Exemption of Retirement or Gratuity Pay from Tax

October 9, 1990 BIR RULING NO. 194-90 28 (b) (7) (B) 167-90 194-90 M a d a m : This refers to your letter dated April 25, 1990 stating that you were employed since 1976 at the Philippine Deposit Insurance Corporation (PDIC), a government agency; that your last appointment was Manager of the Claims Department (in charge of pay-off operations of closed banks); that since 1987 up to the present, you are suffering from various illness the most serious of which are bronchial asthma and kidney pains; that you have been advised by your physician since 1989 to rest and stop working more especially that your work and work environment were deemed contributory to the worsening condition of your health; that after your operation last December 9, 1989, you were again advised by your attending physician to stop working if you do not want a recurrence of your illness; and that pursuant to the said advise, you were retired from the government service effective April 16, 1990. cdta Based on the foregoing representations, you now request that the proceeds of your retirement or gratuity pay be exempted from taxes. 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. In view thereof, this Office is of the opinion as it hereby holds that any and all amounts which you received from PDIC as a result of your separation from the service of PDIC due to sickness are exempt from income tax and consequently, from withholding tax prescribed by 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 PDIC's payments for your salary and cash equivalent of your accumulated vacation and sick leaves, if any. Very truly yours, (SGD.) JOSE U. ONG Commissioner