BIR Ruling [DA-311-98]

July 7, 1998 BIR RULING [DA-311-98] Bulacan National Agricultural School San Ildefonso, Bulacan Attention: Ms. Ma. Dolores G. Bersamina Accountant I Gentlemen : This refers to your letter dated June 5, 1998 requesting for a ruling on whether or not the terminal leave pay of Mr. Lorenzo S. Anarcon who availed of the optional retirement is exempt from income and consequently from the withholding tax. IcSHTA It is represented that Mr. Lorenzo S. Anarcon, former Vocational School Superintendent II of the Bulacan National Agricultural State College availed of the optional retirement under Republic Act No. 660 at the age of 63.5 years effective April 1, 1998 and that his total accumulated leave credits amounted to P865,191.12 for his 829.594 days accrued leave. ITCHSa In reply, please be informed that commutation of leave credits more commonly known as terminal leave is applied for by an officer or employee who retires, resigns or is separated from the service through 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). DASEac In view thereof, this Office is of the opinion as it hereby holds that the terminal leave pay received by a government official or employee who availed of the optional retirement not being 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. 150-92 dated May 19, 1992) DaAIHC Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group