Overview

In the Philippines, whether gratuity pay received upon optional retirement at age 60 is taxable depends on what the payment legally is and under which law or retirement plan it is given. “Gratuity pay” is not a single, uniform concept in tax law; it can refer to:

Retirement benefits (statutory or plan-based), which may be tax-exempt, or
A discretionary/extra cash benefit not tied to a qualified retirement framework, which is typically taxable compensation.

So the tax answer is not just about the label “gratuity.” It is about source, purpose, and compliance with tax-exemption rules.

Key Legal Framework

1. National Internal Revenue Code (NIRC)

The NIRC (as amended, including by TRAIN and later tax laws) governs taxability of compensation and retirement benefits. The main exemption provision is under:

Section 32(B)(6) — Exclusions from Gross Income: Retirement benefits, pensions, and gratuities meeting specific conditions.

This section provides two main paths to tax exemption for private-sector retirement benefits:

(A) Exemption for Retirement Benefits Under a Reasonable Private Benefit Plan

Retirement benefits are tax-exempt if ALL of these are present:

The retirement plan is “reasonable” and approved/recognized for tax purposes
- Typically a bona fide retirement plan set up by the employer, often with BIR registration/approval.
The employee is at least 50 years old at the time of retirement.
The employee has rendered at least 10 years of service with the employer.
The employee has not previously availed of tax-exempt retirement benefits under this provision (i.e., only once in a lifetime).

If any one of these is missing, then the benefit (or the non-qualifying portion) becomes taxable.

Implication for age 60 optional retirement: Age 60 easily satisfies the minimum 50-year age requirement. The critical checks become 10 years service, plan reasonableness/approval, and first-time availment.

(B) Exemption for Retirement Benefits Under RA 7641

Retirement pay mandated by Republic Act No. 7641 (the Retirement Pay Law) is also tax-exempt.

This is important because even if the employer does not have a qualified retirement plan, statutory retirement pay under RA 7641 remains exempt (so long as it is truly RA 7641 retirement pay).

2. RA 7641 (Retirement Pay Law)

RA 7641 amended the Labor Code to ensure minimum retirement pay for private-sector workers who do not have a retirement plan or whose plan benefits are lower than the statutory minimum.

Key points:

Optional retirement age: 60 years old
Compulsory retirement age: 65 years old
Minimum service: At least 5 years with the employer
Minimum retirement pay (if no plan or inferior plan): At least one-half (1/2) month salary for every year of service, with a fraction of at least six months counted as one whole year.

“1/2 month salary” is specifically defined in RA 7641 as typically including:

15 days salary
plus 1/12 of 13th-month pay
plus up to 5 days service incentive leave (if applicable)

Tax implication: Retirement pay that is clearly RA 7641 retirement pay is tax-exempt under the NIRC.

What Counts as “Gratuity Pay”?

“Gratuity pay” in retirement contexts commonly appears in these situations:

Scenario 1: Gratuity as Part of a Qualified Retirement Plan

If the gratuity is part of the employer’s retirement plan (or CBA) and is paid because the employee retired, it is treated as retirement benefit.

Tax treatment: Exempt if the NIRC plan-based requirements are met (reasonable plan, 50+, 10 years, first availment). Otherwise, taxable.

Scenario 2: Gratuity as Statutory RA 7641 Retirement Pay

Sometimes employers refer to the statutory retirement pay itself as “gratuity” even when there is no separate plan.

Tax treatment: Exempt, provided it truly corresponds to RA 7641 retirement pay.

Scenario 3: Gratuity as a Purely Discretionary Bonus

If “gratuity” is not anchored to a retirement plan or RA 7641 computation—e.g., an extra “thank-you” amount granted by management regardless of statutory/plan basis—then it is treated like any other additional compensation.

Tax treatment: Taxable as part of gross compensation income and subject to withholding tax.

Scenario 4: Gratuity in Lieu of Retirement

If the employee resigns or is separated but the employer gives a “gratuity” anyway not tied to retirement rules, it is not retirement pay.

Tax treatment: Generally taxable, unless it qualifies as exempt separation pay under another NIRC provision (see below).

Distinguishing Retirement from Separation Pay

Sometimes a worker retires at 60 but the paperwork uses “resignation,” “early separation,” or similar language. This matters.

