t r _Regular Inco me Tax: Exclu s· f

cnaP e 8 ion rom Gross Inco me

cflJ\PTER 8
REGULAR INCOME TAX:
EXCLUSIONS FROM GROSS INCOME
~

chapter overview and Objectives

;;;·;~·;;;;~-~i;~:;~:~-;~·;·;;;;~·:;~~~~~:··;~~-;-~~~-~~;;~~~~-;~~:-········.·········
ence not subJe ct to mco me tax unde r the NIRC It I . I .d ~ross i~come,
h . d . · a so me u es d1scuss1ons of
other exempt mcom e un er spec ial laws, treat ies, or contr acts.
After this chap ter, read ers mus t be able to demo nstra te:
1. Mastery of the list of exclu sions from gross income
z. Comprehension of exclu sion cond ition s or limitations of certa
in items of
income
3. Knowledge of the list of entit ies exem pt unde r the NIRC and
special laws

EXCLUSIONS FROM GROSS INCOME

Exclusions from gross income are incom e whic h will not be
subject to income tax.
They are not incl~ ed in gros s inco me subje ct to regul ar tax,
capital gains tax, or
final tax.
' Under Sec. 32(8 ) of the NIRC, the following items shall not
be included in gross
income and shall be exem pt from taxat ion:
I A Proceeds oflif e insu ranc e polic
y .
B. Amount recei ved by the insu red as
a retur n of prem mm
C. Gift, bequest,
devis e, or desc ent
D. Compensation
for injur ies or sickn ess
E.
Income exem pt unde r treat y
F. R~tiremen
t bene fits, pens ions, gratu ities, etc.
G.
Miscellaneous item s . ent or foreign government-
1. Income in the Phili ppin es of foreign gove rnm
owned and cont rolle d corp orati ons . . ubdivisions
2· In~ome of the
gove rnme nt and it_s _poht~~a1r:ligious, charitable, scientific,
3· Prizes and
awar ds in reco gmtw n . ents
d ·vie ach1evem
e ucational, artis tic, litera ry, or ci petiti ons
4
· ~rizes and awar ds in athletich~r:rt:t~o;ag-Ibig, and union dues
S. 0 ntrib ution s to GSIS, SSS, P 1 ea . ' ent Account (PERA)
6. C0 . IE uity Retirem
7. ntn? ution s to Pers ona q RA distr ibuti ons
PER.A inve stme nt inco me and PE .

249
 . trom Gross Inco,me
Tax- Exclusion
gular Incom e ·
Chapt er 8 ~ Re · · · xceed ing P90, 000
b efits note f· d b
13th month pay and oth;r d:~en tures , or certif icate s o m e tedness With .
~· Gains from sale of bon s, .
. f . than 5 years If d
maturity o mo1 e . . hares in mutu a un
10. Gains from redemptton of s

EXCLUSION FROM GROSS INCOME . .

. . e oli _The proce eds of hfe insur ance policies
A. f_rQCeeds of a Life IJ!sui:3nc !n
t~ death of the insur ed, whet her in a single
an
paid to the heir~ or beneficial i~s up h amou nts are held by the insur er under
ed in
sum or otherwise; .however,h1f sue the intere st paym ents .shall Ibe includ
H
aareement to pay intere st t ereon, . . fi
o-~oss income. Life is regard ed as a capita l item with in 1n1te va ue. ence, the
;rocee ds of life insurance is a return of capital.
amoun t
B. Amount received by the insured as a return of prem ium - The
nce,
received by the insured as a return of premi ums paid by him unde r life insura
endowment, or annuity contracts, either durin g the term or at the matu rity
of the
term mentioned in the contract or upon surre nder of the contr act.
The amo~nt received by _the insured as a return of prem ium on any
insurance
contra ct 1s a return of capital; hence, it is excluded from gross incom e.
Illustr ation 1: Life insurance contra cts
. . .
Albert o is insured in a Pl ,000,0 00 life insuranc
payme nts of P20,00 0 for 10 years If Albert0 re pohcy with annu al pr:emwrn
will be paid a PS00,0 00 maturity ;alue. out ives th e policy after the 10th year, he

