How Rent is Calculated in Income Tax in Malaysia?

As a Malaysian taxpayer, understanding how rent is calculated in your income tax return is crucial.

Rental income can have a significant impact on your overall tax liability, so it's important to know the rules and guidelines surrounding this type of income.

In this blog post, we'll dive deep into the details of how rent is calculated and reported for income tax purposes in Malaysia.

What is Rental Income?

Rental income refers to the money you earn by renting out a property you own, such as a house, apartment, or commercial space.

This income is considered part of your overall taxable income and must be reported to the Inland Revenue Board of Malaysia (LHDN) when filing your annual tax return.

How is Rental Income Calculated?

The calculation of rental income for tax purposes in Malaysia involves several key steps:

1. Determine Gross Rental Income

Your gross rental income is the total amount of rent you receive from your tenant(s) over the course of the tax year.

This includes any advance rental payments, security deposits, or other fees collected as part of the rental agreement.

2. Deduct Allowable Expenses

Once you have your gross rental income, you can deduct certain expenses related to the rental property.

Allowable expenses include:

Quit rent and assessment fees
Interest on loans used to purchase or renovate the property
Repair and maintenance costs
Insurance premiums
Management fees paid to a property manager
Utilities (e.g., water, electricity) if paid by the landlord
Legal and professional fees related to the rental property

It's important to keep detailed records of all your rental-related expenses, as you'll need to provide documentation to LHDN if requested.

3. Calculate Net Rental Income

Your net rental income is the amount left after subtracting the allowable expenses from your gross rental income.

This is the figure you will report on your income tax return.

The formula for calculating net rental income is:

Net Rental Income = Gross Rental Income - Allowable Expenses

4. Apply the Appropriate Tax Rate

The net rental income you calculated in the previous step will be added to your other sources of taxable income, such as employment income or investment income.

Your total taxable income will then be subject to the standard income tax rates set by LHDN.

For the 2023 tax year, the personal income tax rates in Malaysia range from 0% to 30%, depending on your total taxable income level.

Example

To calculate the income tax liability for a Malaysian who earns between RM80,000 and RM85,000 per year with a rental income of RM1,800 per month, we need to follow several steps.

The calculation will involve determining the total annual income, calculating the net rental income, and applying the appropriate income tax rates.

Step 1: Calculate Total Annual Income

First, let's determine the total annual income, which includes the salary and the rental income.

Annual Salary: Let's assume the individual earns RM80,000 for this calculation.
Monthly Rental Income: RM1,800
Annual Rental Income: RM1,800 x 12 months = RM21,600

Now, we can calculate the total annual income:

Total Annual Income = Annual Salary + Annual Rental Income
Total Annual Income = RM80,000 + RM21,600 = RM101,600

Step 2: Calculate Net Rental Income

Next, we need to consider allowable expenses related to the rental income.

For this example, let's assume some common allowable expenses for simplicity:

Quit rent and assessment fees: RM500
Repairs and maintenance: RM1,000
Property insurance: RM300
Management fees: RM400

Total Allowable Expenses = RM500 + RM1,000 + RM300 + RM400 = RM2,200

Now we calculate the net rental income:

Net Rental Income = Annual Rental Income - Allowable Expenses
Net Rental Income = RM21,600 - RM2,200 = RM19,400

Step 3: Calculate Total Taxable Income

Now we can determine the total taxable income by adding the net rental income to the annual salary:

Total Taxable Income = Annual Salary + Net Rental Income
Total Taxable Income = RM80,000 + RM19,400 = RM99,400

Step 4: Apply the Income Tax Rates

For the year 2023, the Malaysian personal income tax rates are as follows:

0% for the first RM5,000
1% for the next RM15,000 (RM5,001 - RM20,000)
3% for the next RM15,000 (RM20,001 - RM35,000)
6% for the next RM15,000 (RM35,001 - RM50,000)
11% for the next RM15,000 (RM50,001 - RM70,000)
19% for the next RM25,000 (RM70,001 - RM100,000)
25% for the next RM25,000 (RM100,001 - RM400,000)
26% for the next RM25,000 (RM400,001 - RM600,000)
28% for the next RM25,000 (RM600,001 - RM2,000,000)
30% for any amount over RM2,000,000

Now let's calculate the tax for each bracket that applies to the total taxable income of RM99,400:

