Japan's Retirement Income Deduction: How Much Severance Is Tax-Free? With a Quick Table

The retirement income deduction is a tax-free allowance

A retirement allowance is deferred pay for years of service and also money to live on in retirement, so it's taxed far more lightly than salary. The core of this treatment is the retirement income deduction. You subtract the deduction from the allowance, and if nothing remains, neither income tax nor resident tax is due.

Only your length of service sets the deduction. The size of the allowance, your income in the year you retire, your family and your position have no effect on it. So with the same 20-million-yen allowance, someone with 38 years of service pays no tax, while someone with 30 years pays about 400,000 yen. Length of service changes the result dramatically.

The retirement income deduction formula

The deduction grows by 400,000 yen per year for the first 20 years and by 700,000 yen per year from the 21st. Each year counts for more the longer you stay. Even with 1 or 2 years of service, there's a minimum deduction of 800,000 yen.

• Years of service run from your hire date to your retirement date, and any fraction of a year rounds up to a full year (25 years and 1 month counts as 26 years)
• If you retired as a direct result of becoming disabled, add 1 million yen to the amount above
• If you receive retirement allowances from 2 or more places in the same year, or if your service overlaps with a past retirement allowance or an iDeCo or corporate DC lump sum, the deduction is reduced for the overlapping period

The rounding rule matters: a single day's difference in your retirement date can change the deduction by 400,000 to 700,000 yen. See how to count years of service for a retirement allowance for details.

Retirement income deduction by years of service

Joining a company at 22 and retiring at 60 means 38 years of service and a 20.6-million-yen deduction. Staying until 65 means 43 years and 24.1 million yen. For university graduates who stay until retirement, an average allowance mostly fits within the tax-free amount or exceeds it only slightly.

Years of service that bring the tax to zero, by allowance

Working backward, here's how many years of service it takes for a given allowance to be tax-free. If the allowance is at or below the deduction, both income tax and resident tax are zero, and you keep the full amount.

For a 20-million-yen allowance, 37 years of service exceeds the 19.9-million-yen deduction by just 100,000 yen. Half of that, 50,000 yen, is taxed, for a tax of 7,552 yen. At 38 years, it's zero. Actual tax amounts are tabulated in tax and take-home on 10, 20 and 30 million yen.

How the amount above the tax-free allowance is taxed

1. 1

   Subtract the retirement income deduction

   For 20 million yen and 30 years of service: 20 million yen − 15 million yen = 5 million yen.

2. 2

   Halve the remainder (retirement income)

   5 million yen × 1/2 = 2.5 million yen. Amounts under 1,000 yen are dropped to get taxable retirement income.

3. 3

   Apply income tax and resident tax

   Income tax from the quick table is 2.5 million yen × 10% − 97,500 yen = 152,500 yen, which becomes 155,702 yen at 102.1% with the special reconstruction income tax. Resident tax at 10% is 250,000 yen. The total is 405,702 yen, leaving 19,594,298 yen in take-home.

If you retired because you became disabled, the deduction rises by 1 million yen to 16 million yen, and the tax on the same 20 million yen is 304,652 yen, about 100,000 yen less.

When the deduction shrinks or can't be used

As a rule, the retirement income deduction can be used only once for a given period of service. If you've already received a retirement allowance for the same period, or another lump sum overlaps with it, the deduction is reduced by the overlap.

• Allowances from 2 companies in the same year: they're calculated as one deduction, based on the longer service and excluding the overlap
• A past retirement allowance from the same or another company: the amount for the period overlapping your previous service comes off the deduction
• An iDeCo or corporate DC lump sum: depending on the order and interval relative to your retirement allowance, the deduction is adjusted for the overlap between your contribution period and service
• The part of a retirement allowance taken as a pension: it's miscellaneous income rather than retirement income, and it falls under the public pension deduction rather than the retirement income deduction

These adjustments are based on what you write in the Declaration on Receipt of Retirement Income that you submit to your company. How to fill it in and what happens if you don't submit it are explained in the Declaration on Receipt of Retirement Income. In an ordinary case with no overlap, just enter your years of service and allowance into the Retirement Allowance Tax & Take-Home Calculator to see the deduction, tax and take-home.

FAQ

How much of a retirement allowance is tax-free?

Up to the retirement income deduction. With 20 years of service or less, it's 400,000 yen × years of service (minimum 800,000 yen). With over 20 years, it's 8 million yen + 700,000 yen × (years of service − 20). That makes it tax-free up to 8 million yen at 20 years, 15 million yen at 30 years and 20.6 million yen at 38 years.

How does the deduction change after 20 years of service?

From the 21st year, the deduction per year rises from 400,000 yen to 700,000 yen. It's 8 million yen at 20 years, 8.7 million yen at 21 years, 11.5 million yen at 25 years and 15 million yen at 30 years.

Does the deduction change with my income or dependents?

No. It depends only on your years of service and whether you retired because you became disabled. Retirement allowances are taxed separately from salary, so your income that year doesn't affect it either.

Do part-time workers' retirement allowances get the deduction?

Yes. Whatever your employment type, a lump sum paid because you're retiring is retirement income, and the deduction applies according to your years of service. Even 1 or 2 years of service gets a minimum 800,000-yen deduction, so a small allowance isn't taxed.