Scena rio 1
Alberto died on the 8th year of cov erage and h· h
procee s. T 1e entire insurance proceeds of Pl,Ooo,odi . eirs collec ted
d } the Pl,00 0,OO0 .
Scena rio 2 is not taxable.
Upon the death of Alberto, the insur
payme nt of the procee ds where in th a~ce compa ny negot·
insura nce compa iated for an exten sion of tht'
extended payme nt. The Pl ' 000' 000 Peroceed s .1 ny shall '
Pso,.000 excess repres enting interes t is • W1 I not b Pay Pl 050 OOO 011 the
a taxable ite e taxed Upon -, , :
the ' t
t10n , but
m 01Bross i collec
Scena rio 3 . ncom e
Albert o outlive d the policy and collected th ·
e l11aturity (
Value of PSOO ,Ooo. ~
The total procee ds shall be analyz ed as:

Tota] procee ds
Return of premi um (P20,0 00 x 10 years)
Return on capital (item of gross incom e) P soo,ooo
~~Qo
2So ~~-
J}Q
 . ,opter .a - Regular fncome Tax: Exclusion fr· . G
cn° om ross Income

5ceru1riO .f .. . . . . . . .
A.ttrr b yea, so t µ._i~nntmt . ~ lb('I to .\S~tgncd the poli<.; to Clin 0 r.

'. ·ootinuc:·d the premmm µ ..lytn t - f . 1 . Y - who paid him P130,000.

lthno '- . . .· . t: n s OI two more years after whi ch Alberto died
Ghnt) (oHet:ted the Pl 1000,000 msnrance proceeds. · ·

' snit of the policv by Alb erto to C/inu

fh . (1.'>-"(gnment or fer1 p· z,:,o 0('10 . I d .
'· i ?O000 6) rd ,r · · ' · .) , / resu te mto
pJ :t1. 000 ( P.. , x urn °1 ptnniums nnd P10,000 taxab le return on capital.

rhe,r--ect!ipt 0
/ fw in st~rance
2
proc~cds by Glino resu lted in Pl 70,000 return of capital
nd
/PJJ0,000: (P...,O.~OO ·' )1 a PB~W,000 taxable return on capilul. There is loss of life in
dir~stenono but it does Th)t µertam to the purchaser of the life insurance policy. Hence,
tlieexress must be taxable to th e heirs.

mustration 2: Life insurance of company officers

Alberto is insured by his e mploye r corporation for Pl,000,000 with the employer-
corpo ration as the beneficiary. Alberto subsequentl y died, and the corporation
col!e-cted the Pl,000,000 life insurance proceeds.

ft is interesting to note that the entire proceeds under this insurance arrangement are
held with in th e purviev.1 of the NIRC exemption; hence, it is not taxable.

Proper:,ty iDSJ!I.:ance contrac~

T~proceeds of property insurance contracts in excess of the tax basis of the
property lost or destroyed is a taxable return on capital.

IIJuslration: Property insurance f

· · g the entire P2
-- QQQ DOD
, ~ fair value o
Aztec Company secured a fire insurance coverm
its office building. The building was completely destroyed by fire when the
· ) of the building was Pl ' 800,000.
· t ed cost ( tax b as1s
de pree1a - Aztec recovered the
P2,000,000 insurance proceeds.

The total proceeds shall be ana(yzed as follows:

p 2,000,000.,,,
Total proceeds
Less: Basis of property destroyed_ (return of capital)
Retvrn on capital (item ofgross inc;ome) \ \
_p
,
1

. \ .
•~~i~~~ _
. . . 1 , ~ _,,.,__.
\:- l 4'. ' \l'f'•\(,I.•'' ~-·(\ 1t'•;. I ( 'I , t• '
.

.· c . 1
' • ·· ·Descent_ The value of property acquired by
_: G!_f!sd 3_~:(1Uests. . .an!l _l?_~y!ses or .ded however that income from such
gift, .bequest, devise, or descent: P_rovi0 d~scent of i~come from any property,
. ~roperty .as well as gift, beque~t, devise, h ~ 1be included in gross income.
in cases of transfers of divided mtere 5t, 5 a
111
Ustration "ft on April 1, 2020. On that date, the
tJark . . b . 1ess .as a g1p . h.
PS0,000 cas mcome
· . received a restaurant . usu ·.
st 400 000 including
re aurant
earn d .
had total properties amounn_ng
. · The
to
restauran
t p~sted an additional PlS0,000 cash
.
.1 ~-. e smce January 1, 20 20 · · . · ·
e 31 '
.• ,e rom April. 1 to Decem bnr
nl{Jhi- f 2 020 · ·
251
 l J"f1
V

. f m Gross Income l
. Exclusion ro
T ·' .
8 - Reg:utar Income ax. . . . .' I,.
Chapter . . _ ,
400 000
to Mark 1s a gratUt t y S\lbje . , . !
s wot th p · \ t.1/\"l·
d · ·on1 c_-, .s··.h<-1·~11•· be \htl
& f business prope rtlever the P50 ~ ,
000 donat e me P 'l SO 0()0 . . - llQ~• .
The trans,er o f the donor. The .. , mcon, e )f . -: t'
x not income tax. Howe , . d d · c tht
trans fer t a , . tax return o
. income, but in the mcome . f h donati on is m e1u - e . as item of hit)~~ ~. l
i
m gross aft-er the perfec tion o t e
donated property IJ" f M rk the don ee. l-~l
o a ' f
income in the tax return
Gift distinguished from• exchange_t ve must be evalua ted in dete rminin g . Wheth er ,
.j 11.
10 1
G'ft are charac terize d by pure I·liberalitv ,: 1
The transferor's intent10n or n s . A . c, (
. •ft an exchange. l ithout any consid eratw n. n exc 1ange ahva\·, !
transfer 1s a gt or_ .
·· ;
disinterested generosity and are given w
involves a consideration. d.
Empl~~me~t Gratuditiesan emp Ioyer-employee relatio nship .are norma lly treated 111
. . .,
Gratmties given un er A
exchange for services rendered by employees. Hence, ~hey a1 e su_b~ect. to mcorne
tax.
yees \ ~·l·
The transfer of properties by the employe: to manag er_ial or s~pe~I visor~ emplo
by
generally subject to fringe benefit tax. Chnstm as or m~Jor an~1ve1 sary gifts granted
et
e1
the employer to employees are de minimis benefit sub1ect to mcom e tax.

D. Compensation for injuries and sickn ess - amou nts receiv ed through pl
accident or health insurance or under Work men's Comp ensati on
Acts as b,
compensation for personal injuries or sickne ss, plus the amou nts of any
damages
el
ss
received, wheth er by suit or agreem ent, on accou nt of such injuri es or sickne
Illustration 1 T
:d~ew was hit by a jeepney. He paid Pl00,0 00 for hospit alizati on expen ses
He sued h
di~~:~p~er i::e: P;~~ ;;~
0
_awarde? by the court a total indem nity of 1
i,340,000
P40,00l
for his Jost salarie:· and PlOO ~~~emmo/ for his pain, anguis h and suffer ings,
, , as reimb ursem ent for his hospit al bills.
...
The P200,000 indemnity and the PlOO 000 . alizati on expen.i~
are non-taxable returns of c ·t I N ' reimbursement for hospit
vo/llt'
~o.wever, the 40,000 reimbu~sp1 a. fiote that health ·is a capita l item with inl]nite
1' n
·
item ofgross mcome. ement or lost sal ary is a recovery of Jost profit; hence, ll
1

II
Illustration 2
A
Mr. Pogi's brand n car Which h b
. . ew e ought for Pl 2 . . r.
co l Jision. Mr. p0 i e H ' OO,OOO was totally wreck ed JJl 8 ,J i 11
g scaped unharmed :
Th Pl00 . e was paid Pl 300 ,000 for the accide nt. l 0
indemn i . . '
e ,000 excess
personal physical inju r ty is an Item of9ross .
ry ather than injury tori h Income. Note that the law
9 ts or prope rty.
pertaJ11
. ...
~
/t I
I t

E. Income exempt under tr

In. come. items that are Ieaty . f.
PhT . · exc Uded b · . . clf
.. J lppme gover nment is a si Y intern atio \
recalled tha~ treaty agr eem ~ ~re excJude~al . ~ n t to wt11ch
. IJf ·
case of contl1ct under the .overncte provi .. from incom e tax. It mus~ii! , f

. ·. . ·. . . exemp tion doctrtne of ~Ions of our reven ue tax Jaws .

