BIR Ruling [DA-032-99]

January 20, 1999 BIR RULING [DA-032-99] Mr. Angelito G. Tolentino Sampaguita Street Midtown Subdivision Cainta, Rizal S i r : This refers to your letter dated December 2, 1998 requesting for a ruling on whether or not the terminal leave pay of retired employee should be subject to deduction of withholding taxes. It is represented that you retired as Municipal Budget Officer of the Municipality of Cainta, Province of Rizal effective June 26, 1998. In reply, please be informed that terminal leave pay is applied for by an officer or employee who retires, resigns or is separated from the service though no fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). The terminal leave pay received by a government official or employee is not part of his gross salary or income but a retirement benefit which is not subject to income tax and consequently to the withholding tax on wages prescribed by Section 79, Chapter XIII, Title II of the Tax Code of 1997 and as implemented by Revenue Regulations No. 6-82, as amended. The rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay is that "the Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits" (Jesus N. Borromeo vs. The Hon. Civil Service Commission, et. al., G. R. No. 96032, 31 July 1991). In view thereof, this Office is of the opinion as it hereby holds that terminal leave pay received by a government official or employee who availed of retirement not being a part of the gross salary or income of a government official or employee but a retirement benefit, is exempt from tax and consequently from the withholding tax. (BIR Ruling No. DA-311-98 dated July 7, 1998) casia Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)