Income Tax in Malaysia: Which Parts of an Employee’s Salary Are Taxable?

Income tax is a core part of payroll management in Malaysia. It affects the employees’ take-home pay. For employers and HR teams, it directly impacts payroll accuracy, statutory compliance, and employee communication.

Not all salary components are taxable. Understanding what counts as taxable income and what does not helps HR teams apply correct PCB deductions and explain income tax clearly to employees.

Who Must Pay Income Tax in Malaysia?

Income tax liability depends on residency status and income level.

In Malaysia, individuals are classified as tax residents or non-residents based on their length of stay and employment status. Malaysian tax residents are taxed on income earned in Malaysia at progressive rates, while non-residents are taxed at a flat rate.

As a basic rule, individuals earning above the annual tax threshold are required to register and file income tax. For employees who meet this condition, employers are responsible for deducting PCB (Potongan Cukai Bulanan) through payroll.

Income Tax Threshold: When Does Salary Become Taxable?

Income tax does not apply simply because someone is working. It applies once income crosses certain thresholds.

For Malaysian tax residents, employees are generally required to file income tax when their annual employment income exceeds around RM37,333 after mandatory EPF deductions, which is roughly equivalent to RM3,111 per month.

Payroll operates monthly, but income tax is assessed annually. This means HR must always look at how a monthly salary translates into total yearly income, including bonuses and taxable allowances.

For example, an employee earning RM3,200 per month may already fall within the taxable range when annualised, even before considering bonuses.

Is this employee taxable or not? (Table)

The table below provides a simple reference to help HR teams estimate whether an employee’s salary is likely subject to income tax based on gross monthly pay and estimated annual income.

Monthly Gross Salary (RM)	Estimated Annual Income (RM)	Income Tax Status
Below RM2,833	Below RM34,000	Not subject to income tax
RM2,834 – RM3,500	RM34,000 – RM42,000	May be taxable (depends on reliefs)
RM3,501 – RM5,000	RM42,000 – RM60,000	Taxable
Above RM5,000	Above RM60,000	Taxable

Disclaimer: This table is for general reference only. Actual income tax liability depends on individual reliefs, rebates, allowances, tax residency status, and the latest LHDN guidelines.

What Parts of Salary are Subject to Income Tax?

Income tax applies to more than just basic pay. There are two parts of salary that are subject to income tax:

Base Salary

Base salary forms the core of taxable income.

Monthly basic pay is taxable. In addition, bonuses, incentives, commissions, and other cash payments linked to employment are also treated as taxable income and must be included when calculating PCB.

Allowances & Benefits

Many allowances are taxable unless specific exemptions apply.

Common taxable components include overtime payments, performance bonuses, commissions, and certain transport or commuting allowances. These are generally treated as part of employment income.

However, some allowances may be non-taxable or partially exempt if they meet specific conditions under Malaysian tax rules. HR teams should always verify allowance treatment against current LHDN guidance.

Common Deductions & Non-Taxable Items

Not all payroll items increase an employee’s taxable income. Below are the details:

Mandatory Employer Contributions

Employer contributions to EPF and SOCSO are not considered taxable income for employees.

Genuine Reimbursements

Reimbursements for work-related expenses such as business travel, meals, or accommodation are non-taxable, provided they are bona fide and properly supported with claims.

Approved Tax Reliefs and Rebates

Certain personal reliefs, rebates, and deductions approved under Malaysian tax law reduce an employee’s taxable income. These are usually claimed during annual tax filing rather than applied directly in payroll.

How Employers Should Handle Income Tax in Payroll

Accurate payroll handling is essential for income tax compliance. Here’s the step-by-step employers can use to handle income tax in payroll:

Check the Employee’s Tax Residency Status

Confirm whether the employee is a Malaysian tax resident or non-resident, as this directly affects applicable tax rates and PCB calculations.

Use Relevant Tax Tables to Calculate PCB

Calculate Monthly Tax Deductions (PCB) using the latest LHDN tax tables or a payroll system that follows current LHDN guidelines.

Apply Tax Reliefs or Exemptions Where Applicable

Ensure approved exemptions or non-taxable items are applied correctly in payroll, where allowed, to avoid over- or under-deduction.

Issue EA Forms at Year End

Prepare and issue EA forms accurately and on time to employees to support their annual income tax filing.

Ensure Accurate Reporting to LHDN

Submit payroll and tax information accurately and within deadlines to LHDN to prevent penalties, audits, or employee disputes.

Example Scenarios

Practical examples help clarify how income tax works in real situations. Check the example scenarios below

Example 1: An employee earning RM2,500 per month has an annual income of RM30,000. This employee is generally not required to file income tax.

Example 2: An employee earning RM3,800 per month with additional commission and annual bonus may cross the taxable threshold once all components are added, even if base pay alone seems borderline.

HR Best Practices

Good income tax management starts with consistency and clarity. Below are some best practices that you can follow:

Review Taxable and Non-taxable Salary Components Regularly

Periodically assess payroll items to ensure correct tax treatment and compliance with the latest LHDN guidelines.

Communicate Income Tax Deductions Clearly to Employees

Explain PCB deductions and taxable components transparently to avoid confusion, mistrust, or disputes.

Keep Employee Tax Residency Status Updated

Monitor changes in residency status, especially for new hires, foreign employees, and contract staff.

Use Reliable Payroll Systems and Tools

Ensure payroll systems are updated and aligned with current LHDN income tax rules to minimise errors and compliance risks.

Resources & References

For the most accurate and up-to-date information, employers should always refer to LHDN’s official income tax guidelines and threshold updates below:

https://www.hasil.gov.my/en/individual/introduction-individual-income-tax/when-is-taxable/

FAQs

What is the income tax threshold in Malaysia?

Generally around RM37,333 per year after EPF deductions for tax residents, subject to reliefs.

Is overtime always taxable?

Yes, unless specifically exempted under tax rules.

Do allowances always count as taxable income?

Not always. Some allowances may be exempt if conditions are met.

How do we handle tax for part-time employees?

Tax applies if annual income exceeds the threshold, regardless of employment type.

When should HR review taxable income components?

Whenever salary structures, allowances, or tax rules change.

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