As an employee who have serve a company for sometime, you may receive the following:
- Retrenchment benefits when your employer no longer needs your services; or
- Retirement benefits when you reached your retirement age.
Retrenchment benefits are payments given by employers to compensate for the loss of employment. Payments to compensate employees for the loss of employment are not taxable as they are capital in nature.
When is it taxable
Some employers may pay their employees lump sum payments that consist of payment for loss of employment and other payments that are taxable.
If you received any payments (such as salary in-lieu of notice, gratuity, ex-gratia and etc.) apart from the payment for loss of employment, they will be subjected to tax.
Retrenchment payments that are made to compensate for the loss of employment are not taxable to the retrenched employee because they are capital receipts. This tax treatment applies even if the payments to compensate for the loss of employment are provided for in the contract of service or collective agreement, or are computed based on the number of years of service with the employer.
However, employers often include payments for other purposes when paying out retrenchment benefits. Such other payments are taxable to the employees. Examples are salary in-lieu of notice and gratuity for past services. These other payments are not payments received by the retrenched employees as compensation for loss of employment. They are payments for services. They constitute gains or profits from employment and are, therefore, liable to tax under section 10(1)(b) of the Income Tax Act.
Whether payments are made to retrenched employees as compensation for loss of employment or not is largely a question of fact. IRAS will examine all the facts and circumstances giving rise to the payments to determine the nature of the payments in each case. The nature of the payments does not simply depend on, and hence is not affected by, the description ascribed to the payments by the employers.
An example showing the different types of payments an employee may receive upon retrenchment and the taxability or otherwise of each type of payment.
All retirement benefits including gratuities and pensions are taxable unless they are specifically exempted under the Income Tax Act.
Retirement benefits are not taxable if they are received from the following tax exempt pension schemes/funds:
- Government pension schemes under any written law relating to pensions in Singapore (including the Pensions Act, Singapore Armed Forces Act and Parliamentary Pensions Act).
- CPF/designated funds.
If you participate in existing approved pension and provident funds, the retirement benefits accrued from such funds up to 31 Dec 1992 will remain tax-exempt. The tax-exemption will apply when they are paid out on the date of retirement based on the statutory retirement age.
When is it taxable
If you receive the retirement benefits from existing approved pension and provident funds
You are taxable on the total amount of retirement benefits received. You are not eligible for tax exemption.
- After retirement
You are taxable only on funds accrued from 1 Jan 1993 to date of retirement. The funds will be taxed at the time the benefits are received.
- How to report
You need to declare the taxable retirement benefits under ‘employment – others’ in your tax form.
How to report
You need to declare the taxable retirement benefits under ‘employment – others’ in your tax form. Find out more about how to submit your tax return.