Guidance for T9 MYS - Taxable gratuity

Gratuity is simply a lump-sum cash received by the tax payer due to retirement. Gratuity is exempted under certain circumstances, but here we will look at what if the gratuity is taxable, how much it will be taxed in a YA. Gratuity is assessed under S13(1)(a).

To determine the taxable gratuity amount for a YA, you must first look at period of first day working to first day of last basis period.
1. If the period is more than 5 years - gratuity received will be spread back 6 YA.
2. If the period is not more than 5 years - gratuity received will be spread even throughout the employment period (first day working to last day working).

Example: On 31.10.10, Ali who is 49 years old, received gratuity of RM88500 on his retirement, calculate the gratuity to be taxed in YA 2010 if:
(i) Ali worked with his employer since 30.11.03
(ii) Ali worked with his employer since 1.12.05
Solution:
(i) First day working to first day of last basis period = 30.11.03 - 1.1.10 = more than 5 years.
Gratuity is spread back 6 YA, so RM88500/6 = RM14750.
Gratuity taxable in YA 2010 = RM14750.
(ii) First day working to first day of last basis period = 1.12.05 - 1.1.10 = less than 5 years.
Gratuity is spread evenly throughout employment period, employment period = 1.12.05 - 31.10.10 = 59 months. Therefore, RM88500/59 = RM1500 per month.
Gratuity taxable in YA 2010 = RM1500 x 10 = RM15000 (gratuity taxable in YA 2009 = RM1500 x 12 = RM18000).

Gratuity is quite straightforward topic and it is highly examinable in June 2011 as part of question 1 in section B, understand the rule and learn to apply it by looking at this example.