Japan Tax Bulletin
Tax Reform on Retirement Income
May 2021
Under Japan’s traditional employment practice represented by
lifetime employment and seniority-based wage systems,
employees’ wages increased at an accelerated speed during thelater years of career. Coupled with defined benefit retirement
plans, employers paid large amount of lump-sum or annuity
retirement allowance to reward retiring employees for their
lifetime loyalty, commitment, services and contributions.
Retirement allowance was positioned by employees and by thewider society as means to secure retirement life. Positioning
retirement income as means for employees to build theirretirement nest, retirement income is treated favourably for tax
purposes.
Over time, however, cases have rose where employers “reduce”
employees’ salaries and pay the reduction in the form ofretirement allowance to benefit from the special tax treatment for
retirement income and reduce employees’ income tax. 2021 Japan
Tax Reform responded to these undesirable application of thefavourable tax treatment. Effective 1 April 2021, the 50%
standard deduction to arrive at taxable retirement income will bedisallowed for employees with less than five years of service.
1. Current tax system
Taxable retirement income, other than for specified directors1,
is 50% of the amount calculated after deducting the retirement
income deduction from retirement income received. The
retirement income deduction is based on the number of years ofservice.
For specified directors with a service period of less than fiveyears, the 50% standard deduction to arrive at taxable retirement
income is disallowed for retirement income relating to the periods
when they were a specified director.

Service Years

Retirement Income Deduction< 20 years

JPY400,000 for each year of service(minimum of JPY800,000)> 20 years

JPY8 million + JPY700,000 for eachyear in excess of 20 years

If the "Application Concerning Receipt of Retirement
Income" (“Application”) has been submitted to the payer of theretirement allowance before the date of the retirement allowanceis paid, in principle, most recipients are not required to file a tax
return. This is because income tax and local tax will be deducted
after subtracting the retirement income allowance.
If the Application is not submitted before the payment date,20.42% of income tax and 10% local inhabitant tax is deductedfrom the retirement allowance, and the filing of a tax return isrequired to settle the income tax. The procedures relating to the"Application” will not change after the reform.
2. Reformed tax system
The reform applies to employees with shorter than five yearsof service under the employer paying the retirement allowance. In
such cases, the 50% standard deduction only applies to the first
JPY3 million of retirement income after 50% standard deduction
is applied. Amount in excess of JPY3 million after the 50%
standard deduction will no longer be eligible for the 50% standarddeduction.
3. Applicable Period
For National Income Tax, the change applies to retirement
allowances from 2022 onwards.
For Local Inhabitant Tax, the change applies to retirement
allowances paid on or after 1 January 2022.
4. Examples
Examples below show the effect of the reform for employeeswith less than five years’ service and over five years’ service.

1 Specified directors (directors, executive officers, accounting advisors, auditors, board members, auditors, liquidators, etc.), members of the National Diet, members of local

assemblies, national and local public officials as defined in Article 2, Paragraph 15 of the Corporation Tax Act.

＜Example 1＞・Resigned after three years of service as an employee
・Receives JPY6 million as a retirement allowance
Calculation of retirement income
・Retirement Income Deduction
JPY400,000 x 3 years = JPY1.2 million
・Taxable Retirement Income
JPY6 million - JPY1.2 million = JPY4.8 million
JPY4.8 million - JPY3 million = JPY1.8 million(JPY3 million x 1/2) + JPY1.8 million = JPY3.3 million＜Example 2＞・Retired after 6 years of service as an employee
・Receives JPY8 million as a retirement allowance
Calculation for Retirement Income
・Retirement Income Deduction
JPY400,000 x 6 years = JPY2.4 million
・Taxable Retirement Income(JPY8 million - JPY2.4 million) x 1/2 = JPY2.8 million© 2021 Grant Thornton Taiyo Tax Corporation. All rights reserved.
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