Tax Exemption of Separation Benefits Paid to Employee Separated from Service by Reason of Health Condition

September 11, 1992 BIR RULING NO. 261-92 28 (b) (7) (B) 162-92 261-92 Armco-Marsteel Alloy Corporation 2nd Floor Alpap I Building 140 Alfaro Street, Salcedo Village Makati, Metro Manila Attention: Mr . Alan B . Guinto Manager Human Resources Gentlemen : This refers to your letter dated July 9, 1992 requesting in effect a ruling that the separation benefits due to your employee, Mr. Ernesto Dela Cruz, by reason of health condition are exempt from withholding tax. Documents submitted shows that your employee, Mr. Ernesto Dela Cruz, has been certified by your company physician, Dra. Patricia Lichauco-Pagkalinawan, to have been diagnosed to have Diabetes Mellitus and has been on SSS leave from January 20, 1992 until May 18, 1992 exhausting his 120 days leave on medications, diet and medical management without any significant improvement in his condition; and that as a consequence, your aforenamed company physician has declared Mr. Ernesto Dela Cruz, no longer fit to resume his work. Said findings has been confirmed by the BIR Medical Office commenting that the condition of Mr. Ernesto Dela Cruz will greatly affect his performance and may endanger the life of other co-workers. 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 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 Mr. Ernesto Dela Cruz will receive from you as a result of his separation from the service of your company due to his aforesaid health condition 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 your payment of Mr. Ernesto Dela Cruz's salary. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue