(TAX UPDATE) Budget 2026 Malaysia : Key Tax Highlights for Businesses and Individuals

(TAX UPDATE) Budget 2026 Malaysia : Key Tax Highlights for Businesses and Individuals

By KTP Tax Team | 15 October 2025
Your trusted audit and tax advisors in Johor Bahru

www.ktp.com.my

Introduction

Budget 2026 marks a major transition for Malaysia from post-pandemic recovery to a new phase of sustainable and digital-led growth.

The government’s direction is clear : support innovation, strengthen families, encourage green practices, and modernise the tax system.

In this KTP Weekly Edition, we summarise the key tax changes and incentives that matter most to SME owners, investors, and individual taxpayers.

1. Foreign-Sourced Income Exemption Extended to 2030

Malaysia has extended the foreign-sourced income exemption period to 31 December 2030, continuing to attract cross-border investments and promote regional competitiveness.

Scope of Exemption

  • Resident companies, LLPs, trusts, and cooperatives – exempt on gains from disposal of foreign capital assets.

  • Resident companies, LLPs, individuals (through partnerships), cooperatives, and trusts – exempt on foreign dividends.

  • Unit trusts – remain fully exempt.

KTP Insight

The extended timeline gives businesses a longer runway to plan their profit repatriation strategy and group dividend policies.
Companies with overseas subsidiaries should review how to optimise tax efficiency before the exemption window closes.

2. Personal Tax Reliefs : Health, Family and Sustainability

Budget 2026 expands individual reliefs to promote preventive healthcare, family welfare, and environmental awareness.

Health and Medical

  • Medical expenses for serious illnesses, fertility treatment, vaccination, and dental treatment : up to RM10,000.

  • Relief for disabled or special-needs children : raised from RM6,000 to RM10,000.

  • Vaccination relief: now includes all vaccines registered under the National Pharmaceutical Regulatory Agency (NPRA).

Insurance and Takaful

  • Life insurance relief (RM3,000) now includes children.

  • Education and medical policy relief (RM4,000) now covers:

    • Children under 18 (unmarried)

    • Children 18 or older (unmarried and studying)

    • No age limit for disabled children

Family and Lifestyle

  • Childcare relief extended to children up to 12 years old, applicable only for registered childcare centres.

  • Lifestyle relief expanded to cover EV chargers, CCTV installations, and food waste grinders.

KTP Insight

These reliefs will help taxpayers manage the rising cost of living while promoting healthier and greener lifestyles. Employers should update employee declaration templates to reflect these changes.

3. Tax on LLP Partner Distributions

Starting YA 2026, partners of Limited Liability Partnerships (LLPs) will be taxed 2% on profit distributions exceeding RM100,000 per year.

This change applies to both resident and non-resident partners and aims to align LLPs more closely with company tax treatment.

KTP Insight

Partners should reassess their distribution strategies, ensuring documentation is complete and aligned with LHDN’s future computation formula.

4. AI Training Deduction for MSMEs

To promote digital transformation, MSMEs can claim an additional 50% tax deduction on qualifying AI training expenses, once every two years between 1 January 2026 and 31 December 2027.

Eligible programmes must be recognised under HRD Corp or the Digital Economy Centre.

KTP Insight

This incentive encourages SMEs to invest in upskilling employees in AI and automation.
Keep invoices, attendance records, and course details ready for LHDN verification.

5. Accelerated Capital Allowance (ACA): Modernising Investments

To drive local industrial growth and digital adoption, the government introduces Accelerated Capital Allowance (ACA) for qualifying capital expenditure incurred between 11 October 2025 and 31 December 2026.

Qualifying Expenditure

  • Heavy machinery, plant, and general machinery purchased from local manufacturers.

  • ICT equipment and customised computer software, including consulting, licensing, and incidental fees.

Allowance Rates

  • Initial allowance: 20% of qualifying cost

  • Annual allowance: 40% per annum on the remaining balance

KTP Insight

Businesses planning to upgrade production lines or digital infrastructure should complete procurement within this period to benefit from accelerated deductions.

6. New Investment Incentive Framework (NIIF)

The New Investment Incentive Framework (NIIF) will replace the long-standing Pioneer Status and Investment Tax Allowance (ITA) in 2026.

Features

  • Performance-based evaluation linked to:

    • Productivity improvement

    • ESG and sustainability commitments

    • Technology adoption and high-value job creation

  • Manufacturing sector implementation: Q1 2026

  • Services sector implementation: Q2 2026

KTP Insight

Companies seeking tax incentives for expansion should align their proposals with NIIF’s performance metrics to qualify for higher benefits.

7. Tourism and Hospitality Incentives

Tourism and hospitality players will enjoy multiple tax reliefs in support of Visit Malaysia Year 2026.

Key Benefits

  • 100% income tax exemption on incremental income for YA 2026 and YA 2027.

  • Renovation and refurbishment deduction capped at RM500,000.

  • 10% deduction (up to RM10 million) for converting commercial properties into residential units.

KTP Insight

Hotels, resorts, and homestay operators should time their refurbishment or conversion plans strategically to fully utilise these incentives.

8. Indirect Tax and Excise Updates

The government continues to tighten control and modernise excise administration:

  • Luxury vehicles imported into Langkawi and Labuan valued above RM300,000 will now attract import, excise, and sales tax from 1 January 2026.

  • Excise duty increases:

    • Tobacco: +10%

    • Alcohol: +10% (effective November 2025)

  • Digital excise stamps to enhance monitoring for tobacco and liquor products.

  • Exemption for nicotine replacement therapies extended to 31 December 2027.

KTP Insight

Importers and distributors should update pricing, supply chain controls, and compliance procedures to reflect these new duties.

9. Stamp Duty Reforms and Self-Assessment

From 2026, Malaysia will implement a Stamp Duty Self-Assessment System, allowing taxpayers to calculate and pay duties directly, similar to the income tax regime.

Key Updates

  • Employment contracts: exemption threshold increased from RM300 to RM3,000 per month, effective 1 January 2026.

  • Residential property transfers by non-citizens: rate raised from 4% to 8%.

  • First-home purchases up to RM500,000 remain exempt until end-2027.

  • Structured warrants: 0.1% duty (capped at RM200) with buy-side exemption until 2028.

KTP Insight

The self-assessment model will improve efficiency and transparency but requires taxpayers to maintain precise documentation.
Developers and legal advisors should review SPA templates and ensure systems are ready for digital submission and self-calculation.

10. Carbon Tax Implementation

The Carbon Tax is expected to launch in 2026, starting with the iron, steel, and energy sectors.

While detailed mechanisms are pending, the tax is expected to be based on emission thresholds and linked to carbon credit markets.

KTP Insight

Businesses should start monitoring their carbon footprint (Scope 1 and Scope 2 emissions).
Early adopters of green reporting may also qualify for upcoming ESG-related incentives and financing.

Conclusion

Budget 2026 is not about short-term reliefs — it is about reshaping Malaysia’s economy for the next decade.

The focus is on:

  • Digitalisation through AI training and accelerated capital allowance

  • Sustainability via carbon tax and ESG-linked incentives

  • Fairness through self-assessment reforms and updated LLP taxation

  • Family well-being through enhanced medical and childcare reliefs

The message is clear: Malaysian businesses must adapt, digitalise, and prepare. Those who align early with the new frameworks will enjoy the greatest advantage.

Prepared by:
KTP Tax Team
KTP & Company PLT | Chartered Accountants, Approved Auditors & Licensed Tax Agents
Johor Bahru, Malaysia
www.ktp.com.my

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