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

December 1, 1992 BIR RULING NO. 336-92 28 (b) (7) (B) 315-92 336-92 Victoria Manufacturing Corporation Barangay Sta. Lucia, Pasig, Metro Manila Attention: Mr . Edwin Z . De Leon Personnel Manager Gentlemen : This refers to your request for a ruling as to whether or not the separation benefit to be paid to your employee, Mr. ERNESTO A. SARA by reason of health condition is exempt from income tax and consequently from the withholding tax pursuant to Section 28 (b) (7) (B) of the Tax Code, as amended. LexLib Documents submitted show that your employee Mr. Ernesto A. Sara was certified by your company physician, Dr. Jorge B. Ty to be suffering from frequent recurrence of hypertension-related symptoms and occurrence of restrosternal pain; that his illness affects the performance of his duties and would endanger his physical well being if he continue working; and that by reason of the said findings, he was declared to be unfit for work and was advised by your said physician to retire from his work. Said finding has been 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 leave credited which Mr. Ernesto A. Sara will receive from your company as a result of his separation from the service of your company due to his ill health (sickness) are exempt from income tax and consequently, from withholding tax prescribed by Section 78, 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 A. Sara's salary. LLphil Very truly yours, VICTOR A. DEOFERIO, JR. Deputy Commissioner (Officer-In-Charge)