Monetized Vacation Leave Credits of Government Officials and Employees are Exempt from Income Tax

September 6, 1991 BIR RULING NO. 173-91 21 (a) 72 000-00 173-91 S i r : This is in reply to your request for clarification on the question of whether or not the monetized vacation leave credits of government officials and employees as provided for under the Joint Civil Service Commission (CSC) and the Department of Budget and Management (DBM) Circular No. 1, s. of 1991, are subject to withholding tax. cdti Said Joint Circular defines monetarization of leave credits as payment of the money value of the accumulated vacation leave credits without actually going on leave of absence. [Rule III, Section 1 (a)] Officers and employees in the career and non-career service, whether permanent, provisional, temporary or casual, who have accumulated at least fifteen (15) days vacation leave/service credits shall be allowed to monetize a maximum of ten (10) working days vacation leave/service credits a year. Moreover, Rule I, Section I of the Joint Circular provided that the leave laws are social legislations which had been enacted to promote the physical and mental well-being of public servants and should be responsive with the time and be interpreted reasonably in favor of the employee; and that monetization of leave credits aims, among others, to: (a) provide necessary additional funds to finance the education, health or other emergency expenses of the employee, or any member of his family; and (b) allow the employee to continue reporting for work and be paid his salary for service actually rendered even if he chooses to monetize portion of his accumulated vacation leave credits. Gleaned from the foregoing objectives, the leave credits monetization scheme is indeed a facility or privilege of relatively small value which are offered or furnished by the employer merely as a means of promoting the health, goodwill contentment, or efficiency of its employees as contemplated under Section 2 of Revenue Regulations No. 12-86. Moreover, being social legislation a liberal construction is justified. Such being the case, the ten-day monetized leave credits do not constitute an additional compensation to the employee; hence, the same shall be exempt from income tax, and consequently from withholding, pursuant to Section 2 of Revenue Regulations No. 12-86. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge