Vital Tax Exemptions on Your Retirement Benefits

There are many things that are inescapable, unavoidable, and inevitable. Retirement is one of those things, along with taxes. Eventually, certain positions, professions, and laws require that individuals retire from work once they hit a certain age. 


Retirement may sound simple. You make an exit from your place of work, acquire retirement benefits, and enjoy a restful and well-deserved time off after many years of joining the labor force and earning an income. But not many are aware that it does not end there and is not as easy as taking retirement money and spending it for your enjoyment.


Retirement requires planning and due diligence by proper accounting of assets and liabilities. You must plan for the future since you will have no more income but a pension. Moreover, you must plan well in order to avail of tax exemptions on your retirement benefits. This is so that you can enjoy the amount you have earned through your many years of hard work and minimize deductions. That said, there are certain provisions under the law that allow retirement benefits to be tax exempt.

Republic Act (RA) 7641 - the New Retirement Law

This law governs and prescribes the minimum retirement benefits to all qualified employees in the private sector. The law grants minimum retirement pay to all employees who retire between the ages of 60 and 65 with a minimum of 5 years of service rendered. It also states that even in the absence of a retirement plan, employees are still entitled to minimum retirement pay. 


Eligible retiring employees are paid “half a month’s salary for each year of service to the company.” This “half a month’s salary” includes he following:


  1. 15 days salary
  2. The cash equivalent of 5 days of service incentive leave
  3. One-twelfth (1/12) of the 13th month’s pay

This would amount to approximately 22.5 days per year of service. This law applies to all qualified private-sector employees and does not include employees in retail, agricultural, and service establishments with ten (10) or fewer employees. It also does not apply to employees of the National Government and its political subdivisions, which include government-owned or controlled corporations.

Republic Act (RA) 4971 - an Act Providing that the Retirement Benefits of Employees of Private Firms Shall Not be subject to Attachment, Levy, Execution, or any Tax whatsoever

This law states that all employees may not be subject to attachment, levy, execution, or tax provided their employer has a Reasonable Private Benefit Plan. 


This provides a nontaxable retirement benefit if the said retiring employee has been working under the same employer for at least 10 years. Additionally, the employee must be no less than 50 years old and this benefit may only be availed of once. 


The law also provides an exemption to amounts received by the employee or by his or her heirs from the employer as a consequence of separation due to the following circumstances: sickness, death, physical disability, or any other cause beyond their control.

Bayanihan to Recover as One Act (BARO) - Republic Act No. 11494

The BARO covered provisions for tax exemptions for employees during the Covid-19 pandemic. Tax exemptions were available for employees retiring and receiving the retirement benefits from June 5, 2020, until December 31, 2020.


Under this Act, the retirement benefits were exempted from income tax, regardless of the number of years the employee was in service or regardless of age, so long as the retirement benefits were aligned with and received in accordance with a retirement plan registered with the BIR, and provided the retiring employee is not re-employed within the next 12 months by the same company or its subsidiaries and related parties. 

Retirement Planning is a Must

Ultimately, tax breaks and benefits can be claimed with good retirement planning. Proper accounting of your current cash flow is also essential to assess if your retirement money can cover your needs. Retirement plans are part of a compensation package, and help give employees the financial security that they need. Retirement plans include income goals, investment goals, and retirement benefits.


There are two types of plans:


  1. Defined or Fixed Benefit Plan

For this plan, all contributions are shouldered by companies for employee benefit. It is fixed, specific, and definite. It is often measured as the number of months per year of service based on the employee’s salary history.


  1. Provident Plan of Defined Contribution

The primary contributor to this retirement fund is the employee. But, the employer has the option to match employee contributions. This retirement plan benefits depend on the contributions and income for this fund, or how many contributions have been made.


Are you on the verge of retiring or are you setting up a plan for your employees? If so, speak to an accounting specialist like our team. We’d love to iron out the details of your retirement.