Reviewing the Tax Rules on Pension Payments

A judicial review petition against Article 4 paragraph (1) and Article 17 of the Income Tax Law brings fresh hope for recipients of severance pay and pension benefits.

Although the Constitutional Court (MK) has not yet issued a decision on case number 170/PUU-XXIII/2025, if granted, any pension payments or severance received would no longer be subject to income tax.

This means pension benefits or severance payments would be received in full without any tax deductions.

Regardless of this case, it is important for taxpayers to understand the current tax provisions related to pension payments.

Institutions Managing and Receiving Pension Funds

The majority of workers in Indonesia participate in pension programs managed by Employee Social Security System (BPJS Ketenagakerjaan) either through the Pension Benefit (JP) scheme or the Old-Age Security (JHT) scheme.

In addition to BPJS Ketenagakerjaan, there are several other institutions that may manage pension funds, including:

Employer Pension Funds (DPPK), established by companies for their employees.

Financial Institution Pension Funds (DPLK), managed by banks or life insurance companies.

Special institutions for civil servants and members of the military and police (TNI/Polri).

In tax terminology, pension income refers to compensation received by a retiree for work performed in the past.

A retiree refers to an individual or their heirs who receive pension payments periodically. Meanwhile, heirs include widows, widowers, children, and other qualifying heirs.

Tax Aspects of Pension Funds

Regarding the tax obligations related to pension funds, there are two main aspects that taxpayers need to pay attention to:

• The tax treatment of pension benefits received by retirees or employees.
• The tax aspects of pension contributions paid during the period of employment.

Pension Income as an Object of Income Tax Article (ITA) 21

The provisions on the imposition of tax on pension income are regulated under Minister of Finance Regulation (PMK) Number 16/PMK.03/2010 and PMK Number 168 of 2023 (PMK 168/2023).

There are two approaches to taxing pension income: pension benefits paid periodically and those paid in a lump sum.

Basis for Imposing ITA 21 on Pension Income

Referring to these regulations, pension income received periodically by retirees is subject to non-final Income Tax Article (ITA) 21 withholding. Meanwhile, pension income paid in a lump sum is subject to final ITA 21 withholding.

This tax treatment also applies to a portion of pension benefits received by participants of pension programs who are still employees (not yet retired).

The basis for imposing and withholding ITA 21 on pension income received periodically is the gross income amount. This means:

• For permanent employees who receive pension income, the tax base is the amount received.
• For retirees, the tax base is the total pension income received.

As for pension income paid in a lump sum, the portion of income subject to final tax includes:

• Payments up to a maximum of 20% of pension benefits are paid in a lump sum when the employee, as a pension participant, retires or passes away.
• Monthly pension benefits that fall below a certain threshold determined from time to time by the Minister of Finance and therefore paid in a lump sum, and
• The transfer of pension benefits to a life insurance company occurs when a Pension Fund purchases a lifetime annuity.

ITA 21 Rates on Pension Income

The ITA 21 rates applied to pension income differ based on the type of pension payment received.

For pension income paid periodically, the ITA 21 rate applied follows the Monthly Average Effective Rate (TER). The amount of ITA 21 payable is calculated using the monthly effective rate multiplied by the gross income received by the retiree within a tax period.

The term gross income refers to all income received or earned from the payer of the periodic pension within a tax period.

In addition, there are specific rules for calculating ITA 21 on periodic pension income received by retirees in the final tax period.

The calculation is done in the same way as calculating ITA 21 for employees in December. The difference is that the taxable net income is derived from the total gross pension income received during one year, minus pension costs and zakat or mandatory religious contributions.

For pension income paid in a lump sum, the ITA 21 rate varies depending on the amount received:

• Pension income up to IDR 50 million is subject to a 0% rate
• Pension income above IDR 50 million is subject to a 5% rate

This provision applies to the cumulative amount of pension benefits, severance pay, or old-age benefits paid within a maximum period of two years.

Income Tax Article (ITA) 21 Withholding on Pension Income

Withholding is carried out by DPPK, DPLK, or other institutions that pay pension benefits, whether the payment is made periodically or in a lump sum. In addition to withholding, these institutions are also required to calculate, deposit, and report Income Tax Article (ITA) 21 for each Tax Period.

These obligations remain applicable even if the pension amount paid is IDR50 million or below (0% rate).

Furthermore, the withholding agent must provide the ITA 21 withholding slip to the pension recipient, whether requested or not.

Pension Contributions as a Deduction from Gross Income

Another aspect to note is the treatment of pension contributions paid while an employee is still actively working.

There is an exemption from Income Tax Article (ITA) 21 withholding on contributions related to pension and old-age programs paid to pension funds, the social security administering body for employment, or the old-age benefits administering body, when such contributions are paid by the employer.

The pension fund in question must be one approved by the Minister or licensed by the FSA (OJK). Meanwhile, the social security administering body for employment must be established in accordance with statutory regulations.

In addition, pension contributions paid by employees through the employer may be used as a deduction when calculating net income for one fiscal year.

For example, an employer participates in the Pension Security Program (Jaminan Pensiun) from BPJS Ketenagakerjaan, with contribution details of 2% paid by the employer and 1% paid by the employee through the employer.

The 2% pension contribution component paid by the employer each month is not included in gross income for calculating the monthly Income Tax Article (ITA) 21. Meanwhile, the 1% pension contribution component paid by the employee becomes a deduction from income for the recalculation of ITA 21 in the December period.

For retirees, there is a pension cost that can be used as a deduction from gross income in the recalculation of Income Tax Article (ITA) 21 for the final period.

Referring to Article 11 of PMK 168/2023, the deductible pension contribution amount is set at 5% of gross income, with a maximum of IDR2.4 million per year or IDR200,000 per month.

If a person receives pension income from more than one institution, then the pension cost is calculated separately for each institution.

Conclusion

Pension income is essentially still subject to Income Tax Article (ITA) 21, unless the Constitutional Court rules otherwise in the ongoing judicial review case.

A proper understanding of these tax provisions is important so that both retirees and active employees can ensure tax compliance and optimize pension benefits in accordance with applicable regulations. (ASP/NZR/HFZ)