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

November 5, 1992 BIR RULING NO. 324-92 28 (b) (7) (B) 052-92 324-92 Philippine Long Distance Telephone Company P.O. Box No. 952 Makati, Metro Manila Attention: Mr . P . E . Caoili Gentlemen : This refers to your request for a ruling as to whether or not the separation benefit to be paid to your employee, Mrs. MARILYN S. CANARIA by reason of health condition are exempt from income tax and consequently from the withholding tax pursuant to Section 28(b)(7)(B) of the Tax Code, as amended. Documents submitted show that your employee, Mrs. Marilyn S. Canaria was certified by your company physician, Dr. Felix M. Rustia to be suffering from URTI/Chronic Laryngitis; that her illness affects the performance of her duties being a telephone operator, and would endanger her physical well being if she continue working; and that by reason of the said findings, she was declared to be unfit for work and was advised by your said physician to retire from her work. Said finding has been confirmed by the BIR Medical Officer. LLjur 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 by his/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. In view thereof, this Office is of the opinion as it hereby holds that any and all amounts, including terminal leave pay and sick leave and vacation leave credits which Mrs. Marilyn S. Canaria will receive from your company as a result of her separation from the service of your company due to her ill health (sickness) 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 Mrs. Marilyn S. Canaria's salary. Very truly yours, JOSE U. ONG Commissioner of Internal Revenue