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.