Tax Exemption of the Terminal Leave Pay of a Deceased Employee

February 18, 1992 BIR RULING NO. 056-92 28 (b) (7) (B) 027-92 056-92 Mrs. Lucia Villena No. 1178 J. Nakpil St. Paco, Manila M a d a m : This refers to your letter dated January 24, 1992 requesting for a ruling that the terminal leave pay of your husband, the late Eduardo Villena who died on October 19, 1991 be exempt from income tax and consequently from the withholding tax. In reply, please be informed that pursuant to Section 28(b)(7)(B) of the Tax Code, as amended, by E.O. No. 37, any amount received by an official or employee or by his heirs from the employer as a consequence of separation of such official or employee from the service of the employer due to death , sickness or other physical disability or for any cause beyond the control of the said official or employee shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. The Supreme Court in the case of Commissioner of Internal Revenue vs. The Court of Appeals and Efren P. Castaeda, G.R. No. 96016, October 17, 1991, ruled that the terminal leave pay received by a government official, or employee is not part of compensation but a retirement benefit exempt from income tax and consequently from the withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code as amended by B.P. Blg. 135 and as implemented by Revenue Regulations No. 6-82 as amended. Such being the case, the terminal leave pay of your husband is not subject to income tax and consequently to the withholding tax. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue