Taxability of Retirement / Separation Benefits.

Hello and Good Day!

Somebody asked me: "Are Retirement or Separation Fees subject to Tax?"

There are several conditions to consider to determine whether such fee received by an employee is taxable or exempt from tax and these are as follows:

For Retirement Benefits:

             

           1) 50 years old and above

           2) 10 years in service
           3) Availed by employee only once

For Separation Benefits:

          1) Due to death, sickness and other physical disability           

          2) Or any cause beyond the control of the employee such as:redundancy, laying-off, severance and others

The absence of the above conditions will not merit tax exemptions of separation fees received from employer. Thus, the retirement/separation benefit to be paid to him shall be subjected to income tax and consequently to withholding tax.

Such conditions are based on Section 32 (B) (6) (a) and (b) of the Tax Code which states that:

      TAX CODE:

      Sec. 32. Gross Income. –

                                            xxx                              xxx                              xxx

      (B) Exclusions from Gross Income. - The following items shall not be included in gross income and shall be exempt from taxation under this title:

            (6)  Retirement Benefits, Pensions, Gratuities, etc.-

a)     Retirement benefits received under Republic Act No. 7641 and those 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 ten (10) years and is not less than fifty (50) years of age at the time of his retirement: Provided, further, That the benefits granted under this subparagraph shall be availed of by an official or employee only once. For purposes of this Subsection, the term 'reasonable private benefit plan' means a pension, gratuity, stock bonus or profit-sharing plan maintained by an employer for the benefit of some or all of his officials or employees, wherein contributions are made by such employer for the officials or employees, or both, for the purpose of distributing to such officials and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials and employees.

b)    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 because of death sickness or other physical disability or for any cause beyond the control of the said official or employee.

The Tax Code is available in the BIR Website.

Goodnight and GOD bless us all !