. intern at· . . .
. . . . lOna/ comity. - ..
. ·. -· - . . . . 252
c1,aP ter 8 - Regular Income Tax: Exclusio n from Gross Income
Retirement Ben efits , Pen sion s Gratuiti•
f. ' es and others benefits
Retirement ben efit und er RA . 764 l and
/..p/oyees of priv ate firm s in acco r danc e w 'th those received
em_ . ed by the employe r by officials and
inau,t a111 l a reas onable priva te bene fit plan

Requi s~t~s of ex~~p~ion : (P~eumonics: 1-lO-SO-RPB

P)
a. This 1s th~J
. . u~t t~me ava1 lmen t of retir eme nt be f't
ffi . .
ne 1 exempt10n
The retir mg o 1c1al or emp loye e has
.
b. . been · th · .
employer for at \1ec!~t te.n_l lO} ~s. m e servi ces of the same
__
r. The retir ing emp loye e is at leas t fifty (SO) year s
retire il].fill t.
(r ag~ t the time of
--._; .. ·----
d. The emp loye r main tains a ~ ason able priv ate bene
fit plan.
A reasonable pr~vat~ benefit plan mea ns a pension, gratu
ity, stock bonus or profit-
sharing plan mam tame d by an emp loye r for the benefit
of some or all of his officials or
employees, whe rein cont ribu tions are mad e by such
employer for the officials or
employees, or both , for the purp ose of distr ibuti ng to such
officials and employees the
earnings and princ ipal of the fund thus accumulated, and
wher ein it is provided in said
plan that at no time shall any part of the corp us or incom
e of the fund be used for, or
be diverted to, any purp ose othe r than for the exclusive
benefit of the said officials and
employees.

To be exempt, the retir eme nt bene fit plan mus t be a "trus

teed" plan wher e the fund is
held under the man agem ent of a trust ee free from both
employer and employee
control.
The 10-year service peri od requ irem ent perta ins to cumu
lative years of employment
with the same emp loye r. It does not need to be conti_nu?
~s years of_ employment. A
requirement for cont inuo us emp loym ent wou ld be pre1u
d1c1al to workmg women.

