Termination Compensation & VSS: Is It Taxable?

What is termination compensation?

Compensation is a payment received by an employee from his employer as a result of termination of employment, and this payment may be made before or after the employee is terminated. (Source: HASiL — Tax Exemptions — Companies — R1.)

Do not confuse it with gratuity: gratuity = a payment received for past services (for example, retirement gratuity); compensation = a lump sum payment received for loss of employment. Both have different tax rules. (Source: R3.)

Basic treatment: employment income

Compensation for loss of employment is employment income under paragraph 13(1)(e) of the Income Tax Act 1967 (ACP 1967) — that is, in principle, it is included in chargeable income unless exempted. This item still awaits official confirmation from HASiL — check again with HASiL before deciding.: the full text of section 13(1)(e) ACP must be verified from the act text before being cited.

Confirmed exemptions

Situation	Treatment
Compensation received due to ill-health or disability	Fully exempt
Termination before 1 July 2008 (other reasons)	Exemption of RM6,000 for each completed year of service with the same employer or companies in the same group
Termination on or after 1 July 2008 (other reasons)	Exemption of RM10,000 for each completed year of service with the same employer or companies in the same group
Compensation received by a director (not a managing director) of a controlled company	Fully taxed

(Source: R1.)

Important note: the RM10,000/year (or RM6,000/year) exemption is an exemption, not a claim limit — the excess after the exemption remains taxable. Ill-health cases receive full exemption — distinguish them from "other reasons".

Employer obligations

When an employee is terminated, the employer must:

• Submit Form CP22A (private) / CP22B (public) no less than 30 days before termination of employment (or no more than 30 days after being notified of death). (Source: R2.)
• From 1 January 2024, submission is mandatory via e-SPC (MyTax). (Source: R2.)
• If the employee leaves Malaysia for more than 3 months — submit CP21. (Source: R2.)
• The employer may withhold money for up to 90 days / until a Certificate of Tax Clearance (SPC) is received. (Source: R2.)

Legal references: provisions of s.83(3), 106, 107(4), 120(1) ACP. (Source: R2.)

Documents & records

Keep supporting documents such as Form EA, the termination agreement letter and compensation calculations as records — this is good record-keeping practice for both employees and employers.

Related questions

Is voluntary VSS eligible for the RM10,000/year exemption? The confirmed official HASiL page states the RM10,000/year formula for terminations on or after 1 July 2008 for "other reasons". This item still awaits official confirmation from HASiL — check again with HASiL before deciding.: whether the RM10,000/year formula applies to all types of "other reasons" (including voluntary VSS vs retrenchment) — only one official page is confirmed; no definitive HASiL example for VSS was found at this review.

What does "completed year of service" mean? this item still awaits official confirmation from HASiL — check again with HASiL before deciding.: the definition of "completed year of service" (e.g. a period of less than a year) has not been verified from official sources.

What if compensation is paid in instalments? this item still awaits official confirmation from HASiL — check again with HASiL before deciding.: the treatment of compensation if paid in instalments vs as a lump sum has not been verified.

Where is this exemption provision in the Act? this item still awaits official confirmation from HASiL — check again with HASiL before deciding.: the exact paragraph number of Schedule 6 ACP granting the compensation exemption (e.g. paragraph 23 of Schedule 6) has not been confirmed at this review — verify with the latest act text before writing the paragraph number.