PUBLIC RULING NO. 9/2016 : Gratuity
The objective of this PUBLIC RULING NO. 9/2016 is to explain the method used to characterise lump sum payments received by employees upon the termination of their employment as gratuity and the tax treatment of gratuity.
- What is gratuity?
When an individual ceases employment upon resignation or retirement, he may be paid a lump sum termination benefit in respect of his long period of service.
If the payment is attributable to the past services of the employee, it would generally be characterised as a gratuity.
- What is the difference between gratuity and compensation for loss employment?The method of making an apportionment between gratuity and compensation depends on the circumstances of each case, such as: Employer’s normal practice
In general, consideration is given according to the employer’s normal practice in granting gratuities to employees leaving his service and the rate or amount of gratuities normally granted.The terms of the employment with regards to payment of retirement benefits including gratuties would normally be stated in the contract of service or in other documents that binds the employer and employee.Premature termination
If the lump sum payment is received due to premature termination of an employment which has the prospect of continuing up to the retirement age, such sums are treated as compensation for loss of employment and not gratuity.
Full Expiry of Contract Terms / Cessation of Employment at Retirement Age
Where a contract of employment is for a specific number of years and the employment ends at the specified time or the retirement age, any lump sum payment paid to the employee would be treated as gratuity if it is payment for past services.
- What is the tax treatment of gratuity?According to paragraph 13(1)(a) of the ITA, gratuity is specifically included in the gross income from an employment and will be taxed in the year of receipt, regardless of the period to which the income is attributable.
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Are there any tax exemptions on gratuity received?
Full exemption for Gratuity
An employee receiving a gratuity upon Retirement From an Employment would qualify for FULL EXEMPTION by virtue of paragraph 25 of Schedule 6 of the ITA under the following circumstances:• Retirement due to ill health ,or
• Compulsory retirement for working in the same company for more than 10 years. (Retirement age 55 years old) ,or
• Employment contract stated retirement at age 50, and have worked more than 10 years with the same employer ,or
• Death Gratuity (sum received by way of death gratuities or as consolidated compensation for death or injuries.Partial exemption for Gratuity
An employee would qualify for PARTIAL EXEMPTION of RM1,000 for each completed year of service on gratuity payment by virtue of paragraph 25D of Schedule 6 of ITA under the following circumstances:• Compulsory retirement after working in the same company for less than 10 years
• Retirement under a contract of employment after having worked with the same company for less than 10 years
• Retirement before the age of 55 years regardless of the years of service in the company
• Retirement at the optional retirement age under a collective agreement
• Retirement before the age of 55 years – Served with different companies in the same group
• Retirement before age of 55 years due to health issues
• Reemployed on a contract basis by the same employer after compulsory retirement
• Employee receives gratuity payment while still under employment
**If the employment is with companies in the same group, the partial exemption is only applicable to the gratuity attributable to the service with the last company in the group.Example of Partial Exemption:
Employee commenced employment on 1 May 2014Employee is retired on 25 March 2020Total Gratuity paid is RM10,000Determine number of completed years of service:-
Answer:
01.05.2014 – 30.04.2015
1 completed year of service 01.05.2015– 30.04.2016
1 completed year of service
01.05.2016 – 30.04.2017
1 completed year of service
01.05.2017 – 30.04.2018
1 completed year of service
01.05.2018 – 30.04.2019
1 completed year of service
01.05.2019 – 25 March 2020 Less than 1 completed year of service
Partial Exemption for 5 years.
RM1,000 for 5 completed years of service.
Partial Exemption = 5 years * RM1,000
= RM5,000
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