Thursday, December 29, 2011

Income and Earnings Exempted from Tax

Income and Earnings Exempted from Tax
Income and Earnings Exempted from Tax Print E-mail
by Ravindran Duraisamy

Most taxpayers dread to reveal their true income or all sources of income, fearing they will have to pay hefty taxes. However, they should not forget that there are relevant provisions under the Income Tax Act 1967 that allow tax exemptions on many types of income and earnings.

Let’s see what they are. A summary below shows those most relevant to the man on the street.

Compensation for Loss of Employment

Compensation for loss of employment is exempted from tax if ill health is the underlying reason. The same goes for compensation paid for a covenant entered into by an employee restricting his/her right to take up a similar employment in the future. Otherwise, the exemption is calculated at RM10,000 for every completed year of service with the same employer or with companies in the same group. The tax exemption of RM10,000 is applicable for payments made to an individual who ceased employment on or after 1 July 2008.

Interest or Discount on Government Securities or Bonds

Interest or discount paid or credited to any individual in respect to Bon Simpanan Malaysia issued by Bank Negara, or in respect to any saving certificates or security or bond issued or guaranteed by the Government, is also exempted from income tax. Interest accrued in respect to bonds issued under the Bon Simpanan Malaysia Siri Kedua (BSM 2) by Bank Simpanan Nasional is also exempt.

Interest or Discount on Debentures Other Than Convertible Loan Stock

Effective from Year of Assessment (Y/A) 2003, interest income earned by individuals from debentures other than convertible loan stock approved by the Securities Commission is exempted from tax. Effective from Y/A 2006, the exemption is extended to discounts receive, and effective from Y/A 2010 this has been extended to include interest or discounts from Islamic Securities.


A sum received by an individual in the nature of a scholarship or other similar grant or allowance, whether or not it is in connection with an employment of that individual, is exempted from income tax.

Retirement Gratuities

Retirement gratuities paid due to ill health or after reaching the retiring age of 55 or any other compulsory retirement age from an employment that lasted 10 years with the same employer or with companies in the same group is also exempted from income tax.

Effective from Y/A 2007, full income tax exemption is given for retirement benefits if retirement takes place on reaching compulsory age of 50 and not 55, and the person has served not less than 10 years with the same employer. The exemption is on condition that the compulsory retirement age is provided for in the employment contract or collective agreement between the employer and the employee.

Retirement gratuities or payment in lieu of leave paid to government servants upon retirement (golden handshake) or on termination of a contract of employment is fully exempt from income tax.


Pension derived by an individual who has reached the age of 55 or compulsory age of retirement or due to ill health is not subject to income tax. However, it must be noted that if a person is paid more than one pension, only the highest pension paid will be exempted. The rest will be subjected to income tax.

Pensions, granted or paid under any written law or under an approved scheme for the benefit of widows, widowers and orphans of a deceased is also exempted from income tax.

Gratuities or Pensions Paid to Senators and Elected Reps

Gratuities or pensions paid to the Senate President or Deputy President, Speaker or Deputy Speaker of the Dewan Rakyat, Speaker of the State Legislative Assembly, Member of the Senate, Members of Parliament or Members of the State Assembly, provided that the person has attained the age of 55 or has ceased to hold office due to ill health, is exempt from tax as well. This exemption applies to the highest drawn pension only in the case that the person draws more than one pension.

Other Incomes

Other relevant incomes exempted fully or partially from income tax are those from the employment on board a Malaysian ship; income from translation works and composition of music; prize money received by professional sportsmen and sportswomen; income derived from employment in Labuan; income from offshore companies or trust funds; grants or subsidies received from Federal and State Governments; income earned by drivers and riders from car and motorcycle racing events of international standards; interest from Merdeka Bonds; and those given to employees such as child care allowance up to RM 2,400 a year,; meal allowance, transport allowance from home up to RM2,400 per annum; travel allowance for official work up to RM6,000 per annum; parking fees, gifts and payment of utility bills by employer; and subsidies on car loans, housing loans and education loans.

In all, there are more than 70 types of income exempt from tax. Taxpayers can get further information from the Inland Revenue Department or from practicing accountants and tax agents. A glance at relevant books on income tax will introduce interesting areas of tax-exempt income.

The writer is a qualified tax agent and chartered accountant, and a member of the Malaysian Institute of Accountants (MIA), Chartered Tax Institute of Malaysia (CTIM) and the Association of Chartered Certified Accountants UK (ACCA).

- Bernama

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