Tax Exemption of Terminal Leave Pay or Monetized Unused Vacation and Sick Leave Credits of a Retired Officer

December 28, 1992 BIR RULING NO. 378-92 28 (b) (7) (B) 267-92 378-92 China Banking Corporation Paseo de Roxas cor. Villar St. Makati, Metro Manila Attention: Mr . R . P . Del Rosario, Jr . Assistant Manager, HRMDD Gentlemen : This refers to your letters dated June 11, 1992 stating that an officer of your Bank has retired on May 15, 1992, after serving the bank for thirty-two (32) years and has accumulated forty-five (45) days vacation leave credits which is commutable to cash under your bank policies. 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 retired officer are exempt from income tax and consequently from the withholding tax. In reply, please be informed that pursuant to Section 28 (b) (7) (A) 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 employee 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 shall be exempt from taxation. Moreover, under Section 28 (b) (7) (B) of the same Code, any amount received by an official or employee or by 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 likewise not be included in gross income and shall 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 or paid to an official or employee who is separated from the service of his employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee. In view thereof, this Office is of the opinion as it hereby holds that if your retired employee/officer was separated from the service of your bank due to any of the causes and circumstances provided for under either Section 28 (b) (7) (A) or Section 28 (b) (7) (B), both of the Tax Code, the terminal leave pay or money value of the unused vacation and sick leave credits which will be paid to such retired officer is not subject to income tax and consequently to the withholding tax on wages. aisadc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue