Are retrenchment payments taxable?

Retrenchment payments are not taxable. The sum is paid for the loss of office. It is treated as a capital receipt, and therefore not taxable. This is true even when the retrenchment payments are provided for in the contract of service or collective agreements, or when the payments are computed based on the number of years of service.

However, employers often include other payments for services to be rendered, or already rendered, when paying out retrenchment benefits. Such payments are taxable.

Examples are salary in lieu of notice and gratuity for services. They are payments which the employee would have got even if he were not retrenched.   In summary, retrenchment benefits as such are not taxable.

However, if other payments are also made which the employee would have got even if he were not retrenched, these portions will be taxable. The description by employers on the payouts is also irrelevant to IRAS.

They will look at the facts to determine the nature of the payment.