(Article 30, paragraph 1 of the Income Tax Act; excerpt from the original in Japanese)
In plain terms: besides the retirement allowance itself, money received in a lump sum on retirement is retirement income. What is taxed is not the whole retirement allowance. The amount of retirement income is calculated as follows. > 退職所得の金額は、その年中の退職手当等の収入金額から退職所得控除額を控除した残額の二分の一に相当する金額（当該退職手当等が、短期退職手当等である場合には次の各号に掲げる場合の区分に応じ当該各号に定める金額とし、特定役員退職手当等である場合には当該退職手当等の収入金額から退職所得控除額を控除した残額に相当する金額とする。）とする。[［1］](#ref-1) > > Reference translation (unofficial): The amount of retirement income is the amount equal to one-half of the remainder after subtracting the retirement income deduction from the amount of retirement allowances, etc. received during the year (where the retirement allowances, etc. are short-term retirement allowances, etc., the amount prescribed in each of the following items according to the category of case listed therein; where they are specified officer retirement allowances, etc., the amount equal to the remainder after subtracting the retirement income deduction from the amount of those retirement allowances, etc.).(Article 30, paragraph 2 of the Income Tax Act; excerpt from the original in Japanese)
In plain terms: the basis for the tax is one-half of what remains after subtracting the "retirement income deduction" from the amount received. However, this parenthetical provision sets out cases in which the amount is not halved, such as an allowance paid after five years of service or less (explained under Pitfalls). The key point of this article is that a deduction is provided first. Once the amount of retirement income is fixed, tax rates are applied to the retirement allowance alone. > 居住者に対して課する所得税の額は、その年分の課税総所得金額又は課税退職所得金額をそれぞれ次の表の上欄に掲げる金額に区分してそれぞれの金額に同表の下欄に掲げる税率を乗じて計算した金額を合計した金額と、その年分の課税山林所得金額の五分の一に相当する金額を同表の上欄に掲げる金額に区分してそれぞれの金額に同表の下欄に掲げる税率を乗じて計算した金額を合計した金額に五を乗じて計算した金額との合計額とする。[［2］](#ref-2) > > Reference translation (unofficial): The amount of income tax imposed on a resident is the sum of the following: the total of the amounts calculated by dividing the taxable total income or taxable retirement income for that year into the amounts in the upper column of the following table and multiplying each by the tax rate in the lower column of the same table; and the amount calculated by multiplying by five the total of the amounts calculated by dividing one-fifth of the taxable forestry income for that year into the amounts in the upper column of the same table and multiplying each by the tax rate in the lower column of the same table.(Article 89, paragraph 1 of the Income Tax Act; excerpt from the original in Japanese)
In plain terms: the basis for tax on salary and similar income (taxable total income) and the basis for tax on a retirement allowance (taxable retirement income) are each multiplied by tax rates separately. A large retirement allowance does not push up the tax rate by being added to your salary. The National Tax Agency (NTA) explains the same point. > 退職所得は、原則として他の所得と分離して所得税額を計算します。[［4］](#ref-4) > > Reference translation (unofficial): As a rule, the amount of income tax on retirement income is calculated separately from other income.(NTA Tax Answer "No.1420 When you receive a retirement allowance (retirement income)"; excerpt from the original NTA page in Japanese)
This way of calculating is called separate taxation. ## The "retirement income deduction" that creates the tax-free range The amount of the retirement income deduction is determined by your years of service. Article 30, paragraph 3 of the Income Tax Act provides as follows. > 政令で定める勤続年数（以下この項及び第七項において「勤続年数」という。）が二十年以下である場合四十万円に当該勤続年数を乗じて計算した金額[［1］](#ref-1) > > Reference translation (unofficial): Where the years of service prescribed by Cabinet Order (hereinafter in this paragraph and paragraph 7 referred to as "years of service") are 20 years or less: the amount calculated by multiplying 400,000 yen by those years of service.(Article 30, paragraph 3, item 1 of the Income Tax Act; excerpt from the original in Japanese)
> 勤続年数が二十年を超える場合八百万円と七十万円に当該勤続年数から二十年を控除した年数を乗じて計算した金額との合計額[［1］](#ref-1) > > Reference translation (unofficial): Where the years of service exceed 20 years: the sum of 8,000,000 yen and the amount calculated by multiplying 700,000 yen by the number of years obtained by subtracting 20 years from those years of service.(Article 30, paragraph 3, item 2 of the same Article; excerpt from the original in Japanese)
In plain terms: for up to 20 years of service, the deduction is "400,000 yen x years of service." Beyond 20 years, it is "8,000,000 yen + 700,000 yen x (years of service - 20 years)." The NTA also explains the same formulas in a table. > 退職所得控除額の計算の表勤続年数(＝A)退職所得控除額20年以下40万円×A(80万円に満たない場合には、80万円)20年超800万円＋70万円×(A-20年)[［4］](#ref-4) > > Reference translation (unofficial): Table for calculating the retirement income deduction. Years of service (= A), 20 years or less: retirement income deduction of 400,000 yen x A (800,000 yen if this is less than 800,000 yen). Over 20 years: 8,000,000 yen + 700,000 yen x (A - 20 years).(Same page, calculation of the retirement income deduction; excerpt from the original NTA page in Japanese)
There are two rules for calculating the deduction. The first is that a fraction of a year of service of less than one year is rounded up. Here is the NTA's numerical example. > 勤続年数は11年になります。（端数の2か月は1年に切上げ）40万円×（勤続年数）＝40万円×11年＝440万円[［4］](#ref-4) > > Reference translation (unofficial): The years of service come to 11 years. (The fraction of 2 months is rounded up to 1 year.) 400,000 yen x (years of service) = 400,000 yen x 11 years = 4,400,000 yen.(Same page, Example 1; excerpt from the original NTA page in Japanese)
The second is that if the calculated deduction is less than 800,000 yen, it is treated as 800,000 yen [［1］](#ref-1). So what happens when the retirement allowance fits within the deduction? Subtracting the deduction from the amount received gives zero, so no amount of retirement income arises. Tax is calculated by applying tax rates to the amount of retirement income, so if that amount is zero, no tax is due. Retirement allowances are also subject to inhabitant tax. Inhabitant tax is calculated from the same amount of retirement income as income tax, separately from other income [［5］](#ref-5). If the amount of retirement income is zero, no inhabitant tax is due either. ## Whether tax arises depends on your years of service and the amount of the allowance Let us look at two fictional people.| Person | Retirement allowance (amount received) | Retirement income deduction | Amount of retirement income |
|---|---|---|---|
| Person A, 10 years of service | 4 million yen | 4 million yen | 0 yen |
| Person B, 30 years of service | 25 million yen | 15 million yen | 5 million yen |
(Tax rate table in Article 89, paragraph 1 of the Income Tax Act, partial; excerpt from the original in Japanese)
Applying these to Person B's retirement income of 5 million yen, the amount of income tax is 1.95 million yen x 5% + 1.35 million yen x 10% + 1.7 million yen x 20% = 572,500 yen. Special reconstruction income tax is also added [［4］](#ref-4). Comparing the two, what decides whether tax arises is the relationship between the amount of the allowance and the amount of the deduction. Within the deduction there is no tax, and the part above it is taxed. "Retirement allowances are not taxed" holds only within the deduction. ## Pitfalls There are four pitfalls worth knowing. The first is the "Application Form for Receipt of Retirement Income." A person receiving a retirement allowance must submit the form to the head of the tax office through the payer by the time of receipt. > 国内において退職手当等の支払を受ける居住者は、その支払を受ける時までに、次に掲げる事項を記載した申告書を、その退職手当等の支払者を経由して、その退職手当等に係る所得税の第十七条（源泉徴収に係る所得税の納税地）の規定による納税地（第十八条第二項（納税地の指定）の規定による指定があつた場合には、その指定をされた納税地）の所轄税務署長に提出しなければならない。[［3］](#ref-3) > > Reference translation (unofficial): A resident who receives payment of retirement allowances, etc. in Japan must, by the time of receiving that payment, submit a written application stating the following matters, through the payer of those retirement allowances, etc., to the head of the tax office having jurisdiction over the place of tax payment under Article 17 (Place of Tax Payment for Income Tax Subject to Withholding) for the income tax on those retirement allowances, etc. (or, where a designation has been made under Article 18, paragraph 2 (Designation of Place of Tax Payment), the designated place of tax payment).(Article 203, paragraph 1 of the Income Tax Act; excerpt from the original in Japanese)
> 第一項の規定による申告書は、退職所得の受給に関する申告書という。[［3］](#ref-3) > > Reference translation (unofficial): The written application under paragraph 1 is called the "Application Form for Receipt of Retirement Income."(Paragraph 6 of the same Article; excerpt from the original in Japanese)
In plain terms: a person receiving a retirement allowance submits the "Application Form for Receipt of Retirement Income" to the tax office through their employer or other payer by the time of receipt. If you have submitted this form, the payer calculates the tax and withholds it. > 退職金等の支払者が所得税額および復興特別所得税額（令和9年以後は所得税額、防衛特別所得税額および復興特別所得税額。以下同じです。）を計算し、その退職手当等の支払の際、退職所得の金額に応じた所得税等の額が源泉徴収されるため、原則として確定申告は必要ありません。[［4］](#ref-4) > > Reference translation (unofficial): The payer of the retirement allowance, etc. calculates the amount of income tax and special reconstruction income tax (from 2027 onward, income tax, special defense income tax and special reconstruction income tax; the same applies below), and the income tax, etc. corresponding to the amount of retirement income is withheld when the retirement allowance, etc. is paid, so as a rule a final tax return is not required.(Same page, people who have submitted the form; excerpt from the original NTA page in Japanese)
The second is that if you receive a retirement allowance without submitting the form, more tax than necessary is withheld at first. > 退職金等の支払金額の20.42パーセントの所得税額および復興特別所得税額が源泉徴収されますが、受給者本人が確定申告を行うことにより所得税額および復興特別所得税額の精算をします。[［4］](#ref-4) > > Reference translation (unofficial): Income tax and special reconstruction income tax equal to 20.42 percent of the amount paid as the retirement allowance, etc. are withheld, and the recipient settles the income tax and special reconstruction income tax by filing a final tax return.(Same page, people who have not submitted the form; excerpt from the original NTA page in Japanese)
In plain terms: 20.42% of the retirement allowance is withheld without subtracting the deduction. The more the amount was meant to fit within the deduction, the larger the refund you get by filing a final tax return. The third is that in some cases the calculation of the deduction changes. > 前年以前に退職金を受け取ったことがあるときまたは同一年中に2か所以上から退職金を受け取るときなどは、控除額の計算が異なることがあります。[［4］](#ref-4) > > Reference translation (unofficial): If you have received a retirement allowance in a previous year or earlier, or receive retirement allowances from two or more places in the same year, the calculation of the deduction may differ.(Same page, Note 2; excerpt from the original NTA page in Japanese)
If you expect retirement allowances from two places in the same year, or received one in a previous year, the amount of the deduction may not follow the formula above. If you are unsure, you can consult the tax office's consultation desk. The fourth is that for an allowance paid after five years of service or less, part of the amount is not halved. For an allowance paid to a person who served five years or less as an officer or the like (specified officer retirement allowance), the whole amount after subtracting the deduction becomes the amount of retirement income, and no halving is applied. For an allowance paid after five years of service or less to a person other than an officer (short-term retirement allowance), the part of the amount after subtracting the deduction that exceeds 3 million yen is not halved. The NTA explains it as follows. > 退職金の額から退職所得控除額を差し引いた額が退職所得の金額になります（上記計算式の2分の1計算の適用はありません。）[［4］](#ref-4) > > Reference translation (unofficial): The amount obtained by subtracting the retirement income deduction from the amount of the retirement allowance becomes the amount of retirement income (the one-half calculation in the above formula does not apply).(Same page, Note 1, "Where the retirement allowance, etc. falls under 'specified officer retirement allowances, etc.'"; excerpt from the original NTA page in Japanese)
> 退職金の額から退職所得控除額を差し引いた額のうち300万円を超える部分については、上記計算式の2分の1計算の適用はありません。[［4］](#ref-4) > > Reference translation (unofficial): For the part, of the amount obtained by subtracting the retirement income deduction from the amount of the retirement allowance, that exceeds 3 million yen, the one-half calculation in the above formula does not apply.(Same page, Note 2, "Where the retirement allowance, etc. falls under 'short-term retirement allowances, etc.'"; excerpt from the original NTA page in Japanese)
In plain terms: the shorter the years of service, the smaller the deduction, and in some cases the one-half calculation does not apply either. It is not always true that what remains after the deduction is halved. ## What to do| Situation | How to think about it |
|---|---|
| Before receiving the allowance | Submit the "Application Form for Receipt of Retirement Income" to your employer. The payer calculates the tax and withholds it［3］［4］ |
| Wondering whether it fits within the deduction | Calculate the deduction from your years of service (round up any fraction of a year) and compare it with the amount of the allowance［1］［4］ |
| Received it without submitting the form | 20.42% of the allowance is withheld at first. You can settle it with a final tax return［4］ |
| Two or more places in the same year, or received one in a previous year | The calculation of the deduction may change. You can consult the tax office's consultation desk［4］ |