What is Gratuity?

  • Upon employment termination of an individual due to retirement or resignation, he/she might be paid a lump sum termination benefit in respect of long period of service.
  • It would generally classified as gratuity.

However…

  • Employment cease for variety of reasons, and due to…
    • Retirement, Resignation, Premature termination of contract or Mutual agreement
  • The lump sum payment may be described by the employer as compensation for loss of employment, ex-gratia, contractual payment, retrenchment payments, gratuity, etc.

Determination elements of Gratuity and Compensation for loss of employment

  • The characteristics and nature of payment are more critical than its form and labelling.
  • And its determination is largely depends on cases
  • In general, consideration is given according normal practice of employer, and gratuity would stated in employment contract

Example:

  • XXX Sdn Bhd has general practice to pay lump sum gratuity of RM 20k for employee who leave after 10 years
  • In 2016, an employee who in service for 11 years are dismissed by company, and paid a lump sum of RM 50k
  • The lump sum considered as follow:

If it is premature termination,

  • The lump sum received due to premature termination of employment which has the likelihood of continuing up to retirement, such amounts are treated as compensation for loss of employment
  • E.g. David, aged 40, worked for 11 years with XXX Sdn Bhd, was retrenched and employer paid him RM 100k
    • David has high chance to continue if not retrenched by company. Thus, such payment are consider as compensation for loss of employment

Contract of employment

If a contract of employment has:

  • Stated for a specific number of years in service
  • Stated the end of employment for specified time, or retirement age.

… any lump sum would be treated as gratuity, if it is payment for past service

Tax treatment of gratuity

  • According to the ITA, gratuity is specifically included in the gross income from an employment.
  • All employment income receivable will be taxed in year payment is received

Tax treatment of gratuity

  • Full exemption on gratuity payment
    • Employee receiving gratuity upon retirement would qualify for full exemption under following circumstances:
      • Retirement due to ill-health (prove satisfaction of DGIR)
      • Retirement on or after age of 60 under any written law, and has worked with same employer more than 10 years
      • Compulsory retirement under collective agreement after worked with same employer more than 10 years (if contract stated retire on age of 50)

Tax treatment of gratuity

  • Partial exemption
    • Exemption of RM 1k for each complete year of service on gratuity payment
    • E.g. Ella, work for 9 years, retired at 60, gratuity of RM100k
      • Eligible for partial exemption of RM9k, the balanced 91k is taxed in the year of receipt

Gratuity credited to EPF

There might be condition where gratuity is not paid directly but to EPF account

…as such, that gratuity is taxed in the year of receipt and employers are required to credit the net amount (after deducting income tax) to EPF account

and to determine the deducted tax amount, employers are required to file a Form CP 22A Notification of Cessation of Employment to IRBM

Death Gratuities

  • Sums received by way of death gratuities or as consolidated compensation for death or injuries is tax exempt