Taxability of Sick Leave and Vacation Leave Credits Which are Converted to Cash Payments

August 5, 1992 BIR RULING NO. 216-92 21 (a), 72 28 (b) (7) (B) 099-92 150-92 216-92 De Guzman, Florentino & Associates Suite C, 15th floor Strata 200 Building Emerald Avenue, Ortigas Commercial Complex Pasig, Metro Manila 1600 Attention: Atty . Francisco G . de Guzman Gentlemen : This refers to your letter dated April 23, 1992 requesting clarification as to the taxability of sick leave and vacation leave credits which are converted to cash payments. In reply, I have the honor to inform you that the monetized unused vacation leave credits not exceeding ten (10) days during the year are not subject to income tax and consequently to the withholding tax. (BIR Ruling No. 031-92 dated January 23, 1992). However, considering that monetization of leave credits is the payment of the money value of the accumulated vacation leave credits without actually going on leave of absence, the monetization of leave credits therefore shall not apply to sick leave credits because the employee who avails of the sick leave credits has to go on sick leave. (See Joint Civil Service Commission and the Department of Budget and Management Circular No. 1, S. of 1991). On the other hand, pursuant to 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. 135 and as implemented by Revenue Regulations No. 6-82 as amended. aisadc The above rulings are applicable to employees of both the government and the private sector. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue