Retirement Laws, how construed

- The purpose of which is to entice competent men and women to enter the
government service and to permit them to retire therefrom with relative security,
not only those who have retained their vigor but, more so, those who have been
incapacitated by illness or accident.
- Retirement laws are construed liberally in favor of the retiree because their
intention is to provide for his sustenance, and hopefully even comfort, when he
no longer has the stamina to continue earning his livelihood (Bengzon vs. Drilon,
208 SCRA 133)
- The grant of retirement benefits is not only an act of generosity or liberality on
the part of the government but is equally a compensation and reward for
satisfactory, faithful, meritorious and valuable service to the latter (Perez vs.
Abiera, 64 SCRA 302)

Retirement Benefits under RA 7641 Labor Code of the Philippines

received by officials and employees of private firms from employers
without any retirement plan.

In order to avail of the exemption of retirement benefits under RA 7641 from

private employers without any retirement plans, the following conditions
must be met:

1. The retirement benefits must be received under existing collective bargaining

agreement (CBA) or other agreements;
2. This is given in the absence of retirement plan or agreement providing for
retirement benefits (i.e., there is no BIR- qualified reasonable private retirement
plan);
3. The retiring employee has served at least 5 years in the said establishment;
4. That he is not less than 60 years of age but not more than 65, which is declared
as the compulsory retirement age; and
5. He shall be entitled to retirement pay equivalent to ate least month salary for
every year of service, a fraction of at least 6 months being considered as one
whole year.

Retirement benefits under RA 4917 An Act Providing that Retirement

Benefits of Employees of Private Firms Shall Not Be Subject to Attachment,
Levy, Execution, or Any Tax Whatsoever received by officials and employees
of private firms under a reasonable private retirement plan

RA 4917 exempts from all taxes the retirement benefits received by officials and
employees of private firms under a reasonable private benefit plan maintained by the
employer and all amounts received by such officials and employees from their
employers on account of involuntary separation, such as death, sickness, or physical
disability, or any other cause beyond the control of said officials and employees.

In order to avail of the exemption, the following requirements must be met:

1. The plan must be reasonable;

2. The benefit plan must be approved by the BIR;
3. The retiring official or employee must have been in the service of the same
employer for at least 10 years and at least 50 years old at the time of
retirement; and
4. The retiring official or employee should not have previously availed of the
privilege under the retirement benefit plan of the same or another employer.

Meaning of the term Reasonable Private Benefit Plan

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, or both, for the purpose of distributing to such officials or
employees the earnings and principal of the fund thus accumulated, and wherein it
is provided in the said plan that at no time shall any part of the income of the fund
be used for or diverted to, any purpose other than for the exclusive benefit of the
said officials or employees.

Additional payments in the form of gifts for the loyalty and invaluable
services given by private employers on top of the retirement benefits
under a reasonable private plan

The additional payments should not be considered a retirement pay but a GIFT
given by the private employer to the employee and should not form part of the
retirement benefits exempt from income tax since the same is not a retirement
benefit received in accordance with a reasonable private benefit plan maintained by
the employer.

Rather, it should be taxed as a taxable gift to the donor who is subject to donors
tax. Under the Tax Code, gifts are excluded from gross income and therefore
exempt from income tax but subject to the donors tax.

However, if the gift falls within the provision of the de minimis benefits given by
the employer to the employees, then the same shall be treated as such and
excluded from the gross income of the recipient, and therefore exempt also from
withholding tax and income tax.

Terminal leave is not a salary but a retirement gratuity not subject to

income tax

Gratuity is the amount paid to the beneficiary for past services purely out of
generosity of the giver or grantor. It is a bounty given by the government in
consideration or recognition of meritorious services and springs from the
appreciation and graciousness of the government.

Terminal Leave Pay or the commutation of leave of credits is the cash value of the
officers or employees accumulated leave credits. It is not salary but a retirement
gratuity and is thus not subject to income tax. It is applied for by an officer or
employee who retires, resigns or is separated from the service through no fault of
his own.

Pension not a salary nor gratuity, but a vested right

The right to a public pension is of statutory origin. Where a public officer has
complied with the statutory prerequisite for retirement with pay, his right to retire
and draw salary becomes vested and may not thereafter be revoked or impaired.

The law exempts retirement and pension benefits from garnishment, attachment,
levy or execution. Accordingly, retirement and pensions benefits cannot be withheld
from a retiree to be applied to his indebtedness to the government.
Separation Pay

Separation Pay is defined as the amount that an employee receives at the time of
his severance from the service and is designed to provide the employee with the
wherewithal during the period that he is to look for another employment.

GR: An employee LAWFULLY DISMISSED IS NOT ENTITLED TO

SEPARATION PAY. Thus, any payment made by the employer to an employee on
account of lawful dismissal constitutes compensation regardless of whether the
employer is legally bound by contract, statute, or otherwise, to make such payment.

The only exceptions are when the dismissal is due to:

1. The installation of labor-saving devices;

2. Redundancy;
3. Retrenchment;
4. Cessation of employers business; or
5. When the employee is suffering from a disease and his continued employment is
prohibited by law or is prejudicial to his health and to the health of his co-
employees

-Employee will be entitled to separation pay which is exempt from withholding tax
and consequently from income tax.

Social security benefits, retirements, pension received by a Balikbayan

from Foreign Government, NOT TAXABLE

Social security benefits, retirement gratuities, pensions and other similar benefits
received by residents or nonresident citizens of the Philippines (like balikbayans) or
aliens who come to reside permanently in the Philippines from foreign government
agencies and other institutions, private or public, being received by him while he is
staying here in the Philippines are not taxable.

Payments of benefits due or to become due to any person residing in the

Philippines under the laws of the United States administered by U.S
Veterans Administration NOT TAXABLE
Benefits received from or enjoyed under the Social Security System in
accordance with the provisions of RA 8282- NOT TAXABLE

Benefits received from the GSIS under RA 8291, including retirement

gratuity received by government officials and employees- NOT TAXABLE

-Excluded from the gross income, hence exempt from income tax.

The retirement of most government officers or employees under the GSIS is made
automatic and compulsory at the age of 65 years, after having served a certain
number of years of service. The law also grants such officer or employee the option
to retire:

1. Upon completion of 30 years of total service and attainment of age 57 years;

2. After rendering a total service of 30 years regardless of age; or
3. After having rendered a total of at least 20 years of service, the last 3 being
continuous regardless of age and employment status.

In any of these instances, the employer has no right to deny any application for
retirement of an officer or employee who has qualified for optional retirement, for
retirement law being in the nature of a contract between the government and the
officer or employee.

The retirement benefits or the monthly GSIS pension shall be exempt from income
tax.

But interest income derived for depositing in the bank the monthly
pension received from GSIS of a retiree is subject to the 20% final
withholding tax. Why? Because the interest income derived from depositing his
pension in the bank is a passive investment income which is not the one
contemplated under the above provision of the Tax Code.