24 Incomes Exempted From Tax In Malaysia

When planning compensation packages in Malaysia, employers must balance competitive benefits with compliance under the Income Tax Act 1967. While most employment income is taxable, certain allowances, benefits, and payments are exempt from income tax.

Understanding these exemptions is crucial for both employers and employees, as it helps employers design attractive benefits in Malaysia while reducing employees’ tax burden.

The difference between taxable and non-taxable income lies in whether a particular payment is specifically exempted under Malaysian tax laws.

For example, overtime pay is taxable, but some allowances (like certain travel claims) may be exempt up to a limit. Employers need to be aware of these rules not only for accurate payroll reporting but also for retaining and attracting top talent through tax-efficient benefits.

Below are the main types of income exempt from tax in Malaysia, as recognised by the Inland Revenue Board (LHDN).

1. Leave Passage

Employers may provide employees with leave passage benefits. Exemptions include:

Local leave passage up to 3 trips per year within Malaysia.
Overseas leave passage is limited to RM3,000 per year.

This encourages employers to support employee rest and recovery without increasing tax liability.

2. Medical and Dental Benefit

Medical benefits provided by the employer are fully exempt from tax, including:

Outpatient and inpatient treatment.
Maternity expenses.
Traditional medicine such as ayurvedic or acupuncture.

There is no monetary cap on this exemption, making it one of the most valuable parts of a benefits package.

3. Retirement Gratuity

Retirement gratuities are fully exempt if:

Retirement plans are due to ill health, or
Employee retires at/after age 55 with ≥10 years of service, or
Compulsory retirement at age 50–55 with ≥10 years of service.

4. Gratuity Paid Out of Public Funds

Any retirement gratuity paid directly from public funds is fully exempt from tax.

5. Gratuity Paid to a Contract Officer

If a contract officer receives a gratuity upon termination, it is fully exempt, even if the contract is later renewed.

6. Compensation for Loss of Employment

Exemption rules include:

Full exemption if loss of employment is due to ill health.
RM6,000 per completed year of service if termination was before 1 July 2008.
RM10,000 per completed year of service if termination was on/after 1 July 2008.

Note: Compensation received by directors of control companies is not exempt.

7. Pensions

Pensions are exempt if:

Retirement is at age 55/the compulsory retirement age, or due to ill health.
If multiple pensions are received, only the highest pension qualifies for exemption.

8. Death Gratuities

Any payment made to the family of a deceased employee in the form of death gratuities is fully exempt from income tax.

9. Scholarships

Scholarships awarded to employees or their dependents are fully exempt. This exemption supports career development and enhanced employability.

10. Cultural Performances

Income from cultural performances approved by the Minister of Finance is exempt from tax.

11. Interest

Exempt if derived from:

Licensed banks or finance companies.
Islamic banks.
Development Financial Institutions (DFIs).
Tabung Haji, MBSB, or Borneo Housing Finance Berhad.

12. Dividend

Dividends are exempt if received from:

Exempt company accounts.
Co-operative societies.
Approved unit trusts (e.g., Amanah Saham Bumiputera [ASB]).
Unit trusts with ≥90% investment in government securities.

13. Royalty

Certain royalty income is exempt up to thresholds:

Artistic works and recordings: RM10,000
Translation: RM12,000
literary works, paintings, and musical compositions: RM20,000

Any royalty exceeding these limits is taxable.

14. Income Remitted from Outside Malaysia

Foreign-sourced income (FSI) became taxable from 2022, but exemptions apply until 31 Dec 2026 for:

Dividends received by companies and LLPs.
All income received by individuals in conventional partnerships.

15. Fees or Honorarium for Expert Services

Exempt if related to validation, moderation, or accreditation of franchised education programmes verified by the Malaysian Qualifications Agency (MQA).

16. Income Derived from Research Findings

50% exemption on statutory income for 5 years if:

Research findings are commercialised.
Verification is provided by the Ministry of Science, Technology and Innovation (MOSTI).
The recipient is a Malaysian citizen and resident.

17. Company Special Service Awards

Special awards from employers are exempt up to RM1,000.

18. Grants for Green SRI Sukuk and Bonds

Tax exemption is available for issuances made between 2021 and 2025, supporting sustainable financing.

19. Income from Employment Onboard a Ship

Exempt if employment is on a ship:

Registered under the Merchant Shipping Ordinance 1952, and
Owned by a Malaysian resident.

20. Non-Malaysian Director’s Fees from Labuan Entity

Director’s fees received by non-Malaysians from Labuan entities are exempt until YA 2025.

21. Government Grant or Subsidy

Any grant or subsidy received from the government is fully exempt.

22. Travelling Allowances

Exemptions apply up to RM6,000 annually for petrol and tolls when employees use their personal vehicles for official duties.

This falls under travelling expenses tax deductible in Malaysia and is part of the broader employee allowances list.

23. Benefits in Kind Exemptions

Certain benefits in kind (BIK) are exempt, such as:

Dental care.
Childcare services.
Food and drink provided.
Transportation arranged by the employer.
Staff discounts on consumables (non-resalable).

24. Women Returning to the Workforce

Women who re-enter the workforce may qualify for tax exemption incentives under government initiatives, encouraging long-term participation in employment.

Recap in Table

Exemption Type	Exemption Limit / Rule	Employer Notes
Leave Passage	3 local trips/year; RM3,000 overseas	Encourage employee rest; ensure proper records of claims.
Medical & Dental Benefits	Fully exempt, incl. maternity & traditional medicine	Provided as part of the benefits package; no tax cap.
Retirement Gratuity	Fully exempt if retirement due to ill health or ≥10 yrs service at age 50–55+	Plan gratuity schemes aligned with the law.
Gratuity Paid Out of Public Funds	Fully exempt	Applies to public sector retirement.
Gratuity to Contract Officer	Fully exempt upon contract termination	Exemption applies regardless of contract renewal.
Compensation for Loss of Employment	RM6,000/year of service (before 1 July 2008); RM10,000/year (on/after 1 July 2008); full if ill health	Directors of control companies are not exempt.
Pensions	Exempt if retirement at 55/compulsory age or ill health	Only the highest pension is exempt if multiple pensions are received.
Death Gratuities	Fully exempt	Paid to the family of the deceased employee.
Scholarships	Fully exempt	Employer-provided scholarships exempt for employees/dependants.
Cultural Performances	Exempt if approved by the Minister	Applies to specific events.
Interest	Exempt if from licensed banks, Islamic banks, DFIs, Tabung Haji, MBSB, Borneo Housing	Ensure the interest source qualifies.
Dividends	Exempt if from exempt accounts, co-ops, approved unit trusts, ASB, 90%+ govt securities	Verify fund approval status.
Royalty	Exempt up to RM10k (artistic), RM12k (translations), RM20k (literary/music/paintings)	Amount exceeding thresholds is taxable.
Foreign-Sourced Income (FSI)	Exempt until 31 Dec 2026 for dividends (companies/LLPs) & partnerships	Subject to foreign tax rules.
Expert Services Fees	Exempt for MQA-verified franchised education programmes	Applies only to education-related services.
Research Findings	50% exemption on statutory income for 5 yrs (MOSTI verified)	Applies if commercialised; the recipient must be a citizen.
Company Special Service Awards	Exempt up to RM1,000	For long service/recognition awards.
Green SRI Sukuk & Bonds	Exempt for issuances 2021–2025	Supports sustainable finance.
Employment Onboard Ship	Fully exempt if ship is Malaysian registered & resident-owned	Maritime industry specific.
Non-Malaysian Director’s Fees (Labuan Entity)	Exempt until YA 2025	Applies only to Labuan-based companies.
Government Grant/Subsidy	Fully exempt	Applies to government-funded support.
Travelling Allowances	Up to RM6,000 for petrol/tolls using a personal vehicle for official duties	Must be work-related travel; keep logs/claims.
Benefits in Kind (BIK)	Dental, childcare, food, transport, consumables, and staff discounts	Only listed BIK exempt, others taxable.
Women Returning to the Workforce	Eligible for government incentive-based exemptions	Encourage female participation in workforce.

FAQ

What types of income are exempted from tax in Malaysia?

Exemptions include medical benefits, retirement gratuities, pensions, death gratuities, scholarships, dividends from approved funds, travel allowances up to RM6,000, and more as outlined above.

Are employee allowances always exempt from income tax?

No. Only certain allowances (such as travel allowances, childcare support, or medical benefits) are exempt within prescribed limits. Others, such as overtime pay or meal allowances, are taxable.

Which benefits package items are fully deductible for employers?

Employers can generally claim business expenses that are incurred in the production of income as tax deductions, such as salaries, statutory contributions, and medical benefits. However, not all benefits offered are deductible.

Can travelling expenses be claimed as tax-deductible in Malaysia?

Yes, travelling allowances for employees are tax exempt up to RM6,000 if for official duties using personal vehicles. Employers can also claim such costs as deductible business expenses.

How do retirement plans affect taxable income?

Retirement gratuities and pensions are exempt under certain conditions (e.g., retirement at 55 with 10 years of service). Approved retirement plans help employees save for the long term while reducing tax liability.

What happens if allowances are not reported correctly under Malaysian tax laws?

Failure to report allowances correctly can lead to penalties for both employees and employers. Employers must accurately reflect all taxable and non-taxable items in the EA Form to comply with the Income Tax Act.

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