Generally, the compensation for loss of employment received by an employee is subject to tax under Section 13(1)(e) of the ITA 1967 as follows:
is essential to determine whether the payment made to employee is in the nature
of gratuity or compensation for loss of employment as different tax treatment
is accorded for gratuity payment. Please refer to our previous article for tax
treatment of gratuity received by an employee.
In general, the distinction between compensation for loss of employment and gratuity is as follows:
Compensation for loss of employment (other than a payment by a controlled company to a director of the company who is not a full-time service director) is exempted from income tax in the following circumstances:
✓ Full exemption
If the Director General is satisfied that the payment is made on account of loss of employment due to ill-health (required to be certified by a Medical Board);
✓ Partial exemption
An exemption of RM10,000 is given for each completed year of service with the same employer or with companies in the same group.
from YA 2007, compensation for the payment received by an employee from an
employer for an early termination of an employment contract (including
termination under a Voluntary Separation Scheme (VSS) or Mutual Separation
Scheme) will be granted a tax exemption pursuant to subparagraph 15(3) of
Schedule 6 of the Act.
However, if the separation scheme offers the employees reemployment with the same employer or any other employer, the payment under the scheme does not qualify for an exemption.
Reference: PR No. 1/2012