Capital Allowance Malaysia 2026 — Schedule 3 Rates

Capital allowance is one of the most powerful tax deductions available to Malaysian businesses. It allows you to deduct the cost of business assets — machinery, vehicles, computers, furniture — against your taxable income over time. Unlike accounting depreciation, capital allowance follows specific rates prescribed under Schedule 3 of the Income Tax Act 1967.

This guide provides the complete Schedule 3 rates for 2026, explains how to calculate capital allowance, covers special schemes like accelerated capital allowance (ACA) and renovation allowance, and shows you how to maximize your claims legally.

How Capital Allowance Works

When your business purchases a qualifying asset, you cannot deduct the full cost as an expense in Year 1 (unlike revenue expenses). Instead, the cost is spread over several years through capital allowance claims:

1. Initial Allowance (IA): Claimed once, in the year the asset is first used for business purposes
2. Annual Allowance (AA): Claimed every year until the asset's residual expenditure reaches zero

The total capital allowance claimed over the asset's life equals the original cost (qualifying expenditure). The rates determine how quickly you can write off the asset.

Qualifying Expenditure

Qualifying expenditure (QE) is the cost of the asset that qualifies for capital allowance. This typically includes:

• Purchase price of the asset
• Delivery and installation costs
• Costs to bring the asset to working condition

It does not include land cost, financing charges (interest), or maintenance costs.

Schedule 3 — Complete Capital Allowance Rates 2026

Motor Vehicle Capital Allowance

Motor vehicles are the most common capital allowance claim for SMEs. However, there are specific rules and caps:

The RM300,000 Cap

• Qualifying expenditure is capped at RM300,000 for new vehicles (on-the-road price)
• If vehicle costs RM400,000, only RM300,000 qualifies — the remaining RM100,000 gets no allowance
• This cap applies per vehicle, not per year

Exceptions to the Cap

• Vehicles for hire: Taxis, e-hailing cars, rental vehicles — no cap applies
• Commercial vehicles: Lorries, vans, trucks used solely for business — no cap

Example: Vehicle Capital Allowance

Company buys a new Toyota Hilux for RM145,000:

Total written off: RM145,000 over 4 years (IA in Year 1 accelerates the write-off).

Computers & IT Equipment

IT assets enjoy the fastest write-off rate under Schedule 3:

• Initial allowance: 20%
• Annual allowance: 40%
• Fully written off in 3 years

Qualifying IT assets include: computers, laptops, servers, networking equipment, printers, software (packaged), and peripherals.

Renovation Allowance

The renovation allowance is a special scheme separate from Schedule 3:

• Maximum qualifying expenditure: RM300,000 per premise
• Allowance spread over 3 years (RM100,000/year)
• Applies to renovation of existing business premises
• Can be claimed once every 3 years per premise

Qualifying Renovation

• Alteration of interior structure
• Flooring, partition walls, ceiling
• Electrical wiring and plumbing (for renovation)
• Built-in furniture and fittings

Non-Qualifying Renovation

• Land and building purchase
• Renovation of non-business areas (e.g., director's personal quarters)
• Landscaping and external works
• Any renovation that qualifies under Schedule 3 (cannot double-claim)

Accelerated Capital Allowance (ACA)

ACA allows 100% write-off in Year 1 for qualifying assets. This is the most tax-efficient way to claim capital allowance:

Small Value Assets

• Assets costing ≤RM2,000 each
• Maximum total claim: RM20,000 per year
• 100% write-off in the year of purchase
• No initial/annual allowance calculation needed

ICT Equipment for SMEs

• Extended under Budget 2025 for YA 2025-2027
• 100% ACA on ICT equipment and software
• Must be SME-eligible company
• Includes computers, servers, licensed software, cybersecurity equipment

Green Technology Assets

• Solar panels and solar energy systems
• EV chargers (electric vehicle charging stations)
• Energy-efficient equipment (certified by MGTC)
• 100% ACA — full write-off in Year 1

Balancing Charge & Balancing Allowance

When you sell or dispose of an asset that has been claimed for capital allowance:

Balancing Charge (Taxable)

If sale price > residual expenditure: the difference is added back to taxable income.

Example: Asset residual value RM10,000, sold for RM25,000 → Balancing charge = RM15,000 (taxable).

Balancing Allowance (Deductible)

If residual expenditure > sale price: the difference is an additional deduction.

Example: Asset residual value RM30,000, sold for RM5,000 → Balancing allowance = RM25,000 (deductible).

Common Mistakes in Capital Allowance Claims

• Claiming depreciation instead of capital allowance: Accounting depreciation is an add-back; only capital allowance is deductible for tax
• Missing the IA claim: Initial allowance must be claimed in the year the asset is first used — if you miss it, you lose it
• Exceeding the vehicle cap: Claiming full cost on a RM500K car when only RM300K qualifies
• Not claiming small value assets: Many businesses miss the RM2,000 per item write-off
• Double-claiming renovation: Cannot claim both renovation allowance and Schedule 3 on the same expenditure

Capital Allowance Planning Tips

1. Time your purchases: Buy assets before year-end to claim IA + AA in the same year
2. Split large purchases: If buying multiple items ≤RM2,000 each, claim as small value assets for instant write-off
3. Consider leasing vs buying: Leased assets — lease payments are revenue deductions (no capital allowance). Bought assets — capital allowance applies. Compare the tax impact.
4. Keep proper records: Maintain an asset register with purchase date, cost, and disposal details. LHDN can audit capital allowance claims.
5. Review annually: Check for assets no longer in use — dispose and claim balancing allowance