Retirement Pay in the Philippines: How to Compute Benefits Under RA 7641

This guide explains retirement pay under the Philippine Retirement Pay Law (Republic Act No. 7641), which amended the Labor Code (now renumbered as Article 302). It’s written for HR practitioners, employers, and workers who want a reliable, step-by-step reference. It’s general information, not legal advice.

1) What RA 7641 does—in one look

RA 7641 sets a statutory minimum retirement benefit for private-sector employees who retire at 60 to 65 years old and have at least five (5) years of service with the employer. If the company doesn’t have a retirement plan, or has one that’s less generous, RA 7641 acts as the floor.

Minimum benefit: “½ month salary for every year of service” where ½ month salary = 22.5 days of pay. Any fraction of at least 6 months counts as one whole year.

2) Who is covered (and who isn’t)

Covered:

All private-sector employees regardless of position, status (rank-and-file, supervisory, managerial), or pay method (monthly, daily, piece-rate/commission), provided they meet the age and service requirements.

Generally not covered by RA 7641 (because they have different laws/systems):

Government workers (national/local government, GOCCs with original charters) – governed by GSIS laws.
Employees already covered by a retirement plan or CBA that provides equal or better benefits than RA 7641 (that plan applies; RA 7641 is the minimum floor).
Special categories may be governed by special laws, CBAs, or industry practice (e.g., seafarers, certain mining workforces). Check the applicable instrument for any different retirement ages/benefits.

Household service workers (kasambahay) are governed primarily by the Kasambahay Law; entitlement to retirement pay depends on the specific legal and contractual framework in place.

3) When can you retire?

Optional retirement: 60 years old or older (but not beyond 65), with ≥ 5 years of service.
Mandatory retirement: 65 years old (unless a valid plan/CBA sets an earlier mandatory age for the occupation by law or special regulation).
Working beyond 65: Allowed if both parties agree. Retirement pay is computed up to the actual retirement date.

Five-year service means at least 5 years with the same employer/establishment. The service need not be perfectly continuous; authorized absences, paid leaves, regular holidays, and similar periods are credited. Breaks in service (e.g., resignation then rehire) are not automatically bridged unless agreed (contract/CBA/company policy).

4) The key definition: “½ month salary = 22.5 days”

The law defines ½ month salary as:

15 days of basic salary +
1/12 of the 13th month pay (equivalent to 2.5 days) +
Cash equivalent of up to 5 days service incentive leave (SIL)

Total = 22.5 days per year of service.

Practice tip: HR commonly uses 22.5 days for all covered employees, even if a particular employee type isn’t entitled to SIL, because the statute’s definition is a fixed formula for retirement computation (distinct from the employee’s separate SIL entitlement).

What’s in “salary”?

Included: Basic pay at the latest salary rate (the rate at retirement).
Excluded: Overtime premium, night differential premium, holiday premium, and most allowances not integrated into basic pay (e.g., transport, meal, COLA—unless your contract or a CBA integrates them into “basic salary”).

5) The 6-month rounding rule

When counting service:

≥ 6 months in a final, incomplete year → count as 1 whole year
< 6 months → ignore the fraction

Example: 10 years and 6 months → count 11 years. 10 years and 5 months → count 10 years.

6) How to compute: formulas you can actually use

Pick the base you have (daily or monthly). Always use the latest salary rate.

A) If you know the daily rate

Retirement Pay = Daily Rate × 22.5 × Credited Years of Service

B) If you know the monthly rate

A convenient rule of thumb (assuming a 30-day factor):

22.5 days ÷ 30 days = 0.75
Retirement Pay = Monthly Rate × 0.75 × Credited Years of Service

If your payroll uses a different day factor (e.g., 26, 261/313), compute from the daily rate to avoid disputes.

C) For piece-rate / commission-based employees

Determine the average daily rate = (Total earnings in the last 12 months ÷ number of actually worked days).
Apply the daily formula:

Retirement Pay = Average Daily Rate × 22.5 × Credited Years of Service

7) Fully worked examples

Example 1 – Monthly-paid worker

Latest monthly basic salary: ₱30,000
Service: 14 years and 7 months → 15 years (6-month rule)

Computation:

Per year benefit = ₱30,000 × 0.75 = ₱22,500
Total = ₱22,500 × 15 = ₱337,500

Example 2 – Daily-paid worker

Latest daily rate: ₱650
Service: 8 years and 3 months → 8 years

Computation:

Per year benefit = ₱650 × 22.5 = ₱14,625
Total = ₱14,625 × 8 = ₱117,000

Example 3 – Commission-based seller

Last 12 months earnings: ₱720,000
Actually worked days: 288
Average daily rate = ₱720,000 ÷ 288 = ₱2,500
Service: 5 years and 10 months → 6 years

Computation:

Per year benefit = ₱2,500 × 22.5 = ₱56,250
Total = ₱56,250 × 6 = ₱337,500

8) If your company has a retirement plan or CBA

RA 7641 is a floor, not a ceiling.
If your plan/CBA gives more (e.g., 1 month per year of service), use the plan.
If it gives less, the employer must pay the deficiency to meet the RA 7641 minimum.
Plans may allow early retirement (below 60) or special options; those are contractual and sit on top of the statutory minimum when RA 7641 applies.

