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Redundancy benefit

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1 Redundancy benefit on Thu Aug 09, 2012 12:13 pm


Arresto Menor
please advise if my separation
pay is subject to tax. I was
separated because of redundancy

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2 Re: Redundancy benefit on Thu Aug 09, 2012 1:27 pm


Arresto Mayor
NO. Any amount received by an official or employee or by his heirs from the employer due to death, sickness or other physical disability or for any cause beyond the control of said official or employee such as retrenchment, redundancy, or cessation of business are exempt from withholding tax on compensation. Amounts received by reason of involuntary separation remain exempt from income tax even if the official or employee, at the time of separation has rendered less than 10 years of service and/or is below 50 years of age.


Pre-week Beda Sample Problem

Due to business reverses, Kawawa Corp. offered a voluntary redundancy program under which an employee who offered to resign would be given separation pay equivalent to 3 months basic salary for every year of service. A accepted the offer and received P300,000.00 as separation pay under the program. The firm adopted another redundancy program where various unprofitable departments were closed. As a result, B was separated from the service. He also received P300,000.00 as separation pay.

Will the separation pay of A and B be subject to tax?

A’s separation pay will be subject to tax because of the voluntary action on his part. He may, however, avail of the tax-free retirement provided that he is 50 years or over, that he has rendered at least 10 years of service with Kawawa Corp., and that he has not previously availed of the tax-free retirement.

B’s separation pay will not be subject to tax because he was separated for a reason beyond his control.

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3 Re: Redundancy benefit on Thu Aug 09, 2012 2:31 pm


Arresto Menor
follow up query sir, we have an employee who is in compulsory retirement age of 65 years old. he served the company for only 4 years and 9 months. our CBA allows an employee to retire provided he/she must have served the company for 5 years. he was extended for 6 months due to confidentiality of his position. Query: Is he allowed to receive retirement benefit as per CBA or not? Is his retirement benefit taxable or not?

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4 Re: Redundancy benefit on Thu Aug 09, 2012 3:28 pm


Arresto Mayor

RETIREMENT AGE -The age of retirement is that specified in the CBA or in the employment contract. If it is not specified,

1. 60-65 -retirement is optional but the employee must have served at least 5 years ;

2. 65-compulsory retirement age (no need for 5 years of service)

BENEFITS- A retiree is entitled to a retirement pay equivalent at least ½ month salary for every year of service, a fraction of at least six (6) months being considered as one whole year.

Unless the parties provide for broader inclusions, the term “one half (1/2) month” salary shall mean:

• 15 days plus 1/12 of the 13th month pay and

• the cash equivalent of NOT more than 5 days of service incentive leaves. (22.5 days per year of service)


Pre-week Beda Sample Problem

30. What are the conditions necessary to exempt retirement benefits from income tax?

Under RA 4917, retirement benefits are exempt from income tax if the following conditions are present:

a. The retiring official or employee has been in the service of the same employer for the last ten years;

b. He is not less than fifty years old at the time of his retirement; and

c. The official or employee avails of the benefits only once; and

d. Under Revenue Regulation 2-98, the private benefit plan is approved by the BIR.

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