Assume that the contract of employment is terminated when the basic salary of an employee is Br 7,200.

Required  Compute the tax on the severance payment if the employee left the organization after serving for: a) 7 years b) 7 years and 9 months c) 35 years

1 answer

To compute the tax on the severance payment for an employee whose contract of employment is terminated, we first need to understand the severance pay policy relevant to the specific jurisdiction and the tax implications related to severance payments.

In the absence of specific details on the severance pay formula or the applicable tax rates and brackets, I will provide general guidance on how to approach the calculations. Let's assume that the computation of severance pay is typically based on the number of years of service multiplied by a set amount (which is often a factor of the employee's salary) and that severance payments can have specific tax treatments.

Severance Payment Calculation

Assuming that the severance pay is calculated as a factor of the basic salary per year of service (which is common practice), let's define a hypothetical severance pay policy. For this example, suppose the severance pay is calculated as:

  • Severance Pay = Basic Salary × Number of Years of Service

Given the basic salary of Br 7,200, the calculations would be:

a) For 7 Years of Service

Severance Pay = Basic Salary × Years of Service
Severance Pay = 7,200 × 7 = Br 50,400

b) For 7 Years and 9 Months of Service

First, we convert 9 months into years:
9 months = 0.75 years
Total Years = 7 + 0.75 = 7.75

Severance Pay = Basic Salary × Years of Service
Severance Pay = 7,200 × 7.75 = Br 55,800

c) For 35 Years of Service

Severance Pay = Basic Salary × Years of Service
Severance Pay = 7,200 × 35 = Br 252,000

Taxation of Severance Payments

The taxation of severance pay can vary significantly based on local labor laws and tax policies. Here are some possible scenarios:

  1. If Severance is Fully Taxable: The entire amount may be subject to income tax.
  2. If Partial Exemptions Apply: There could be a certain threshold that is tax-exempt, or specific deductions allowed.
  3. Flat Tax Rate: Some jurisdictions may apply a flat tax rate to severance payments.

Example Tax Rate Calculation (Hypothetical Scenario)

Assuming a hypothetical tax rate of 20% applied to severance payments:

a) Tax on Severance Payment for 7 Years

Tax = Severance Pay × Tax Rate
Tax = 50,400 × 0.20 = Br 10,080

b) Tax on Severance Payment for 7 Years and 9 Months

Tax = Severance Pay × Tax Rate
Tax = 55,800 × 0.20 = Br 11,160

c) Tax on Severance Payment for 35 Years

Tax = Severance Pay × Tax Rate
Tax = 252,000 × 0.20 = Br 50,400

Summary of Results

  • 7 Years: Severance Pay = Br 50,400; Tax = Br 10,080
  • 7 Years and 9 Months: Severance Pay = Br 55,800; Tax = Br 11,160
  • 35 Years: Severance Pay = Br 252,000; Tax = Br 50,400

Final Note

Please consult the relevant local labor laws and tax regulations to derive the actual severance payment calculation and tax implications, as these figures can change based on jurisdictional differences in tax rates and severance payment rules.