Tax relief and tax rebate
People mix these two up all the time. It is worth getting right. A relief saves you part of the amount. A rebate saves you the whole amount.
Relief: it lowers the income you are taxed on
A relief comes off your gross income before anyone works out your tax. What is left is your chargeable income.
Say you earn RM72,000. You claim RM9,000 of individual relief and RM4,000 of EPF relief. RM72,000 minus RM13,000 leaves RM59,000. Your tax is then worked out on RM59,000, band by band.
How much a relief saves you depends on which band that part of your income was in. RM1,000 of relief saves you RM10 if it comes off a part taxed at 1%. The same RM1,000 saves you RM250 if it comes off a part taxed at 25%.
Rebate: it lowers the bill itself
A rebate comes off the tax amount after the tax has been worked out. One ringgit of rebate means one ringgit less tax to pay.
There are two rebates for individuals:
- The RM400 rebate. You get this if your chargeable income is RM35,000 or less. If you file jointly, the rebate is RM800.
- The zakat and fitrah rebate. We take off what you actually paid, one ringgit at a time. It cannot take off more than the tax that is left after the RM400 rebate.
How the two fit together
- Start with your gross income.
- Take off your reliefs. What is left is your chargeable income.
- Work through the tax bands. That gives you your tax before any rebate.
- Take off the RM400 rebate if you qualify for it.
- Take off your zakat rebate. It cannot take off more than the tax that is left. What remains is the tax you have to pay.
Watch it happen on the calculator
On the calculator, press Play walkthrough under your tax breakdown. The bar first puts your pay together from your salary, your bonus and any other income you typed in. It then takes off one relief at a time and shows you what that relief saved you. After that it fills the bands one part at a time, takes the rebate and zakat off the bill, and ends with the pay you keep.
If you would rather see the whole picture at once, switch from Walkthrough to Money flow above the chart. Your pay flows through the reliefs, the bands and the rebates in one picture, and the width of each ribbon is exactly the amount of money it stands for. Relief money flows around the bands because it is never taxed. Tax that a rebate or zakat takes off flows back into the pay you keep, because it is tax you end up not paying. Tap any ribbon to see where that money goes, then choose Watch this step to see that part of the walkthrough.
One thing to know about the order. We could take the reliefs off in any order and you would still owe the same at the end. What changes is the saving we show next to each relief. The first relief comes off the top part of your pay, which is the part taxed at your highest rate. Later reliefs may come off parts taxed at a lower rate. Zakat comes after the RM400 rebate. It can bring your bill down to RM0, but it cannot take it below RM0. If your bill is already at RM0, the walkthrough will tell you the extra zakat did nothing.
Why this matters when you choose what to claim
Say you earn RM50,000 and you pay RM2,000 of zakat. Your tax falls by the full RM2,000, or by whatever tax is left if that is less. Now say you claim RM2,000 of lifestyle relief instead. RM2,000 is multiplied by the rate of the band it falls in. At 6%, you save RM120. That is why a rebate of RM2,000 is worth more than a relief of RM2,000.