Retrenchment benefits are payments made to employees when their employment is terminated prematurely by employers.

Taxability of retrenchment benefits

S/NTypes of retrenchment benefits Is it taxable?
1Compensation for loss of employment
 
Loss of employment means that the job is no longer available due to reasons such as company downsizing, restructuring, etc.
Not taxable
 
It is capital in nature.
2Payment for restrictive covenants
 
A restrictive covenant is an agreement which restricts what someone can do (e.g. the employee is not to compete with his/her employer).
Not taxable
 
It is capital in nature.
3Outplacement support
 
Generally, it may include providing counselling and moral support to affected employees and to assist them in their search for jobs.
Not taxable when the following conditions are met:

  1. The outplacement support is provided to compensate for loss of employment and is only available to employees who are retrenched;
  2. The only expense incurred by the employer to provide the outplacement support is the fees paid to the outplacement agents or cost incurred to provide other forms of outplacement support, whichever the case may be; and
  3. Any employee who is eligible for outplacement support but chooses not to accept it is not entitled to any other compensation in lieu, whether in cash or otherwise.
4 ·     Payment in lieu of notice
·     Ex-gratia
·     Gratuity
Taxable
 
These payments are made to recognise the past services provided, not payments for loss of employment.
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 payments does not simply depend on, and hence is not affected by, the description ascribed to the payments by employers.
Where the components of the retrenchment benefits are taxable, they will be taxed in the year that you are legally entitled to the benefits and not based on the date of payment. It is usually taxed in the year that you are retrenched.

Example 1: Tax treatment of retrenchment benefits given to an employee

Mr Tan was retrenched by ABC Pte Ltd. He was given a retrenchment package which was paid to him the following year. The retrenchment package consists of the following components:

  • Payment in lieu of notice
  • Gratuity
  • Compensation for loss of employment

 

a. How will Mr Tan be taxed on his retrenchment package?

·       Payment in lieu of notice
·       Gratuity
Taxable
These payments are for past services, not payments for loss of employment.
·       Compensation for loss of employment Not taxable
It is a payment to compensate Mr Tan for the loss of employment and hence capital in nature.

b. When will Mr Tan be taxed on his retrenchment package?

The taxable components (i.e. payment in lieu of notice and gratuity) will be taxed in the Year of Assessment Mr Tan was retrenched and not when he was given the package (i.e. not taxed in the following year).

Reporting retrenchment benefits

Company not participating in the Auto-Inclusion Scheme (AIS) for Employment Income Company participating in the AIS
You must declare the taxable retrenchment benefits under 'Employment - Others' in your Income Tax Return and email us the following:
 
·       Amount and breakdown of the retrenchment benefits;
·       A copy of your employment contract; and
·       A copy of the relevant documents relating to this lump sum payment.
You do not need to report the retrenchment benefits in your Income Tax Return as your employer will submit the information to IRAS electronically.

FAQs

I have been retrenched and received retrenchment benefits from my employer. How do I know the breakdown of the retrenchment package and how the payout amount is derived?

Generally, employers compute retrenchment payment based on an employee’s length of service. You may approach your employer for the breakdown of the retrenchment package and computation of each payment component.

I have been retrenched and received retrenchment benefits from my employer. When will I be taxed on these benefits?

Payments for retrenchment benefits are taxed in the year that the employee is legally entitled to the retrenchment benefits and not based on the date of payment. It is usually taxed in the year the employee is retrenched.

For example, you were retrenched in 2020 but only received the retrenchment benefits in 2021. The retrenchment benefits received in 2021 will be taxed in the Year of Assessment 2021 (i.e. income for 2020).

Help and support

Help & support available

For financial assistance

If you are experiencing difficulties in paying your tax, you may:

 

For other assistance

If you require other forms of assistance specific to your circumstances, you may wish to approach the following agencies:

For employment assistance

For social assistance