9) Retirement pay vs. separation pay vs. SSS pension

Retirement pay (RA 7641): Due on retirement at qualifying age/service.
Separation pay (Labor Code): Due upon authorized causes (redundancy, retrenchment, closure, disease). It has different rates (e.g., redundancy = 1 month per year; retrenchment/closure = ½ month per year, with minimums). It’s not the same as retirement pay.
SSS pension/benefits: Separate from employer-paid retirement pay. Your SSS retirement benefit depends on SSS rules and contributions, not RA 7641.

You don’t “choose” between retirement pay and SSS pension—you may receive both if you qualify under each system.

10) Tax treatment (high-level)

There are two common pathways to tax-exempt retirement income for private-sector workers:

Retirement under a BIR-approved private benefit plan (“50-and-10 rule”): at least 50 years old, at least 10 years of service with the same employer, first retirement under the plan → exempt (subject to BIR rules/limits).
Retirement under RA 7641: typically 60–65 years old with at least 5 years of service (where no approved plan applies). Amounts paid to comply with RA 7641 are generally tax-exempt.

Tax consequences can vary (e.g., amounts in excess of statutory minimums, multiple retirements, early retirement under non-approved plans). Coordinate with payroll and a tax professional to structure the payout correctly and secure required certifications.

11) Practical issues & HR tips

“Latest salary rate” means pay as of the retirement date. Employers should not artificially lower pay to reduce retirement benefits; that risks legal challenge.
Bridging of service: If the business changes hands or the employee transfers to an affiliate, bridging past service is by agreement (CBA/contract/transition terms). Spell this out to avoid disputes.
Counting years: Document start date, breaks, and rehires. Apply the 6-month rule only on the final, incomplete year.
Allowances: Only those integrated into basic pay count. Keep contracts explicit about what is “basic salary.”
Piece-rate/commission: Keep clean 12-month earnings and attendance records to compute average daily rate defensibly.
Release & clearances: While “final pay” timelines can depend on current DOLE guidance and company policy, best practice is to process promptly upon clearance and submission of standard documents (valid IDs, quitclaims, etc.).
Documentation: A written Notice of Retirement and a signed Quitclaim/Release (carefully drafted) help close out claims—ensure the amount complies with RA 7641.

12) Common pitfalls (and how to avoid them)

Using “½ of monthly salary” instead of 22.5 days. Don’t: the law defines ½ month as 22.5 days, not simply half of monthly pay (unless your monthly uses a 30-day factor; even then, quote it as 22.5 days to be safe).
Skipping the 6-month rule. Remember to round up when the last year has ≥ 6 months.
Ignoring plan vs. law interaction. If a plan exists, compare it to RA 7641 and pay the higher.
Excluding all allowances by default. If an allowance is expressly integrated into basic salary, it must be included.
Confusing separation pay with retirement pay. They’re different triggers and formulas.
Tax missteps. If you want tax-exempt status for non-RA 7641 retirements (e.g., below 60), your plan must be BIR-approved and the employee must meet the BIR age/service conditions.

13) Quick reference (copy-this-box)

Eligibility (statutory): Age 60–65 + ≥ 5 years of service.
Per year benefit: 22.5 days of pay.
Rounding: ≥ 6 months → count 1 year.
Formulas:
- Daily base: Daily Rate × 22.5 × Years
- Monthly base (30-day factor): Monthly Rate × 0.75 × Years
Plan/CBA vs. law: Pay whichever is higher.
Tax (typical): RA 7641 payouts are generally tax-exempt; plan-based exemptions require BIR-approved plan & 50/10 conditions.

14) FAQs

Q: I’m 60 with 7 years of service. If I resign, do I still get retirement pay? If you retire (not just resign) at 60 or above with ≥ 5 years of service, you’re within RA 7641. Label and process it as retirement—you should be paid at least the RA 7641 minimum.

Q: I’m 59 with 20 years. Do I get retirement pay? RA 7641 doesn’t require retirement below 60. You’d need an early-retirement option under a plan/CBA to claim retirement pay now.

Q: I continued working until 68. How is my retirement computed? Computation uses your latest salary rate and credits all years up to your actual retirement date, applying the 6-month rule.

Q: Does overtime or night differential increase my retirement pay? No, premiums and most allowances are excluded unless they’re integrated into basic salary by contract or plan.

Q: Our plan pays 1 month per year. Do we still consider RA 7641? Yes—but only to verify that plan benefits are not lower than RA 7641. Since 1 month/year is higher than 22.5 days, the plan applies.

Final note

RA 7641 is a minimum standard. Many disputes arise from document gaps: what counts as basic salary, whether service is bridged, and whether allowances are integrated. Put those in writing, keep records clean, and compute with the 22.5-day benchmark and 6-month rule in mind. For complex cases (special categories, mergers/transfers, or tax structuring), coordinate with counsel and your payroll/tax team.