Tax Exemption of Separation Benefits Paid to Employee Separated from Service Due to Ill Health

February 26, 1992 BIR RULING NO. 068-92 28 (b) (7) (B) 002-92 068-92 Mr. Victor C. San Miguel 12 Clio St. Meralco Village Marilao, Bulacan S i r : This refers to your letter dated January 9, 1992 requesting for a ruling as to whether the separation benefit which you received from the Manila Electric Company as a result of your separation from the said Company effective December 31, 1991, due to ill health, is subject to tax. It is represented that you had been employed at the Manila Electric Company since March 5, 1965 until December 31, 1991; that you were forced to retire from said Company due to illness; that the Company's physician diagnosed your illness as myopia with diabetic retinopathy which may eventually lead to blindness. In reply, please be informed that pursuant to Section 28(b)(7)(B) of the Tax Code, as amended, 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 said official or employee shall not be included in gross income and shall be exempt from taxation under Title II of the Tax Code. In view thereof, this Office is of the opinion as it hereby holds that any and all amounts which you received from the Manila Electric Company as a result of your separation from the service due to sickness are exempt from income tax and consequently, from withholding tax prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended. Moreover, the cash equivalent of your accumulated vacation and sick leave credits, if any, is not likewise subject to income tax and consequently to the withholding tax (BIR Ruling No. 28(b)(7)(B)-113-91 dated November 8, 1991). cdta Very truly yours, JOSE U. ONG Commissioner of Internal Revenue