

Actual amount of departure levy paid, limited to 2 trips per lifetime

  • Donations to charities, sports bodies, or approved projects: Up to 7% of your taxable income.
  • Other donations, gifts, or contributions: Up to the value of the gift, unless stated otherwise.
  • Subscriptions to professional bodies (eg: medical or legal professional bodies): The member subscription paid.

 

 How About Tax Rebates For Non-Residents Or Expats In Malaysia?

income tax, rental income exemption malaysia 2020

Unfortunately, non-residents and expats don’t have the luxury of any tax reliefs or rebates. Sorry!

Non-residents in Malaysia are classified as those staying less than 182 days within Malaysia, regardless of citizenship or nationality.

But not all non-residents have to pay income tax in the first place! You're not taxable if you are:

  • Employed in Malaysia for less than 60 days
  • Employed on board a Malaysian ship
  • Age 55 years old and receiving pension from Malaysian employment
  • Receiving interest from banks
  • Receiving tax-exempt dividends

But let’s say these don’t apply to you and you are obliged to pay income tax.

As a non-resident, you’ll be taxed fixed rates (usually 28%) instead of the progressive tax rates that apply to residents. Those rates can be found here.

 

Using Your Monthly Tax Deduction (MTD/PCB) As Final Tax

income tax, rental income exemption malaysia 2020

The Monthly Tax Deduction (MTD) / Potongan Cukai Bulanan (PCB) is the percentage of your income that is deducted from your employment income and goes towards paying your income tax.

You’ll still need to file your tax returns though!

Since you’ll only be able to benefit from tax reliefs and rebates if you file your own returns, using your MTD as final tax can be dangerous in that you may be paying more than you’d actually need to!

There are, however, a certain percentage of people who can use their MTD as final tax. The criteria are:

  • Your employment income is your only source of income
  • You have been working with the same employer for the past 12 months
  • Your employer has been deducting MTD from you
  • Your employer is not paying any taxes for you
  • You have not opted to file under joint assessment

If you fulfill these criteria, you may choose not to file your returns, and simply use your MTD as final tax.

If so, remember to submit form TP1. This form will help you to claim the tax reliefs you’re eligible for and facilitate for more accurate returns by your employer.

 

Joint Assessment vs Separate Assessment

income tax, rental income exemption malaysia 2020

For married couples, you’ve probably had to ask yourself the question “Should we file separately or under joint assessment?”

In the end, the question is one that boils down to which method will give the most tax savings by leveraging on the progressive tax rates as well as reliefs. As a general rule to go by:

  1. Separate assessment is beneficial if: Both are high-income earners
  2. Joint assessment is beneficial if: One has a significantly higher income, while the other earns little or no income

This is because the combined income of both high-income earners may result in them being subjected to a higher tax bracket, and hence have to pay a higher tax rate.

This applies to tax reliefs as well, since filing under joint assessment means you’re essentially filing as one person - you can only claim the maximum tax reliefs of an individual.

It goes without saying then, that the best way to find out which option will result in the most tax savings for you is to simply calculate separately and compare.

Whether you agree or not with this incentive, the most important thing to remember is to declare your income tax as accurately as possible to avoid any unwanted punishment.

It’s also a good idea to compile and retain any receipts or documents for a few years, in case you’re suddenly called for a tax audit – it’s better to be safe than sorry!

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