Only the gross income earned from assets attributable to a personal equity and retirement account (PERA)—not the entire account balance—will be subject to a 20-percent charge if accountholders opt to prematurely withdraw their contributions, the country’s top tax authority clarified.

Amid circulating concerns over the massive early withdrawal penalty (EWP) for PERA accounts, the Bureau of Internal Revenue (BIR) issued a circular clarifying that the charge only applies to the gross income earned from PERA assets, not the entire account balance.

“Only the gross income earned attributable to PERA assets that are actually withdrawn shall be included in the EWP base,” BIR Commissioner Charlito Martin R. Mendoza said in Revenue Memorandum Circular (RMC) No. 91-2026.

Mendoza further said that gross income “earned that remains invested, reinvested, or otherwise retained within the PERA shall be excluded from the EWP base, as such amounts have not been subject to an early withdrawal.”

Retained investments include unrealized gains and proceeds from PERA investments that remain under PERA custody after sale, redemption, or liquidation.

Gross income earned refers to the “income component embedded in the PERA assets that are actually redeemed, sold, or otherwise withdrawn” from any account. Under this definition, assets that remain in the account are protected from the penalty incurred for early withdrawal.

Apart from the 20-percent hit on earnings, the EWP also mandates “the recovery of any five percent tax credit previously availed of with respect to such withdrawn PERA assets for the entire period.”

This ensures the government recovers tax incentives granted to contributors who fail to complete the required investment duration.

An early withdrawal does not compromise a contributor’s entire portfolio, the BIR stressed. A withdrawal “shall not, by itself, result in the closure, termination, or impairment of any other sub-account.”

To further explain, the BIR said the EWP only affects the “portion of PERA assets actually withdrawn and shall not affect other PERA accounts that remain intact.”

It added that the EWP is neither a final withholding tax nor an income tax in structure. Instead, it is a “statutory penalty imposed on account of the premature withdrawal of PERA assets,” making it separate and distinct from regular income tax exemptions.

Taking effect immediately, the RMC was issued to “clarify, by way of illustrations, the proper determination of the base amount” for the penalty. It provides guidance on “unqualified” withdrawals—those not made for hospitalization or disability.