A Gratuity is a financial reward to an employee for his / her past services towards the company after service a certain year. Will it be taxable in the hand of employees? This will depend on different circumstances.
Generally, wherever the income received from the employer will be taxable under employment income in the year of receiving. However, some income will be entitled to an exemption under Schedule 6, Income Tax Act, 1967.
Pursuant to Schedule 6, Para 25
(i) Ill health
If the employee who receiving a gratuity due to ill health condition, with the proof of medical report and medical treatment received, therefore the employee who are receiving such a gratuity will be fully exempted from income tax.
(ii) Compulsory retirement with the same employer for more that 10 years
If the employee who are reaching the compulsory retirement age under the law (60 years old) and serve with the same company / same group of company for 10 years and above. Then, if the employee who receiving gratuity will be fully exempted from income tax.
However, if the same condition applies, but the employee who work less that 10 years with the same company or same group of the company. Then, the employee will only be entitled to RM1,000 per complete year of service. The balance of income receives after the deduction of partial income exemption will be taxable.
(iii) Retired after age 55 years with the same employer for more that 10 years.
When the employee retire at the age of 55 years, but before the compulsory age of retirement (60 years old) and serve with the same company / same group of company for 10 years and above. The employee will enjoy full tax exemption on income that he / she receives from the employer.
Even though, the employee who is working for the employer for 10 years, but if he/she retires before 55 years. Then, the employee will only enjoy a partial tax exemption RM1,000 for each complete year of service, the balance will be taxable.
(iv) Compulsory retirement under collective agreement
If the retirement takes place on reaching the compulsory age of retirement pursuant to a contract of employment or collective agreement at the age of 50 but before 55 and that employment has lasted 10 years with the same employer or with companies in the same group. The employee will entitled to full tax exemption.
Remember that, if the employee who are serving the same / same group of company less that 10 years. Then, the employee will be entitled to a partial exemption RM1,000 for each complete year of service.
With the above example, it is clear that if the taxpayer / employee fulfil the condition of Schedule 6, Para 25, therefore, the employee shall not pay any taxes.
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