Beyond Salary: Understanding Income Exempt from Article 21 Income Tax

In tax discourse, the focus is often on what must be paid. However, within the Article 21 Income Tax (PPh 21) mechanism, understanding what is not withheld is just as important as understanding what is. Not all funds or facilities received by employees or individuals are tax objects. Knowing these boundaries is crucial so that taxpayers can ensure their rights are met and avoid improper tax over-withholding.

1. Insurance Benefits and Claims

One of the most common social safety nets is insurance. The good news is that benefit payments or compensation received by individuals from insurance companies are not objects of PPh 21. This covers payments related to health insurance, accident insurance, life insurance, dual-purpose insurance, and scholarship insurance. This means that when an employee falls ill and receives reimbursement for medical expenses from insurance, the money is received intact without tax deductions.

2. Specific Benefits in Kind (Natura) and Amenities

Significant changes occurred after the enactment of the Law on Harmonization of Tax Regulations (UU HPP), where natura (remuneration in the form of goods) and kenikmatan (facilities/amenities) principally became tax objects. However, the government established a "negative list" or exceptions that are not PPh 21 objects to maintain basic employee welfare. These tax-free benefits include:

• Food and Drink: Food/beverages provided for all employees at the workplace, or meal coupons for employees working outside the office (such as marketing or transport staff).
• Work Essentials: Benefits that must be provided by the employer for the execution of work, such as uniforms, safety equipment, employee shuttle services, and lodging for ship crews.
• Remote Areas: Housing, healthcare, education, and sports facilities for employees working in specific (remote) areas designated by the Director General of Taxes.
• Holiday Gifts: Religious holiday hampers (such as for Eid or Christmas) received by employees.
• Worship Facilities: Worship facilities at the workplace intended solely for religious activities.

3. Pension Contributions Paid by Employers

To prepare for old age, employers often pay contributions to pension funds approved by the Minister of Finance or OJK, as well as Old Age Allowance (THT) or Old Age Security (JHT) contributions to social security organizing bodies (such as BPJS Ketenagakerjaan). Contributions paid by the employer are not PPh 21 objects for the employee at the time the contribution is paid. Tax will only be applied later when the employee receives the pension benefits in the future.

4. Zakat and Religious Contributions

The state supports social-religious activities through tax incentives. Zakat or mandatory religious contributions for recognized religions in Indonesia, received by entitled individuals, are excluded from tax objects. The condition is that the zakat must be paid through the employer to a zakat agency/institution approved by the government.

5. Education Scholarships

Human resource quality improvement is supported through tax exemptions on scholarships. Scholarships meeting specific requirements as regulated in Article 4 paragraph (3) letter l of the Income Tax Law are not subject to PPh 21 withholding. This applies to scholarships received by Indonesian citizens to pursue formal or non-formal education domestically or abroad.

6. Grants and Inheritance

The receipt of grants (hibah) received by families related by blood in a straight line of one degree, as well as inheritance, are excluded from PPh 21 as long as there is no business or employment relationship between the parties involved. This confirms that asset transfers within the immediate family are generally not subject to income tax.

7. Profit Share of Partnership Members (CV/Firma)

For those doing business in the form of a limited partnership (CV) where capital is not divided into shares, a firm (firma), or a partnership, the profit share received by members is not a PPh 21 object. Salaries received by members of a CV whose capital is not divided into shares are also not deductible expenses for the company and are not PPh 21 objects for the recipient.

Conclusion

Understanding this list of exemptions is vital for employers as tax withholders to avoid errors in calculating employees' Take Home Pay. For income recipients, this understanding ensures they do not pay tax on income that should be tax-free, allowing them to optimize their personal financial planning.

Regulatory References:

• Law Number 7 of 1983 concerning Income Tax as amended by Law Number 7 of 2021 (UU HPP).
• Government Regulation Number 58 of 2023.
• Minister of Finance Regulation Number 168 of 2023.
• Minister of Finance Regulation Number 66 of 2023.