Retirement & EPF: Withdrawals and Retirement Income — Are They Taxed?

Introduction

Many employees wonder whether EPF money, retirement gratuities and pensions are subject to income tax. The answer depends on the type of income: EPF savings withdrawals, retirement gratuities and periodical pensions are treated differently under the Income Tax Act 1967 (ACP 1967). This article explains those differences.

EPF withdrawals and EPF dividends: not taxed

EPF is an approved scheme under the ACP 1967. Income from approved schemes is exempt from tax under Schedule 6 of the ACP 1967 (exact paragraph number this item still awaits official confirmation from HASiL — check again with HASiL before deciding.). This means:

• Savings withdrawn through EPF withdrawals are not taxed;
• EPF investment returns (dividends) are also not taxed.

Important: withdrawals of EPF savings are not income. Do not confuse this with employer contributions, which are part of employment income (s.13) in the year they are credited.

Retirement gratuity: full exemption

A retirement gratuity paid by an employer can be fully exempt under paragraph 25(1) of Schedule 6 of the ACP 1967 if:

• the Director General is satisfied the retirement is due to ill-health; or
• retirement occurs at or after age 55 or the compulsory retirement age, with 10 years of continuous service with the same employer or the same group of employers; or
• retirement occurs at the compulsory retirement age under a contract or collective agreement at ages 50–54 with 10 years of service.

Gratuities from public funds paid on retirement under written law are also exempt; for contract officers, when the contract ends (even if renewed).

Other gratuities: partial exemption

Retirement or termination-of-contract gratuities other than those covered by paragraphs 25, 25A, 25B or 30A — paragraph 25D of Schedule 6 — are exempt limited to RM1,000 × the number of complete years of service.

Compare with compensation for loss of employment (termination on or after 1 Julai 2008): exemption of RM10,000 for each complete year of service (Form B Explanatory Notes).

Pensions: exemption with conditions

Periodical pensions are exempt under paragraph 30 of Schedule 6 of the ACP 1967 if:

1. retiring at age 55 or the compulsory retirement age;
2. retiring due to ill-health, with a pension from the Government or an approved pension scheme;
3. public-sector employees with early option — pension is assessed until age 55 or the compulsory retirement age;
4. receiving more than one pension — only the highest pension is exempt.

Derived pensions (for example, a wife/husband receiving a pension on the death of their spouse) are not taxed.

Death gratuity and widows/orphans' pensions

Death gratuities are exempt (paragraph 14 of Schedule 6 this item still awaits official confirmation from HASiL — check again with HASiL before deciding.); widow/widower/orphan pensions are exempt (paragraph 16 of Schedule 6 this item still awaits official confirmation from HASiL — check again with HASiL before deciding.).

EPF contribution relief

EPF contributions (compulsory or voluntary) up to RM4,000 plus life insurance/takaful premiums and additional voluntary contributions up to RM3,000 — with a combined cap of RM7,000 (s.49(1) of the ACP 1967). This is a relief from income, not an exemption of withdrawals.

Private Retirement Scheme (PRS)

Income from PRS schemes is exempt (paragraph 20 of Schedule 6). Early withdrawals before age 55 — other than due to death or permanently leaving Malaysia — are subject to final tax of 8% (s.109G). PRS contribution relief up to RM3,000.

Reporting in Form BE

Pensions before age 55 must be reported in Form BE. After the conditions of paragraph 30 are met, the pension is exempt but still must be reported if there is other income (check the filing threshold).