LIRS directs employers to deduct 10% capital gain tax from terminal benefits

Lagos State Inland Revenue Service (LIRS) has directed employers across the state to deduct capital gain tax of 10 percent from any sum paid to employees on termination of their service. This was disclosed in a notice released by the state tax agency, signed by the chairman, Ayodele Subair.

According to the notice, such compensations are subject to taxation in section 6(a) of the Capital Gain Tax Act although it is exempted from taxation in paragraph 26 of schedule three of Personal Income Tax.

The notice further stated the compensation would be exempted from Pay as You Earn (PAYE) if no agreement was made before the disengagement process began. However, the same will be subject to capital gain tax, which is 10 percent of the amount.

“Pre-agreed amounts are generated from employment and subject to PAYE. Gratuity payment are tax deductible for PAYE purposes if they are paid under an approved pension scheme in line with Section 5 of the Pension Reform Act (PRA) 2014,” the notice reads, adding that:

“If paid outside PRA, the gratuity payments would be taxable if the conditions under paragraph 18 of the 3rd Schedule is triggered, that is (a) if the service period is below 10 years; (b) the sum is higher than N100, 000, and (c) where the service period is less than 5 years (or an aggregate of 63 consecutive months in the case of a service that is not continuous), the exemption permitted is N1, 000 per annum for such period.”

The chairman stated that employers should notify the state tax agency of payments for compensation for loss of employment.