Pensions and retirement income: how are they taxed in Malaysia?

How are pensions treated for tax?

Pensions are taxable income under s.4(e) of the Income Tax Act 1967 (ITA) — that is, income from pensions, annuities or other periodical payments. This means your monthly pension is reported as taxable income in your tax return, unless it is exempt. (Source: consolidated text of the ITA 1967 — s.4(e).)

However, not all pensions are taxed. Exemption depends on your retirement age, the type of scheme and the number of pensions you receive.

When is a pension exempt from tax?

Pensions received from Malaysia are exempt from tax if one of the following conditions is met:

1. You retire at age 55 or at the compulsory retirement age under written law;
2. You retire due to ill-health and the pension is received from the Government or an approved pension scheme;
3. If you receive more than one pension, only the highest pension is exempt — the other pensions are reported as taxable income.

(Source: HASiL — Tax Exemption page; Employer and Employee e-Book (e-Buku Majikan dan Pekerja); Form BE Explanatory Notes (Nota Penerangan Borang BE).)

So these exemptions are not automatic for every pension — the age and scheme conditions must be met.

Public-sector optional (early) retirement

For public-sector employees who choose optional (early) retirement before the compulsory retirement age, pension payments are assessed and taxed until reaching age 55 or the compulsory retirement age. (Source: HASiL — Tax Exemption page.) Pensions from non-approved pension funds also remain taxable; non-government schemes require HASiL's approval. (Source: Employer and Employee e-Book (e-Buku Majikan dan Pekerja) — HASiL.)

Gratuity: full and partial exemption

Gratuity is a lump-sum payment on retirement — different from a monthly pension, and its tax treatment differs.

• Full exemption is given if the gratuity is received due to health, death or injury, or when you reach age 55 / the compulsory age after 10 years of service with the same employer.
• Partial exemption: RM1,000 for each complete year of service when retiring from employment or on termination of contract (Paragraph 25D, Schedule 6 ITA, effective from YA 2016). The balance of the gratuity is taxed in the year it is received.

(Source: Employer and Employee e-Book (e-Buku Majikan dan Pekerja) — HASiL; Tax Exemption page — HASiL.)

Illustrative example: If you served 15 years with the same employer, gratuity up to RM15,000 (15 × RM1,000) is exempt; the excess is subject to tax in the year received. (This calculation is only an arithmetic application of paragraph 25D; verify your situation with HASiL.)

Compensation for loss of employment

Compensation received when employment is terminated is treated as follows:

• Full exemption if the compensation is received due to ill-health or health impairment.
• Otherwise, an exemption of RM10,000 for each completed year of service (RM20,000 for YA 2020 and 2021) is given; the balance is taxed.
• Take note: compensation received by a director (other than a managing director) of a controlled company is taxed in full.

(Source: HASiL — Tax Exemption page; Employer and Employee e-Book (e-Buku Majikan dan Pekerja).)

KWSP withdrawals and retirement schemes

Full exemption for lump-sum withdrawals from approved schemes (e.g. age-55, age-60 or partial withdrawals) — this item still awaits official confirmation from HASiL — check again with HASiL before deciding. The relevant Schedule 6 provisions have not been extracted from the full act text at this review; do not assume all KWSP withdrawals are exempt without confirmation.

Retirement contribution reliefs (summary)

Contributions you make yourself can reduce your tax through reliefs:

• KWSP / approved scheme contributions: capped at RM4,000.
• Life insurance premiums / family takaful / additional voluntary KWSP contributions: capped at RM3,000.
• The combined total of both is capped at RM7,000.

(Source: HASiL — Tax Reliefs (Individual) page, item 17.) The amounts above are from the YA 2025 tab displayed by HASiL at review date; the YA 2026 relief schedule has not been published — this item still awaits official confirmation from HASiL — check again with HASiL before deciding. Full details of retirement reliefs are in a separate guide: simpanan-persaraan.md.

Do not confuse: the employee KWSP contribution relief (RM4,000) differs from employer contributions to KWSP. Employer contributions exceeding RM4,000 per year are reported as a taxable perquisite from YA 2024 — this figure has not been confirmed from official HASiL/MOF sources at this review — this item still awaits official confirmation from HASiL — check again with HASiL before deciding.

PRS (Private Retirement Scheme) and deferred annuities

• PRS contribution relief of up to RM3,000 is given from YA 2012 until YA 2025 (Budget 2025, MOF). Extension status for YA 2026 has not been confirmed from current official sources — this item still awaits official confirmation from HASiL — check again with HASiL before deciding.
• PRS contribution withdrawals that must comply with Securities Commission guideline criteria are subject to 8% withholding tax on each ringgit of contributions withdrawn; this withholding tax is treated as final tax (reference s.109G ITA). (Source: HASiL — Withholding Tax page; ITA 1967.)

PRS differs from KWSP; early PRS withdrawals are subject to 8% withholding tax.

Non-residents aged 55 and above

Non-resident individuals aged 55 years who receive pensions from Malaysian employment are not subject to tax. (Source: HASiL — Non-Resident Individuals page.)

Frequently Asked Questions (FAQ)

Q. Are all pensions exempt from tax? A. No. Exemption is only given if conditions are met: retiring at age 55 / compulsory age, retiring due to ill-health from an approved scheme, or (if more than one pension) only the highest pension. Pensions from non-approved funds remain taxable.

Q. I retired early (optional) from the public sector. How is my pension treated? A. Your pension is assessed and taxed until you reach age 55 or the compulsory retirement age. (Source: HASiL — Tax Exemption page.)

Q. Is gratuity the same as a pension? A. No. Gratuity is a lump-sum payment treated separately: full exemption in certain circumstances, or partial exemption of RM1,000 for each complete year of service (Paragraph 25D, Schedule 6).

Q. I received compensation when my employment was terminated. Is it taxed? A. If due to ill-health/health impairment, it is fully exempt. Otherwise, RM10,000 for each completed year of service is exempt and the balance is taxed. Compensation to a director of a controlled company is taxed in full.

Q. Can I claim reliefs for KWSP and PRS contributions? A. Yes — KWSP/approved scheme contributions up to RM4,000 and life insurance/takaful premiums up to RM3,000 (combined cap RM7,000), plus PRS contributions up to RM3,000 for YA 2025. YA 2026 status for PRS relief — this item still awaits official confirmation from HASiL — check again with HASiL before deciding.

Q. I am a non-resident but receive a pension from Malaysia. A. If you are aged 55 and above and receive a pension from Malaysian employment, you are not taxed on that pension.