1. Retirement Benefits

Exemption is under NIRC Sec. 32(B)(6).

2. Separation Pay

Separation pay is exempt only when separation is due to:

death
sickness/physical disability
redundancy
retrenchment
closure not due to serious business losses
other causes beyond the employee’s control

A voluntary retirement at 60 normally does not fit the separation-pay exemption, so you should not rely on separation-pay rules if you are truly retiring.

Practical Test: When Is Optional Retirement Gratuity at 60 Tax-Exempt?

Use this checklist:

A. Is it tied to retirement?

Does the notice/approval say “retirement”?
Is payment triggered by retirement?

If yes, proceed.

B. Is it paid under RA 7641 or a retirement plan/CBA?

RA 7641 basis (no plan or inferior plan)
- At least 5 years service
- Computed as statutory minimum retirement pay

✅ Exempt

Qualified plan/CBA basis
- Plan is reasonable and recognized
- You are 50+ (you’re 60)
- You have 10+ years service
- First time to avail

✅ Exempt

If not meeting plan requirements:

❌ Taxable (partly or wholly)

C. Is it a pure discretionary add-on?

Not in plan
Not RA 7641
Not computed per retirement formula
Described as “bonus,” “special incentive,” “ex-gratia,” “gratuity” without retirement anchoring

❌ Taxable

Partial Taxability: A Common Outcome

Many employers give:

RA 7641 or plan retirement pay (exempt), plus
Extra gratuity/ex-gratia beyond plan/statute (may be taxable).

In this case, the employer will usually:

treat the exempt base as non-taxable, and
withhold tax on the excess.

This division is defensible when properly documented.

Documentation Matters

To support tax exemption, the following are crucial:

Retirement plan or CBA provisions (if plan-based)
Proof of BIR recognition/approval (for plan-based exemption)
Retirement application and employer acceptance explicitly stating retirement
Computation sheet showing RA 7641 or plan formula
Employee service record proving years of service
Affidavit/record that benefit is availed only once (often required by employers)

If documents are unclear, employers may default to taxable treatment to avoid BIR risk.

Special Notes

1. “Only Once” Rule

The once-in-a-lifetime limitation applies to plan-based exemptions under NIRC Sec. 32(B)(6)(a).

If you already used exempt plan retirement in a previous employer, a second plan-based exemption is not allowed, even if you are already 60.

But if your benefit is under RA 7641, that statutory exemption is generally not the same “once only” category. Still, employers often ask for declarations to avoid misclassification.

2. Government Employees

If you are in government service, “gratuity” can be governed by different special laws (e.g., GSIS retirement modes, special early retirement laws). Tax rules still look at whether it is a retirement benefit under law, which is generally exempt, but the specific statute matters more than RA 7641.

3. Mixed Employment History / Corporate Transitions

Mergers, transfers, or reemployment can complicate service counting and plan interpretation. The key is still:

continuous service for RA 7641, or
plan-defined service credit for plan benefits.

Sample Applications

Example 1: No retirement plan; employee retires at 60 with 12 years service

Employer computes pay per RA 7641 ✅ Exempt

Example 2: Employer has a BIR-recognized retirement plan; employee 60 years old, 15 years service, first retirement claim

✅ Exempt

Example 3: Plan exists but not recognized/reasonable; employee retires at 60

Retirement amount treated as compensation ❌ Taxable (unless RA 7641 minimum can be carved out as exempt)

Example 4: Employee retires at 60; plan benefit exempt, plus a “thank-you gratuity” equal to 6 months salary not in the plan

Plan benefit ✅ exempt
Extra ❌ taxable

Bottom Line

Gratuity pay for optional retirement at age 60 in the Philippines is not automatically taxable or exempt. It is:

Tax-exempt if it is true retirement pay under:
1. RA 7641, or
2. A reasonable employer retirement plan/CBA that satisfies the NIRC conditions (50+, 10 years, first availment, plan reasonableness).
Taxable if it is a discretionary or ex-gratia amount not anchored to RA 7641 or a qualified retirement plan, or if plan-based requirements are not met.

If you want the safest classification, make sure your retirement paperwork and computations clearly show the legal basis (RA 7641 or qualified plan) and separate any extra gratuity so the tax treatment is properly split.