Exemption of Separation Pay from Withholding Tax

August 15, 1990 BIR RULING NO. 150-90 25 (b) (7) (B) 323-88 150-90 Gentlemen : This refers to your letter dated May 28, 1990 requesting a ruling on the request of Atty. Alberto Enriquez for exemption from withholding tax of his separation pay from the Philippine Deposit Insurance Corporation (PDIC). aisadc It is represented that Atty. Enriquez volunteered to retire under the PDIC Separation Incentive Plan approved by your Board in its Resolution No. 89-09-77; that to your knowledge, and as attested by his physician, Atty. Enriquez was twice confined and operated on sometime in November 1989 and January, 1990, for cancer of sigmoid colon and closure of colostomy, respectively; that he is requesting exemption from the withholding tax on the additional P2,000.00 for every year of service in PDIC and the one-half month basic pay to retirees under the PDIC separation plan which are over and above the one-month for every year of gratuity month granted to retirees under R.A. 1616 as adjudicated by the Government Service Insurance System. 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 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 abovementioned law requires the presence of these two conditions in order that the employee benefits may be granted tax exemption: (1) the employee is separated 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; and (2) the employer pays benefits to the official or employee or his heirs as a consequence of such separation. Since the separation of Atty. Alberto Enriquez from the service of the Philippine Deposit Insurance Corporation was due to his sickness (cancer-descending colon), any and all amounts received or to be received by him as a result thereof are therefore, 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 Batas Pambansa Blg. 135 and implemented by Revenue Regulations No. 6-82, as amended. It must be understood, however, that the tax exemption does not include company's payment for salary and cash equivalent of accumulated vacation or sick leaves, if any. casia Very truly yours, (SGD.) JOSE U. ONG Commissioner