Understanding Tax at the End of Employment: PPh 21 Calculation on Severance Pay

Termination of Employment (PHK) or retirement involves the settlement of rights and obligations between employees and the company. One of the main financial components in this process is Severance Pay (Uang Pesangon). Unlike monthly salaries which are subject to general rates (Article 17) or Average Effective Rates (TER), severance pay has a special Final Tax treatment, provided it is paid as a lump sum.

Understanding this mechanism is crucial so former employees can predict the net amount they will receive, and companies can withhold tax according to regulations.

Definition of "Lump Sum Payment"

The key to this special rate is the payment method. Regulations consider severance pay to be paid as a lump sum if part or all of the payment is made within a maximum period of 2 (two) calendar years. If severance payments are installed beyond the second year, payments in the third year and onwards are no longer subject to this special final rate, but rather the general non-final Article 17 rate of the Income Tax Law.

Special Progressive Rate Structure for Severance

The government provides tax relief for severance recipients through lighter tax brackets compared to standard personal income tax rates. The Final Article 21 Income Tax (PPh 21) rate on Severance Pay is calculated progressively based on the gross amount received:

1. Gross income up to Rp50,000,000: 0% (Tax-Free).
2. Above Rp50,000,000 to Rp100,000,000: 5%.
3. Above Rp100,000,000 to Rp500,000,000: 15%.
4. Above Rp500,000,000: 25%.

Case Examples and Calculations

Let's simulate this tax calculation with real-world examples.

Case 1: Severance Below Taxable Threshold

Mr. X was laid off and received severance pay of Rp45,000,000.

Case 2: Large Value Severance (Crossing Multiple Brackets)

Mr. Y, a senior manager, retires early and receives a total severance package of Rp600,000,000 paid as a lump sum in January 2024. The calculation must break down this Rp600 million value into the tariff brackets:

The net money received by Mr. Y is Rp600,000,000 - Rp87,500,000 = Rp512,500,000.

Case 3: Phased Payment (Within 2 Years)

If the company pays Mr. Y's severance in stages: Rp200 million in December 2024 and Rp400 million in January 2025.

• Year 2024 (Rp200 Million): Calculated progressively from 0 (Brackets 1, 2, and part of 3). Tax is withheld at that time.
• Year 2025 (Rp400 Million): Since it is still within the 2-year range, the rate calculation continues the accumulation from the previous year. This second payment is immediately subject to bracket 3 (remaining quota) and bracket 4, not starting from 0% again. This ensures the total tax paid is the same as if paid all at once.

Conclusion

PPh 21 on severance pay uses a Final scheme that lightens the burden on recipients of small nominal amounts, while maintaining the principle of fairness for recipients of large severance pay through progressive rates. Companies are required to provide a Final PPh 21 Withholding Slip (Form 1721-VII) to employees as a document for Annual Tax Return reporting.

Regulatory References:

1. Government Regulation Number 68 of 2009 concerning Article 21 Income Tax Rates on Severance Pay, Pension Benefits, Old Age Allowances, and Old Age Security Paid as a Lump Sum.
2. Minister of Finance Regulation Number 16/PMK.03/2010 concerning Procedures for Withholding Article 21 Income Tax on Income in the Form of Severance Pay, Pension Benefits, Old Age Allowances, and Old Age Security Paid as a Lump Sum.
3. Minister of Finance Regulation Number 168 of 2023 (Regulating tax object code for Final Severance 21-401-01).