Note: Republic Act No. 10963 (the TRAIN Law), which took effect on 01 January 2018, adjusted the amount to ₱90,000.00.
Republic Act No. 10653 Raises the Ceiling of 13th Month Pay and Other Benefits for Gross Income Exclusion and Tax-Exemption
Republic Act No. 10653 was signed into law by Pres. Aquino on 12 February 2015. RA No. 10653 amends Sec. 32 of Republic Act No. 8424 (the National Internal Revenue Code or Tax Reform Act of 1997).
Sec. 32 of R.A. No. 8424 excludes 13th month pay and other benefits from gross income and exempts these items from tax to the extent of ₱30,000.00.
R.A. No. 10653 raises the maximum amount from ₱30,000.00 to ₱82,000.00. The corresponding Regulations (Revenue Regulations No. 3-2015) specify that the new ceiling exclusively applies to 13th month pay and other benefits. It shall not apply to compensation and other allowances emanating from employer-employee relationship.
Scenario 1: Assuming that the total amount of an employee’s 13th month pay and other benefits is ₱35,000.00, only that amount will be excluded from gross income and will be tax-exempt. The employee cannot take ₱47,000.00 from his salary to complete the amount of ₱82,000.00.
Scenario 2: Assuming that the total 13th month pay and other benefits amounts to ₱100,000.00, only ₱82,000.00 shall be excluded from gross income and exempt from tax. The excess shall be added to the gross income and may be subject to income tax.
A concern is raised on the period of applicability of R.A. 10653 considering that it took effect in March and not on January 1 of the current year. Does it cover the entire year 2015 or only the portion pertaining to the period from the day it took effect?
Although the law took effect in March 2015, its application retroacts to the first day of the year.
Under Section 3 of Revenue Regulations No. 3-2015, the adjusted ceiling of ₱82,000.00 covers 13th month pay and other benefits paid or accrued beginning 01 January 2015. Sec. 2 of Revenue Regulations No. 3-2015 emphasizes that the gross income exclusion (and the corresponding tax-exemption) does not apply to self-employed individuals and to income generated from business.
Another important point is the coverage of the term ‘other benefits’.
‘Other benefits’ pertain to Christmas bonus, productivity incentive bonus, loyalty award, gifts whether in cash or in kind, and other benefits of similar nature actually received by the employee.
It is important to note that the amount of ‘de minimis’ benefits in excess of the prescribed ceiling for tax-exempt ‘de minimis’ benefits may be considered as ‘other benefits’.