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

November 9, 1992 BIR RULING NO. 325-92 28 (b) (7) (B) 272-92 325-92 Mr. Arturo Q. Quindipan c/o Philippine Airlines Pasay City S i r : This refers to your request for a ruling that the separation benefit to be paid to you by Philippine Airlines (PAL) by reason of health condition are exempt from all taxes pursuant to Section 28(b)(7)(B) of the Tax Code, as amended. LLphil Documents submitted show that you were certified by your Company Physician, Dr. Teresita G. Borja to be suffering from Incipient Cataract, both eyes, loss of visual efficiency estimated at 40% for the right eye and 30% for the left; Mixed type deafness, both ears, loss of hearing estimated at 40% for each ear; and, Old healed fractures, right tibia and left patella with fixation wires physical activity affected to certain degree and that said illness affects the performance of your duties and endangers your life if you still continues working. Said finding is confirmed by the BIR Medical Officer. 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 (sick leave and vacation credits) which you will receive from PAL as a result of your separation from the service of your company due to the 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 the exemption does not include the payment by PAL of your salary. Very truly yours, VICTOR A. DEOFERIO, JR. Deputy Commissioner Officer-in-Charge