Taxability of Terminal Leave Pay of an Official or Employee Retiring from a Private Company

September 18, 1992 BIR RULING NO. 267-92 28 (b) (7) (B) 117-92 267-92 Manila Electric Company (MERALCO) Ortigas Avenue, Pasig Metro Manila Attention: N . D . Torres VP-Legal Services Dept . Gentlemen : This refers to your letter dated February 28 and July 14, 1992 stating that aside from their retirement benefits, your employees who have reached the required number of years in service and age limit to qualify for retirement under the BIR-approved Meralco Employees' Retirement Plan will also be paid upon their retirement, their terminal leave or money value of accumulated/unused vacation and sick leave credits. LexLib Based on the foregoing facts, you now request information as to whether the terminal leave pay or monetized unused vacation and sick leave credits of your retiring employees are exempt from income tax and consequently from the withholding tax. In reply, please be informed that pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended, retirement benefits received by officials and employees of private firms, whether individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer: Provided, That the retiring official or employees has been in the service of the same employer for at least 10 years and is not less than 50 years of age at the time of his retirement; and that the benefits herein granted shall be availed of by said official or employee only once, shall not be included in gross income and should be exempt from taxation. The Supreme Court decision in the case of Commissioner of Internal Revenue vs. The Court of Appeals and Efren P. Castaeda, G.R. No. 96016, promulgated October 17, 1991 that the terminal leave pay received by a government official or employee is not part of the compensation income but a retirement benefit exempt from income tax , likewise applies to a terminal leave pay received by an official or employee retiring from a private company and receiving a tax exempt retirement benefit paid in accordance with a BIR-approved private retirement benefit plan. In view thereof, this Office is of the opinion as it hereby holds that the terminal leave pay or money value of the unused vacation and sick leave credits which will be paid to your employees who are qualified to retire and receive their retirement benefits as provided for under your aforesaid Retirement Plan are not subject to income tax and consequently to the withholding tax on wages. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue