Introduction 

Under Malaysia’s Income Tax Act 1967 (ITA), the Monthly Tax Deduction (MTD), also known as Potongan Cukai Bulanan (PCB), is an income tax deduction mechanism from an employee’s monthly remuneration.
This system ensures that taxes are paid progressively throughout the year — reducing the burden during annual tax filing.

Legal Basis

MTD is governed by the Income Tax (Deduction from Remuneration) Rules 1994, specifically under Rule 3 of the MTD Rules.
It requires employers to deduct the appropriate tax amount from the employee’s salary each month and remit it to the Inland Revenue Board of Malaysia (LHDN).

Rule 3 — Employer’s Responsibility

Employers are responsible for making monthly deductions from employee remuneration.
To qualify for MTD to be treated as final tax, employees must furnish Form TP3 or TP1 to the employer so that all relevant tax adjustments are reflected.

Rule 4 & 7 — CP38 Deductions

If instructed by LHDN, employers must make additional deductions (CP38) as directed by the Board.
Failure to comply constitutes an offence under the ITA.

Rule 11 — Due and Payable

Once deductions are made, the employer is liable to remit the amount to LHDN.
These deductions are considered a debt due to the Government of Malaysia until payment is received.

Rule 17 — Offences and Penalties

Non-compliance can result in prosecution.
Upon conviction, employers may face:

• A fine between RM200 and RM20,000, or
• Imprisonment for up to 6 months, or
• Both.

Under Section 82 and 82A of the ITA 1967, employers must retain all payroll and deduction records for at least seven (7) years, whether in physical or electronic form.

MTD as Final Tax

Since Year of Assessment (YA) 2014, employees with straightforward employment income can opt to treat their MTD as final tax, eliminating the need to file Form BE or M — provided specific conditions are met.

Eligibility Criteria for MTD as Final Tax

An employee qualifies if all of the following are fulfilled:

1️⃣ Single Source of Income — Only employment income in that assessment year.
2️⃣ Benefits-in-Kind (BIK) and Value of Living Accommodation (VOLA) are included in the MTD computation.
3️⃣ Continuous Service — Employed by the same employer for the full 12 months.
4️⃣ Correct Deduction — MTD is calculated in accordance with the Income Tax (Deduction from Remuneration) Rules.
5️⃣ Tax Not Borne by Employer — Employee bears their own tax liability.
6️⃣ Separate Assessment — Husband and wife elect for separate tax assessment.

Example: When MTD Is Final Tax

Key Takeaways

• MTD (PCB) is a mandatory monthly deduction under Rule 3 of the 1994 Rules.
• Employers must remit deductions promptly and maintain records for 7 years.
• Employees can elect for MTD as final tax if they meet the conditions.
• Using Form TP1 or TP3 ensures correct MTD computation.
• Non-compliance can lead to severe penalties under Rule 17.

ANC Group – Your Personal Tax Advisor

Tax consulting is the core service of ANC Group. Our tax professionals provide clients with comprehensive tax support and guidance. We offer tax consulting and compliance services for expatriates, entrepreneurs, and listed and non-listed companies.

Our tax consulting services include business tax, transaction tax, personal tax, and corporate income tax. We don’t just guide you in interpreting and applying complicated taxation rules, but to explore new opportunities and business trends.

ANC Group keep you abreast with Malaysia tax updates and any changes in the local regulations.

We work closely with industry specialists, authorities, and associated professionals within ANC Group to provide the best-in-class integrated tax planning solutions. ANC specialists coordinate the accounting and taxation services to bring your business to success.

If you need professional tax advisory services regarding the Malaysia Income Tax Act 1967, our team is ready to assist you. Contact us here to discuss how we can support your business.