Question & AnswerQ&A (BIR MEMORANDUM CIRCULAR NO. 36-94)
The main purpose of Republic Act No. 7833 is to exclude certain benefits, such as 13th month pay and other related benefits, from the computation of gross compensation income for determining taxable compensation income, thereby exempting these benefits from income tax up to certain limits.
The benefits excluded include: (i) benefits received by officials and employees of the national and local governments pursuant to RA No. 6686, (ii) benefits under Presidential Decree No. 851 as amended, (iii) benefits for officials and employees not covered by PD 851, and (iv) other benefits like productivity incentives and Christmas bonuses not exceeding P12,000, integrated with the 13th month pay.
The exclusion applies only to the first Thirty Thousand Pesos (P30,000) of the aggregate 13th month pay and other benefits, with other benefits capped at Twelve Thousand Pesos (P12,000), which must be integrated into the 13th month pay for tax exclusion purposes.
The exclusion took effect for benefits paid or accrued beginning January 1, 1994.
Employers are authorized not to deduct withholding taxes in the immediately succeeding payroll periods corresponding to the amount previously withheld from such benefits, facilitating reimbursement to officials or employees who received benefits before the act's effectivity.
Section 28 (b) (8) of the National Internal Revenue Code was amended to insert a new sub-paragraph (F) regarding the exclusion of 13th month pay and other benefits from gross compensation income.
Yes, officials and employees of private corporations and entities are covered by the exemption, similar to public sector employees, up to the specified limits.
Other benefits such as productivity incentives and Christmas bonuses can be exempted up to an amount not exceeding P12,000, which should be integrated into the 13th month pay for the purpose of tax exemption.
Benefits in excess of P30,000 are taxable and subject to withholding tax only on the amount exceeding P30,000.
Employers should exclude the 13th month pay and other benefits when computing annual income and tax due. Excess tax withheld should be refunded to employees or credited against future withholding taxes, and taxes withheld on benefits given in November 1994 should not be remitted to BIR but refunded to employees.