Tax Exemption of Terminal Leave Pay Received by a Government Official or Employee on His Optional Retirement

May 19, 1992 BIR RULING NO. 150-92 72 000-00 150-92 National Intelligence Coordinating Agency Quezon City Attention: Ms . Naomi S . Castillo Chief Accountant Gentlemen : This refers to your letter dated February 4, 1992, in effect requesting for a ruling on whether or not the terminal leave pay received by a government official or employee on the occasion of his optional retirement not due to sickness or other physical disability is exempt from income tax and consequently from the withholding tax. In reply, please be informed that commutation of leave credits more commonly known as terminal leave is applied for by an officer or employee who retires , resigns or is separated from the service through no fault of his own. (Manual on Leave Administration Course for Effectiveness published by the Civil Service Commission, pages 16-17). The terminal leave pay received by a government official or employee is not part of his gross salary or income but a retirement benefit which is not subject to income tax and consequently to the withholding tax on wages prescribed by Section 72, Chapter 10, Title II of the Tax Code, as amended and as implemented by Revenue Regulations No. 6-82, as amended. The rationale behind the employee's entitlement to an exemption from withholding (income) tax on his terminal leave pay is that "the Government recognizes that for most public servants, retirement pay is always less than generous if not meager and scrimpy. A modest nest egg which the senior citizen may look forward to is thus avoided. Terminal leave payments are given not only at the same time but also for the same policy considerations governing retirement benefits". (Jesus N. Borromeo vs. The Hon. Civil Service Commission, et al., G.R. No. 96032, 31 July 1991). In view thereof, this Office is of the opinion as it hereby holds that the terminal leave pay received by a government official or employee on the occasion of his optional retirement not due to sickness or other physical disability, not being part of the gross salary or income of a government official or employee but a retirement benefit, is exempt from income tax and consequently from the withholding tax. iatdc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue By: EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge