Separation Pay - Tax-Exempt

April 28, 1993 BIR RULING NO. 146-93 SEPARATION PAY TAX-EXEMPT 2 (b) (7) (B) 50-93 146-93 International School Bel Air, Makati Metro Manila Attention: Atty . Ester S . Garcia Director of Personnel This refers to your request for a ruling that the separation benefits to be paid to Mrs. Eden Teresa A. Etorne by reason of health condition are exempt from all taxes pursuant to Section 28(b) (7) (B) of the Tax Code, as amended. aisadc Documents submitted show that Mrs. Eden Teresa A. Etorne was certified by Dr. Jose Alberto V. Araneta, an Ear, Nose & Throat specialist, to have first came to see him at the Family Med-Care Clinic during the first week of August 1992; that she was complaining of persistent left ear discharge with associate left hermi-cranial headaches; that twice-weekly follow-up and appropriate antibiotic coverage did not alleviate her symptoms; that the x-rays taken did not reveal cholesteatoma formation; that after more than a month of follow-up, the doctor suggested that she undergo surgery; that she was admitted on September 14, 1992; that intra-operatively, a large cholesteatoma was noted to be occupying the middle ear, and had eroded that ossicles and the aditus ad antrum; that this was her third hospital confinement; and that said illness affects the performance of her duties and endangers her life if she continues working. Said finding is confirmed by the BIR Medical Officer. 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 her heirs from her employer as a consequence of separation of such official or employee from the service of her 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, including terminal leave pay (sick leave and vacation leave credits) which Mrs. Eden Teresa A. Etorne will receive from you as a result of her separation from the service of your company due to her aforesaid health condition is exempt from income tax and consequently, from withholding tax as prescribed under Section 72, Chapter 10, Title II of the Tax Code, as amended by B.P. Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. It is, however, understood that this exemption does not include the payment of Mrs. Eden Teresa A. Etorne's salary. cdtech VICTOR A. DEOFERIO, JR. Deputy Commissioner of Internal Revenue