Retirement income tax in Malaysia: pension, gratuity, EPF and what still gets taxed

Pensions: exempt, but check which retirement you had

Paragraph 30 of Schedule 6 exempts a pension derived from Malaysia and paid to a person on reaching the age of 55, or on reaching the compulsory age of retirement, or where the Director General is satisfied that the retirement was due to ill health. The pension must come from the Government or from a pension scheme approved by the Director General under section 150 — which is what the word "approved" in your scheme documents is doing.

So a government pension under the Pensions Act, and a pension paid out of an approved private scheme to someone who retired at or after 55, are both outside the tax net entirely. They are not merely untaxed at source; they do not form part of your total income at all, so they cannot push your other income into a higher band.

Take an early-retirement pension that is not an ill-health case — say you negotiated an exit at 48 and the scheme starts paying immediately. Paragraph 30 is not satisfied yet, and the payments are taxable pension income under section 4(e) until the qualifying age is reached.

The two-pension trap (Paragraph 30A)

Where an individual receives more than one pension, the exemption is restricted to the highest pension received. The others are fully taxable. This catches a specific and increasingly common profile: a retired civil servant with a government pension who then spent fifteen years in the private sector and retired again with a second approved-scheme pension.

If the government pension is RM3,600 a month and the private one is RM1,900, the RM3,600 stream is exempt and the RM1,900 stream — RM22,800 a year — is taxable income that has to be declared. There is no election and no apportionment; the larger pension simply wins. Worth checking before you assume a nil return is correct.

Retirement gratuity: full exemption or RM1,000 a year

A gratuity paid on retirement is employment income under section 13(1)(a), and Paragraph 25 of Schedule 6 exempts it in full in three situations only:

• The Director General is satisfied the retirement was due to ill health — no cap, no minimum service, but expect to produce medical reports and evidence of treatment.
• Retirement on or after age 55, or on reaching the compulsory retirement age specified under any written law, from an employment that has lasted 10 years with the same employer or with companies in the same group.
• Retirement at the compulsory age of 50 but before 55 under a contract of employment or a collective agreement, again after 10 years with the same employer or group.

If you miss Paragraph 25: the RM1,000 partial exemption

From year of assessment 2016, Paragraph 25D exempts RM1,000 for each completed year of service where a gratuity is received on retirement or on termination of a contract of employment and none of Paragraphs 25, 25A, 25B or 30A applies. The balance is taxable.

One detail inside Paragraph 25D is easy to miss and expensive. Unlike the full exemption, it does not treat service with other companies in the same group as service with the same employer — the partial exemption only covers the gratuity attributable to your service with the last company in the group. Twenty years across three subsidiaries can therefore shrink to a four-year exemption if the final posting was short.

Gratuities paid out of public funds — the retirement and contract-termination gratuities of government officers — are exempt under Paragraphs 25A and 25B. A death gratuity, or consolidated compensation for death or injuries, is exempt under Paragraph 14 whoever pays it.

The taxable balance lands in one year

A gratuity is taxed in the year it is received under subsection 25(1) of the Income Tax Act 1967. The old relief that spread a lump sum back over earlier years of assessment is gone, so the taxable portion is stacked on top of whatever else you earned in your final working year — typically eleven or twelve months of salary plus leave encashment.

That is why the RM126,000 line in the table above is so painful: added to a final-year salary it is taxed largely at 25% or above, where the same sum spread over the career would have sat in much lower bands. If a retirement date is negotiable and you are close to ten years of service or to age 55, moving it by a few months is often worth more than anything else on the table.

Note also that the Minimum Retirement Age Act 2012 raised the minimum retirement age to 60 from 1 July 2013, but that did not change the tax treatment. The exemption still keys off age 55, the compulsory age, or the ten-year service test — not off 60.

EPF, annuities and the rest of the retirement pot

• EPF lump sums and i-Emas monthly payments are not taxable. EPF is an approved scheme, so withdrawals do not enter your total income, and the fund's own investment income is exempt under Paragraph 20 of Schedule 6. Only withdrawals from an unapproved fund are caught, as employment income under section 13(1)(d).
• Bank interest from a licensed Malaysian bank is exempt for individuals, so FD income in retirement is tax-free regardless of the amount.
• Malaysian single-tier dividends remain tax-free in your hands, with one exception since YA 2025: individual dividend income above RM100,000 a year attracts the 2% dividend tax.
• Deferred annuities bought from a licensed life insurer or takaful operator sit under their own rules, and the premium shares the RM3,000 relief with PRS contributions — see the PRS guide.
• Payments that look like retirement money but are not: compensation for loss of employment is a separate exemption (RM10,000 per completed year, Paragraph 15), and unpaid salary, bonus and leave encashment in the final payslip are ordinary taxable income with no exemption at all.

Does a retiree still have to file?

If an exempt pension is your only income, there is generally nothing to file — exempt income is not aggregated, so your total income is nil and you fall below the filing threshold. LHDN will usually leave the file dormant rather than closing it, and a nil return costs nothing if you prefer the paper trail.

You do have to file if you have any other taxable source: rental from a property, a second taxable pension, consulting or director's fees, business income, or a taxable gratuity in the year you retired. Reliefs do not disappear at retirement — the RM9,000 individual relief, medical expenses for yourself and your parents, insurance and the lifestyle relief all still apply, and the RM400 rebate still lands if chargeable income is RM35,000 or less.

One practical point: if you draw a second, taxable pension, the payer may or may not deduct PCB. If it does not, nothing is withheld during the year and the whole liability falls due on assessment — worth setting aside for, or covering through CP500 instalments if LHDN issues them.

Important caveats

This guide describes the general position under Schedule 6 of the Income Tax Act 1967 and LHDN Public Ruling 9/2016 (Gratuity); it is information, not tax advice. Whether a payment is a retirement gratuity, compensation for loss of employment or deferred remuneration is a question of substance that LHDN can re-characterise, and ill-health retirement in particular is decided on the evidence rather than on the label in the settlement letter. Confirm your scheme's approved status, your exact completed years of service and the current exemption figures with LHDN or a tax agent before relying on them. Use the calculator below to see what a taxable gratuity or second pension adds to your final-year tax bill.