Whether the Commuted Equivalent of Leave Credits of a Retired Employee in the Private Sector is Subject to Income Tax

July 3, 1992 BIR RULING NO. 196-92 28 (b) (7) (B) 29-92 196-92 De La Rosa Tejero Nograles Law Offices The Penthouse, Alpap 1 Building 140 Alfaro St., Salcedo Village Makati, Metro Manila Attention: Atty . Jacinto R . de la Rosa, Jr . Gentlemen : This refers to your letter requesting for a ruling on the following: "1) Whether or not the commuted equivalent of leave credits of a retired employee in the private sector is subject to income tax? "2) Whether or not BIR Ruling No. 029-92 dated 17 January 1992 exempting from withholding tax the monetized unused vacation leave credits not exceeding ten days of active employees applies to sick leave credits not exceeding the same number of days? In reply, please be informed that under Section 28 (b) (7) (B) of the Tax Code, as amended by E.O. No. 37, 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 Supreme Court in the case of Commissioner of Internal Revenue vs. The Court of Appeals and Efren P. Castaeda, G.R. No. 96016, October 17, 1991, ruled that the terminal leave pay received by a government official or employee is not part of compensation, but a retirement benefit 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 B.P. Blg. No. 135 and as implemented by Revenue Regulations No. 6-82 as amended . Since retirement from service is for "cause beyond the control of said official or employee" then the commuted vacation leave and sick leave credits given to an official or employee is 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 B.P. Blg. No. 135, as implemented by Revenue Regulations No. 6-82, as amended. Viewed in this light, the retirement benefits of officials and employees in the private sector shall likewise be exempt. cdpr Moreover, vacation leave credits of employees which are monetized without having to go on leave are also exempt from the withholding tax provided that the same shall not exceed 10 days during the year. This does not apply however, to sick leave because here the employee is actually absent from work. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue