Tax Exemption of Terminal Leave Pay Received by Employee Separated from Service Upon Liquidation of the Company Bank

April 2, 1992 BIR RULING NO. 117-92 28 (b) (7) (B) 25-92 117-92 Mrs. Elizabeth T. Tan 91 Fordham Street Saint Ignatius Village 1110 Quezon City M a d a m : In reply to your letter dated October 28, 1991, please be informed that under Section 28(b)(7)(B) of the Tax Code, as amended by E.O. 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 . Since as represented your services as a contractual employee from the said Bank were terminated upon liquidation of the Philippine Veterans Bank which is beyond your control, the terminal leave pay you will receive which is now being administered by a Liquidator of the Central Bank of the Philippines is 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, as implemented by Revenue Regulations No. 6-82, as amended. cdta Very truly yours, JOSE U. ONG Commissioner of Internal Revenue