Severance and Pension Tax Rules Challenged at the Constitutional Court

JAKARTA. The imposition of Income Tax Article (ITA) 21 on severance pay and pensions is being challenged through a judicial review filed by two taxpayers with the Constitutional Court (MK) because it is unconstitutional.

The provisions being challenged are Article 4, paragraph (1) of the Income Tax Law and Article 17 of the same law in conjunction with the Law on the Harmonization of Tax Regulations (HPP Law).

According to a written statement from the Constitutional Court, the two taxpayers who submitted the judicial review are private-sector employees, namely Maksum Harahap and Rosul Siregar.

Issue of Economic Capacity

In the petition registered under Case No. 170/PUU-XXIII/2025, the applicants argue that treating severance pay and pension benefits as income that increases one’s economic capacity, thereby making them taxable objects, is misguided.

According to the petitioners, severance pay and pension benefits are normative rights and a form of appreciation for an employee’s service. Philosophically, they are also viewed as the final savings resulting from years of hard work and salary deductions during employment.

Therefore, the imposition of tax on severance pay and pensions, they argue, reflects unfair treatment by the state, as it effectively taxes workers’ rightful entitlements.

Severance Pay as Social Security

The petitioners argued that the imposition of Income Tax Article 21 on severance pay reduces its function as a form of social security. This is because severance pay and pensions essentially serve as an economic cushion provided to vulnerable groups.

Therefore, the tax treatment of severance pay and pensions is seen as equating the economic capacity of vulnerable groups with that of productive groups.

“Substantively, this policy violates the principle of social justice,” said the petitioners.

On that basis, the petitioners argued that the imposition of Income Tax Article 21 on severance pay and pensions contradicts the Preamble of the 1945 Constitution and Article 28H paragraph (1) of the 1945 Constitution, which guarantees the right to physical and mental well-being as well as access to healthcare services. (ASP/KEN)