The policy of taxing the Holiday Allowance (THR) for private employees often sparks public debate, especially ahead of Eid. A lecturer from the Department of Accounting at FEB UGM, Rijadh Djatu Winardi, Ph.D., explained that the taxation of THR is a natural consequence of Indonesia’s income tax system.
“Under the Income Tax Law, any additional economic benefit received by taxpayers is, in principle, subject to tax. THR meets this criterion as it increases workers’ purchasing power, particularly ahead of the holiday,” he stated on Tuesday (March 17, 2026).
Rijadh further explained that from the perspective of tax fairness, the taxation of THR aligns with the principle of horizontal equity. It means individuals with similar economic capacity should be taxed equally, regardless of the source of their income.
He noted that the public perception of high tax deductions on THR is often due to the monthly tax calculation mechanism. When THR becomes payable, total monthly income increases significantly, which makes the income tax (PPh) deduction under Article 21 appear higher than usual.
“In some cases, employees who were previously not subject to tax because their income was below the Non-Taxable Income threshold (PTKP) may become taxable due to the additional THR,” he added.
Following the PPh Article 21 Mechanism
Technically, THR is categorized as irregular income. Therefore, its taxation is governed by Article 21 of the Income Tax Law, as regulated by Government Regulation No. 58 of 2023 and Minister of Finance Regulation No. 168 of 2023.
In practice, THR is combined with gross salary in the month it is paid. The total income is then subject to the Effective Average Rate (TER) to determine the amount of PPh Article 21 deducted in that month.
However, Rijadh emphasized that the PPh Article 21 system is an annual system. At the end of the year, companies recalculate the team members’ total income, including salary, THR, bonuses, and other allowances, using progressive tax rates under Article 17 of the Income Tax Law to ensure compliance with annual tax obligations.
Limited Impact on Purchasing Power
Addressing concerns that THR taxation may weaken purchasing power, Rijadh argued that the impact is relatively limited due to protective mechanisms such as PTKP for low-income groups.
“If annual income is still below the PTKP threshold, no tax is actually deducted,” he explained.
For middle- and high-income groups, although taxes are applied, the THR amount received is generally still substantial enough to support increased consumption. It is reflected in the consistent rise in public spending ahead of Eid.
Maintaining Balance
Rijadh also highlighted that the government has sought to balance state revenue and workers’ welfare through various policies.
One example is the different treatment between the public and private sectors. For civil servants (ASN), including PNS, TNI, and Polri, the THR tax is calculated but borne by the government through the state or regional budget, allowing them to receive THR in full.
In the private sector, companies may adopt a gross-up scheme, in which they provide tax allowances so that the employer effectively bears the economic burden of the tax.
Additionally, the government may introduce fiscal incentives under certain conditions, such as the PPh Article 21 borne by the government scheme. Under this policy, taxes on team member income, including THR, may be covered by the government for specific sectors, such as labor-intensive and service sectors. This facility is typically granted to workers earning up to around IDR 10 million per month to help maintain purchasing power.
“With this combination of policies, the government aims to strike a balance. Taxes are still collected to support state revenue. At the same time, policy space remains to protect workers’ purchasing power, either through government incentives or company policies such as the gross-up mechanism,” he explained.
No Special Tax on THR
Rijadh emphasized the importance of public understanding to avoid misconceptions about THR taxation. He stressed that there is no special tax rate applied specifically to THR.
“The seemingly large deduction occurs because total income in that month increases, potentially placing it in a higher tax bracket during the temporary calculation,” he concluded.
He reaffirmed that THR taxation is normal and consistent with its classification as taxable income.
Report: Shofi Hawa Anjani
Editor: Kurnia Ekaptiningrum
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