First RM5,000: 0% = RM0
Next RM15,000 (RM5,001 - RM20,000): 1% of RM15,000 = RM150
Next RM15,000 (RM20,001 - RM35,000): 3% of RM15,000 = RM450
Next RM15,000 (RM35,001 - RM50,000): 6% of RM15,000 = RM900
Next RM20,000 (RM50,001 - RM70,000): 11% of RM20,000 = RM2,200
Next RM29,400 (RM70,001 - RM99,400): 19% of RM29,400 = RM5,586

Step 5: Total Tax Liability Calculation

Now we can sum these amounts to find the total tax liability:

Total Tax = RM0 + RM150 + RM450 + RM900 + RM2,200 + RM5,586 = RM9,286

For an individual in Malaysia earning a salary of approximately RM80,000 per year and receiving a rental income of RM1,800 per month (which totals to an annual rental income of RM21,600), their total taxable income would be approximately RM99,400 after considering allowable expenses. Consequently, their estimated income tax liability would amount to around RM8,874.

It's essential to keep in mind that individual circumstances may vary and tax regulations can change. Consulting with a tax professional for personalized advice and precise calculations is always recommended.

Exemptions and Deductions

There are a few additional considerations when it comes to rental income and income tax in Malaysia:

1. Exemptions

Certain types of rental income may be exempt from taxation, such as:

Rental income from properties used solely for agricultural purposes
Rental income from properties used for charitable or religious purposes

2. Deductions

In addition to the allowable expenses mentioned earlier, you may also be able to claim the following deductions:

Mortgage interest deduction: You can deduct the interest paid on loans used to purchase or renovate your rental property.
Capital allowance deduction: You can claim capital allowances for the depreciation of your rental property and its fixtures and fittings.
Reinvestment allowance: If you reinvest your rental income into a new or existing rental property, you may be eligible for a reinvestment allowance deduction.

It's important to note that the rules and eligibility criteria for these exemptions and deductions can be complex, so it's best to consult with a tax professional or refer to the latest LHDN guidelines to ensure you're claiming all the deductions you're entitled to.

Reporting Rental Income on Your Tax Return

When filing your annual income tax return in Malaysia, you'll need to report your rental income and related expenses on the appropriate forms.

The main form used for this purpose is the Form B, which is the Return Form for Income from Business, Profession and Other Sources.

On the Form B, you'll need to provide the following information:

Address of the rental property
Gross rental income received
Allowable expenses claimed
Net rental income

It's crucial to maintain accurate records of your rental income and expenses throughout the year, as you may be required to provide supporting documentation to LHDN if requested.

Penalties and Consequences of Underreporting Rental Income

Failing to report rental income or underreporting the amount can lead to serious consequences.

LHDN takes tax evasion and non-compliance very seriously, and they have the authority to impose penalties and fines on taxpayers who do not accurately report their income.

Some of the potential penalties and consequences for underreporting rental income include:

Additional tax assessments: LHDN may issue an additional tax assessment, requiring you to pay the outstanding tax amount plus interest.
Penalties and fines: Depending on the severity of the offense, you may be subject to penalties ranging from 45% to 300% of the tax undercharged.
Criminal charges: In extreme cases, LHDN may pursue criminal charges for tax evasion, which can result in fines and even imprisonment.

To avoid these issues, it's crucial to carefully track and report your rental income and expenses accurately when filing your annual tax return.

Seeking Professional Assistance

Navigating the complexities of rental income and income tax in Malaysia can be challenging, especially for first-time landlords or those with multiple rental properties.

If you're unsure about how to properly calculate and report your rental income, it's highly recommended to seek the assistance of a qualified tax professional, such as a chartered accountant or a registered tax agent.

These experts can help you:

Understand the latest tax laws and regulations related to rental income
Identify all allowable expenses and ensure you're claiming the maximum deductions
Properly complete and file your tax return, including the Form B
Advise on tax planning strategies to minimize your overall tax liability
Represent you in the event of a tax audit or dispute with LHDN

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Conclusion

Rental income is an important consideration when it comes to your annual income tax in Malaysia.

Understanding how to calculate, report, and maximize the tax benefits of your rental properties is crucial for ensuring compliance and minimizing your overall tax burden.

By familiarizing yourself with the rules and guidelines surrounding rental income, keeping meticulous records, and seeking professional assistance when needed, you can navigate the Malaysian income tax system with confidence and ensure that you're meeting all your obligations as a landlord.

Remember, accurate reporting of rental income is not only a legal requirement but can also have a significant impact on your financial well-being.

By staying informed and proactive, you can take advantage of the tax benefits available to you and maximize the returns from your rental investments.

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About the Author

Danny H

Seasoned sales executive and real estate agent specializing in both condominiums and landed properties.