Personal Income Tax | Interest Income Tax Treatment – How to File It Correctly to LHDN
Question:
Hi, my name is Richard. I’m an Assistant Manager working for an MNC, earning a fixed salary of RM 7,000 per month. In addition to my employment, I earned the following interest income in the year 2020 as part of my passive income:
| No. | Source of Interest Income | Amount (2020) |
|---|---|---|
| 1 | Savings and Fixed Deposit Account from a Malaysian Bank | RM 1,000 |
| 2 | P2P Lending Activities in Malaysia | RM 3,000 |
| 3 | Lending to Steve Ma Sdn Bhd. | RM 2,000 |
Also, I had obtained a loan from my employer to purchase a small apartment as the interest rate which I am entitled to is 1.5% a year, below the present market rate of 4.5% per year if I had opted to apply for a similar loan from a local bank.
The loan granted to me was sourced from a loan obtained by my employer from a local bank at a preferential interest rate of 3.0% per annum.
As a result, instead of RM 18,000 on the interest rate, I had only paid RM 6,000 in interest costs and thus, saving me RM 12,000. Weeks ago, an executive of the finance department of my employer had sent me an email stating that my employer had paid a total of RM 12,000 in interest cost for its loan, which was loaned to me, to the bank.
| No. | Details of My Loan from My Employer | Amount (2020) |
|---|---|---|
| 1 | Interest Costs that I had Paid | RM 6,000 |
| 2 | Interest Costs that I would have Paid if my loan is from a bank. | RM 18,000 |
| 3 | Interest Costs that My Employer had Paid | RM 12,000 |
In 2020, I would claim the following tax reliefs:
| No. | Types of Tax Reliefs | Amount (2020) |
|---|---|---|
| 1 | Individual Relief | RM 9,000 |
| 2 | Parent Relief (I would claim for my mother) | RM 1,500 |
| 3 | Lifestyle Expenses | RM 1,500 |
| 4 | 1 Unmarried Child and Under the Age of 18 | RM 2,000 |
| 5 | EPF Contribution | RM 4,000 |
| 6 | Life Insurance Contribution | RM 1,000 |
| 7 | Medical Insurance | RM 1,000 |
| Total Personal Reliefs | RM 20,000 | |
As this is my first time owing money to my employer, I don’t have enough understanding of how to file my individual income tax correctly. Therefore, my questions are, ‘how is interest income taxed and how much is my payable tax for 2020?
Answer:
Before I start calculating the taxable interest income, let me explain a bit; what interest income is? The simple explanation is that interest income is essentially the same as rental income.
A car rental service charges a rental fee for renting a car to you. There are different types of interest income, but it is beyond the scope of this article, but let’s take an example;
If you deposit 100.000 in your savings account for 12 months the bank will in return pay a rental fee (interest rate) usually between 0.5%-2% to you for borrowing your money. You’ll then have earned between RM 500 – RM 2000 in 12 months. So why would your bank pay you a rental fee? Well with your money deposited in your savings account the bank can then expand their own money supply, which they then can lend out to other customers and earn interest income from them. And vice versa if you make a loan with your bank they will charge you a rental fee (interest fee) on that loan. Interest income is considered as the sum paid to an entity for loaning money to you.
Read also: Is Interest Income Taxable on a Director Loan From a Company? – What You Need to Know.
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From the definition above, in addition to employment income, Richard has to determine which of the sources of interest income he earned is taxable. As such, below is the table shows which Richard’s interest income taxable.
| No. | Source of Interest Income | Amount 2020 | Taxability |
|---|---|---|---|
| 1 | Savings and Fixed Deposit from a Malaysian Bank | RM 1,000 | Exempt |
| 2 | P2P Lending Activities in Malaysia | RM 3,000 | Yes |
| 3 | Lending to Steve Ma Sdn Bhd | RM 2,000 | Yes |
Second, Richard had obtained a loan at preferential interest rate. Hence, he will need to file in the interest savings as part of his employment income. According to PR2/2013, the amount of individual income tax to be declared would be the difference between:
a. The interest charged on the employer by the loan provider.
b. The interest costs paid by the employee
The calculation of Richard’s individual income tax is not based on RM 18,000, the amount of interest costs that he would have paid if Richard obtained a similar loan from the bank.
Does your company provide you car benefit? Read also: Company Car Benefit | Should I declare it on my income tax filing in Malaysia?
As such, in Richard’s case, the amount of payable income tax that he needs to declare would be:
| No. | Computation of Taxable Amount | Amount (2020) |
|---|---|---|
| 1 | Interest Paid by Employer | RM 12,000 |
| 2 | Interest Paid by Richard | RM 6,000 |
| 3 | Taxable Amount on Richard’s Interest Savings | RM 6,000 |
Finally, the calculation of Richard’s payable tax rate for 2020:
| Section | Descriptions | Amount (RM) |
|---|---|---|
| 4(b) | Employment Income: Fixed Salary (RM 7,000 a month x 12 months)Taxable Amount on Richard’s Interest Savings | 84,000 |
| 4(c) | Interest Income Savings and Fixed Deposit from a Malaysian Bank P2P Lending Activities in Malaysia Lending to Steve Ma Sdn Bhd | Exempt |
| Less | Deduction from Personal Relief | (20,000) |
| Total Taxable Income | 75,000 | |
| Tax Payable: 1st RM 70,000 @ RM 2,800 The remaining RM 5,000 @ RM 21% = RM 1,050 | 3,850 | |
Therefore, Richard will pay as much as RM 3,850 in personal income tax for 2020.
Is your living accommodation being paid by your employer? If yes, read this: Benefit in Kind | Living Accommodation, how to declare in Malaysia.
Conclusion
Interest income is a form of passive income and not all interest income is tax-exempt. Also, an employee that receives interest savings for a loan from his employer is required to declare the savings in his personal income tax filing, if his employer obtained the loan related from a bank and pays interest on it.
As such, If you need help regarding the calculation of what interest income is taxable or how to declare your individual income tax to LHDN for more details, you may check out Joolah.my, a platform that quickly refers you to the very best tax, audit and accounting experts in Malaysia.
