Paragraph 26 of the Third Schedule to the Personal I e Tax Act (PITA), 2011 as amended exempts "any compensation for loss of employment" from tax under the PITA. The law however fails to define what constitutes loss of employment.

Based on the foregoing, the LIRS has issued a public notice to guide taxpayers in this regard.

Highlights of the notice

Termination vs Terminal Benefit 

Compensation for loss of office can either be a terminal benefit or a termination benefit.

Termination benefit is a redundancy lump sum accruable on premature termination of employment or contract. This benefit may not be fully tied to the employment duties performed.

Terminal benefit is a retirement or resignation lump sum payment such as gratuity and pension usually based on predefined terms and satisfactory performance of employment duties.

Termination benefits are capital in nature while terminal benefits are revenue in nature.

Compliance Requirements

Compensation for loss of employment will qualify for exemption under PITA if the amount paid is not pre-agreed. However such payments are liable to capital gains tax (CGT) under section (6)(1a) of the CGT Act. The LIRS holds the view that all pre-agreed payments are taxable under the PITA.


All gratuity payments under the Pension Reform Act or a scheme approved by the National Pension Commission are tax deductible while those paid outside such schemes are conditionally taxable as provided under Para. 18 of the Third Schedule i.e. subject to applicable minimum periods of service and prescribed maximum amounts (N1,000 per annum or total gratuity of N100,000 as the case may be).

Reporting Obligations

Employers are required to provide a breakdown of severance payments and notify the LIRS of any payment for loss of employment stating the recipients to enable the LIRS determine the correct tax treatment. Individuals who receive termination payments are to disclose the income and remit applicable CGT to the LIRS.


The tax treatment of terminal and termination benefits has long been a grey area both in law and in practice. Legislative provisions and rules designed to address the issue are at best dated or badly drafted adding to the avoidable complications.

While the proper interpretation of the various terms and taxability of the applicable benefits is still up for debate, it is helpful to understand the position of the LIRS as this reduces uncertainty and makes it easier for both employers and employees to plan. Hopefully this triggers a process that will ultimately lead to a more definitive legislative change or case law.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.