What Are Statutory Deductions? Definition, Types, Example

Every month, employers deduct a portion of their employees’ salaries for statutory contributions like EPF, SOCSO, and income tax.

These deductions may reduce take-home pay, but they provide essential benefits such as retirement savings, medical protection, and financial security in case of job loss. 

Understanding statutory deductions is crucial for businesses to stay compliant with labor laws and avoid penalties.

In this article, we will share the elements included in statutory deductions, what employers should do, and other important information. Read below for details.

Definition of Statutory Deductions

In Malaysia, statutory deductions are compulsory salary deductions that employers must process as part of payroll.

These contributions go toward essential programs like social security, retirement savings, employment protection, and income tax. 

Employers are responsible for withholding these amounts from employees' salaries and submitting them to the appropriate government agencies within the required timeframe.

While these deductions reduce an employee’s take-home pay, they provide long-term benefits such as retirement savings, medical coverage, and financial assistance during unemployment. 

For businesses, handling these deductions accurately is crucial to staying compliant with labor laws and avoiding penalties.

Types of Statutory Deductions in Malaysia

Usually, statutory deductions in Malaysia include EPF, SOCSO, EIS, MTB/PCB, and Zakat. To know more about each type, read the details below.

Employees Provident Fund (EPF)

EPF is a retirement savings scheme where both employees and employers contribute. This fund helps employees save for their post-retirement life.

• Employees contribute 11% of their salary to EPF.

• Employers contribute 12% or 13%, depending on the employee’s salary level.

For employees aged 60 and above, EPF contributions are lower, with employees no longer required to contribute, while employers contribute 4%.

Social Security Organization (SOCSO)

SOCSO protects employees in case of work-related injuries, disabilities, or illnesses. It is divided into two categories:

1. Employment Injury and Invalidity Scheme (for employees below 60 years old)

   • Employers contribute 1.75% of the employee’s salary.

   • Employees contribute 0.5% of their salary.

2. Employment Injury Scheme (for employees aged 60 and above)

   • Employers contribute 1.25% of the employee’s salary.

   • Employees do not contribute.

SOCSO covers medical treatment, disability benefits, and compensation for work-related accidents or death.

Employment Insurance System (EIS)

EIS supports employees who lose their jobs by providing temporary financial assistance while they look for new employment.

Both employers and employees contribute 0.2% each, totaling 0.4% of the employee’s salary. EIS only applies to employees below 57 years old who have prior contributions.

This scheme provides six months of financial support for retrenched workers.

Monthly Tax Deduction (MTD/PCB)

MTD, also known as Potongan Cukai Bulanan (PCB), is the monthly income tax deduction.

Instead of paying a lump sum at the end of the year, employees’ tax payments are deducted from their salary every month.

The amount deducted depends on the employee’s salary, marital status, and tax reliefs.

Employers must submit these deductions to the Inland Revenue Board of Malaysia (LHDN) before the 15th of the following month.

Zakat (Islamic Tax)

Zakat is an optional deduction for Muslim employees that can replace income tax payments if the contribution meets the required amount.

Employers can deduct Zakat from employees' salaries and submit it to the relevant religious authorities.

How to Calculate Statutory Deductions

Employers must calculate deductions correctly to ensure payroll accuracy. The amount deducted depends on salary level, employee age, and employment status.

1. EPF Calculation

EPF contributions in Malaysia vary based on salary, citizenship status, and age.

Malaysian citizens and permanent residents earning RM5,000 or less contribute 11% of their salary, with employers adding 13%.

However, if their salary exceeds RM5,000, the employee’s contribution remains 11%, while the employer’s share drops to 12%.

Non-Malaysians who became EPF members before 1 August 1998 contribute 5.5%, while employers provide 6% for those earning above RM5,000.

Once employees reach the age of 60, they are no longer required to contribute, but employers must still contribute 4% to their EPF savings.

2. SOCSO & EIS Calculation

SOCSO contributions fall under two categories:

1. First category: Applies to employees below 60 years old and covers both Employment Injury Scheme and Invalidity Scheme.

2. Second category: Applies to employees aged 60 and above, covering only the Employment Injury Scheme.

The EIS contribution rate is set at 0.4% of an employee’s monthly salary, split equally between the employer and the employee, with each contributing 0.2%.

Below is the contribution breakdown:

 

3. PCB (Income Tax) Calculation

PCB is calculated based on the employee’s salary, tax reliefs, and other taxable allowances.

To know the calculation, utilize the LHDN PCB Calculator or any other PCB online calculator or software to determine the correct deduction.

The PCB deduction follows a progressive tax system, meaning higher salaries result in higher tax rates. The formula for calculating PCB is:

Breakdown of the formula:

1. Chargeable Income: The taxable portion of an employee’s salary after deducting non-taxable income components.

2. Tax Reliefs & Deductions: Include personal relief, EPF contributions, SOCSO, insurance premiums, child education relief, and other allowable deductions.

3. Applicable Tax Rate: Higher income is taxed at a higher rate.

Example Calculation:

Let’s assume an employee has:

• Gross Monthly Salary: RM7,000

• Chargeable Income (after EPF & SOCSO deductions): RM6,000

• Tax Reliefs & Deductions: RM1,500

• Applicable Tax Rate: 8%

Thus, RM360 will be deducted as PCB from the employee’s salary.

Example Salary Breakdown After Deductions

Take a look at an example of statutory deductions for an employee earning RM7,000 per month below.

 

After these deductions, the employee receives RM5,881 as take-home pay.

Employer Responsibilities for Statutory Deductions

Employers must manage statutory deductions correctly to comply with Malaysian labor laws.

Deduct contributions (EPD, SOCSO, EIS, PCB) before the deadline comes.

Don’t forget to file and submit statutory reports, such as Form A, CP39 (PCB), Borang 8A, and EIS contributions.

If an employer fails to deduct or pay these contributions on time, they may face penalties such as additional charges, penalty fees, or fines of up to RM20,000, or imprisonment under the Income Tax Act 1967.

To avoid problems, employers must calculate and submit deductions correctly and on time. Using payroll software can help businesses stay organized and error-free.

Employee Rights & Benefits from Statutory Contributions

While statutory deductions reduce an employee’s take-home salary, they provide essential benefits:

• EPF: Helps employees save money for retirement.

• SOCSO: Covers medical expenses, disability, and death benefits.

• EIS: Provides financial aid to retrenched employees.

• Income Tax Management: PCB deductions help employees manage tax obligations throughout the year.

These contributions ensure employees receive financial security and protection throughout their careers.

Frequently Asked Questions (FAQ)

What is statutory deduction in Malaysia?

Statutory deductions are mandatory salary contributions that employers deduct and submit to government agencies. These include EPF, SOCSO, EIS, PCB (income tax), and Zakat.

What is the statutory contribution for foreign workers in Malaysia?

Foreign employees are not required to contribute to EPF but may choose to do so. However, SOCSO, EIS, and PCB deductions are mandatory.

What is deducted from salary in Malaysia?

Deductions include EPF (11%), SOCSO (0.5%), EIS (0.2%), and PCB (varies by income bracket). Additional voluntary deductions may include Zakat and PTPTN loan repayments.

What is statutory income from sources of employment in Malaysia?

Statutory income refers to taxable earnings, including basic salary, overtime, bonuses, commissions, and taxable allowances.

Statutory deductions may seem like just another administrative task, but they are crucial for protecting employees and keeping businesses compliant. 

Businesses that follow the correct payroll procedures avoid fines and contribute to a stable and well-supported workforce.

To make the process smoother, stay updated on the latest contribution rates and use reliable payroll tools.

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