Additional Compensation Allowance of Government Personnel Exempt from Income Tax

September 14, 1999 BIR RULING NO. 144-99 144-99 Mr. Danilo C. Furia Assistant City Budget Officer Butuan City Dear Mr. Furia, This refers to your letter dated May 26, 1999, requesting for an opinion on the taxability of additional compensation allowance earned in 1998 pending its formal integration into the basic pay of government personnel. It is your opinion that the additional compensation of P500.00 per month given to government personnel per Administrative Order (AO) No. 53 dated May 17, 1993 is not subject to income tax. In reply, please be informed that this Office has ruled on the taxability of the additional compensation allowance granted under Administrative Order No. 53 dated May 17, 1993. Thus, it was stated in Ruling No. 006-95: ". . . the Five Hundred Pesos (P500.00) additional compensation per month granted to government officials and employees beginning May 1, 1993 with salary grade up to Grade 25 under Administrative Order No. 53 is in the nature of compensation as explicitly provided in the first "WHEREAS clause" of the said order. . . . This Administrative Order is issued to extend the same privilege to the rest of the personnel of the government, which shall partake of an allowance and not subject to GSIS, HDMF Fund premiums and income tax deductions pending its formal integration into the basic pay of the subject government personnel ." (emphasis supplied) Such being the case, the said P500.00 additional compensation shall be subject to income tax and consequently to the withholding tax prescribed under Section 72 of the Tax Code, as amended. However, the withholding tax thereon shall be made only as of the time of its formal integration into the basic pay of the subject government personnel with salary grade up to Grade 25. llcd Effective January 1, 1998, however, excluded from taxable gross income under Sec. 32 of Republic Act No. 8424, are the 13 th month pay and other benefits received as a consequence of employer-employee relationship. Thus, (B) Exclusions from Gross Income . The following items shall not be included in gross income and shall be exempt from taxation under this Title: xxx xxx xxx (7) Miscellaneous Items . (e) Gross benefits received by officials and employees of public and private entities: Provided, however, That the total exclusion under this subparagraph shall not exceed Thirty thousand pesos (P30,000) which shall cover: (I) Benefits received by officials and employees of the national and local government pursuant to R.A. 6686; (II) Benefits received by employees pursuant to P.D. 851, as amended by Memorandum Order No. 28 dated August 13, 1986; (III) Benefits received by officials and employees not covered by P.D. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; and (IV) Other benefits such as productivity incentives and Christmas bonus: Provided, further, That the ceiling of Thirty thousand pesos (30,000) may be increased through rules and regulations issued by the Secretary of Finance, upon recommendation of the Commissioner, after considering, among others, the effect on the same of the inflation rate at the end of the taxable year. The additional compensation income per month granted under A.O. No. 53 falls within the meaning of " other benefits " as defined in the Sec. 32(B) above cited. Accordingly, the additional compensation income granted under A.O. 53 dated May 17, 1993 or such amount thereof that, when in conjunction with " the other benefits ", do not exceed the limitation of P30,000 prescribed under Sec. 32(B) of R.A. 8424, shall be treated as an exclusion from taxable gross income, and, as such, is exempt from income tax. prcd Ruling No. 006-95 is hereby modified accordingly. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue