Taxability of the Money Value of Accrued Vacation Leave Credit to Separated Retired/Retiring Officials or Employees

July 13, 1992 BIR RULING NO. 203-92 28 (b) (7) (B) 238-91 203-92 Petron Corporation 7901 Makati Avenue, Makati, Metro Manila Attention: Mr . Elpidio M . Gamboa Jr . Legal Counsel Gentlemen : This refers to your letter dated 9 March 1992 seeking clarification on whether the money value of accrued vacation leave credit to be paid to your retired/retiring officials or employees whose services were terminated for causes beyond their control (i.e., retrenchment, redundancy) are exempt from income tax and consequently from withholding tax. In reply, please be informed that pursuant to Sec. 28 (b) (7) (B) of the Tax Code, as amended, any amount received by an official or employee or by her 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. Furthermore, the Supreme Court in the case of Commissioner of Internal Revenue vs. The Court of Appeals and Efren P. Castaeda , G.R. No. 98016, October 17, 1991, ruled that the terminal leave pay to be received by a retired/retiring official or employee is not part of compensation but a retirement benefit 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 as implemented by Revenue Regulations No. 6-82 as amended. Based on the foregoing, the terminal leave pay of your retired/retiring official or employees are not subject to tax and consequently from withholding tax. LLphil Very truly yours, JOSE U. ONG Commissioner of Internal Revenue