Start with the documents
Collect the employment contract, relevant collective terms, termination letter, settlement agreement and calculation. Identify whether each amount is due under existing terms or is a separate discretionary or qualifying termination payment.
The Income Tax Law distinguishes the categories in section 5(1)(b)(iv)–(vi) and the corresponding non-resident provisions. These include defined retirement gratuities, early-retirement scheme benefits and specified non-contractual termination compensation. Section 20ST provides the special-rate mechanism. Read the applicable provisions rather than extending the headline rule to all exit payments.
Separate the payment schedule
List final salary, accrued leave, any 13th salary, notice-related amounts, bonuses, pension or provident-fund amounts and the proposed compensation separately. Establish the correct treatment for each. A single bank transfer can contain several tax categories.
For an illustration, assume €250,000 qualifies wholly for the special treatment and no other complication changes the calculation. The excess over €200,000 is €50,000; at 20%, tax is €10,000. Any ordinary final salary paid alongside it needs its own treatment and must not simply be absorbed into that €200,000 threshold.
Review payroll and employer consequences
Check the appropriate withholding, contribution and reporting treatment and the employer’s deduction position. The tax classification does not decide whether the employee was entitled to the amount or whether a settlement validly resolves an employment dispute.
For a cross-border employee, residence, work history and the relevant treaty can add further questions. Do not use a domestic example as a complete answer for duties performed across countries.
Approve before payment
Prepare a component-by-component memo with the legal basis, calculation and approvals. Resolve uncertainty before the settlement is signed or paid. Keep the payroll report, employee statement and payment evidence consistent.
The 13th-salary guide addresses one common separate component. If a payment was already reported incorrectly, use the PAYE correction workflow rather than merely changing the description in the ledger.