Illustration t
Angel was emp loye d in 1990 whe n she was 25 years
old. In 2010, she availed of the
early retir emen t prog ram of her emp loye r.
Angel satisfied the 0-year cumulative employment requirem
old c· 1 ent but s~e is only 45 y~a~s
i.e. 25 + {2010-1990)) at t he t·,me 0'l.r her retiremen t The ret,rement benefit 1s
taxable. It . . . . •
. .
as compensatwn mcome.
1s an mclu swn m gross mcome
lllustrar 2
A Ion
wss~me that Angel joine d anot her emp 1oyer and work ed there in for 7 more years after
.
hich she retir ed from her emp loym ent.
Alth h . 1y 7 year
em ough Angel is 50 years old by then,.~ e_,s 0; taxables unde
as
r the employ of her second
comp
,. Ployer. The second retirement bene1 1t ,s a 5 0 ensation income since
.)he101 ·
1ed the residency reqw.rement.
f:. -
·
253
 . . Gro ss Inco me
Tax · Exclusion from
- Reg ular Income . .
C~ ~ r 8 . t~
l
. . . trst Ctnp. O:Yer . .
· ·ne<l her
hen she JOI
was 3o years old w etir ed at SO. She imm ediately ioi:'d
Illustration 3 _ r . ·e when she was 60 yea rs Old 'd
A sume instead that Angel fter which she . .
s . . rein for 20 years a ears of serv1c
worked the loyer and retired after 10 y . is exempt since Ang el is 50Years I
another emp . thefirstemploy~r 20 years). The second ret/rettiod
The first retirement benefit filrimyears of service (1.e., f she met th.e residenc. y and . a
ent
ye
d ed at leas t ble even be 1
availed
,F
o, on ry
1 once ma lifeurn
and hos ren er d player is taxa . e. 11'
benefit from the seco~ em t benefit exempt10n can H
requirements since ret1remen
al
..,. mination
2. Separation or 'er fi
b due to job -thr eate nin g sickness
Requisite of exemption: ~ , 1
. or termination must e
1. The separation h . I disability· and 5
d~t hs, or other P ysica ' b nd the con tro l of the employee or f
~ -~_, ,l I 1
2. The same must be due to any ~ __yo
· \ll ·'i I J ,,...:, ~"·
official such as: +r r ·
Redundancy
,. . , ~
I ' • '• '
a,
b. Retrenchment
c. Closure of employer's business
d. Employee lay-off
e. Downsizing of employer's business
f. Sickness or death of the employee
s involuntariness _on the
The phrase "beyond the control of the employee" connote be of his own
ion mu st not
part of the employee. In other words, the sep arat
making.
seq uen t appointment to
Abandonment of office such as the registration and sub
and doe s not fall within the
another office is considered as a voluntary separation
'for any
the phragse054-
purview of(BIR cause beyond the control of such official or
employee". Rulin 2001)
. .
The exemption of terminat' .n
1. Backwages or ille I ion or separation benefits
does not ext end to:
(BIR Ruling 003-20t~) deductions repaid by the
emp loy er upo n terminatio .
. its :
2. Termina_lleave pay or the com
(BIR Ruimg No. 199-ZOll) mutation of accumulated unu sed leave cred
To avail of the tax exempt Ung
'fi . ion, the empJo s sha ll req ues t for a ru f
or certi icate of exemption (CTE) fr Yee or his heir
required documents shall be filed t ohrn the BIR.
The req ues t for a CTE and othe
a t e RDo here the emp loy er is regi.stere
d.
IUustratlon t w
. . . .!
Yvonne_is an employee of Goldfish C
ed its busines s during the ye3f '
Yvon ne s last paycheck shows the fo~ :i:".gYdWhi_chs: clos
eta1l
2S4
 ter 8 ~ Regular Income Tax: Exclusio fr
ChaP n om Gross Income

.d salary in the last two months

unpal . P 30,000
. nt 011th salary
curie 111 15,000
separation pay
l 00,00Q
rot.al pay P 145J10.Q
the P30,000 backw . .
ri,e current month salary and
1, . • • ages are sub1ect to m come tax Th
h · e
Pl OO,ODO sepa rat10n pay rs an exclus10n from gross income·, ence, not taxable.
1HustratiOD 2
Henson's employer ~as downsizi~g _its business operations. Henson was identified
among others to be laid off. To avoid implications of inefficiencies on h is ' rt H
· t' I tt t O th pa , enson
filed a resigna wn e er e company and received a separation pay of Pl 20,000.

Theseparation pay is taxable a~ comp~nsation income since the underlying reason of the
severance of the. employ"!en t (r.e. :es1!Jnation) is within the control of the employee. ff
Henson got termrnated wrthout res1gmng, the separation pay would be exempt.
· Illustration 3
Mr. Swabe was diagnosed to have a sexually transmitted disease (STD). Due to this, his
employer decided to terminate his services but granted him Pl,000,000 separation
pay.

The Pl,000,000 separation pay is taxable as STD does not normally render the employee
incapable of working.

3. Social Security Benefits, Retiremen t Gratuities, and Other similar benefits

from foreign governme nt agencies and other institutions, private or public,
received by resident or non-reside nt citizens or aliens who come to settle
permanently in the Philippine s
IJJustration
John was an OFW employed by Microsoft Corporation in the USA. John retired and
returned to permanentl y settle in the Philippines. He is paid a $2,000 monthly pensi~n
fro m Microsoft's pension fund and another $800 monthly benefit from the US social
security benefit.
Both the pension and the social security benefits are exempt Not~ that these benef!ts
~ere earned abroad when the taxpayer was a non-residen t Un~er situs rule, the fo~e1gn
Income of non-residen ts is not taxable in the Philippines. Thrs_ ~ol~s true even if the
taxpayer subsequently receives the income as a resident of the Ph1hppmes.

·. 4· United States Veterans Administration (USVA) - administe~e~ b~nefits

Under th 1 f , U ·t d States received by any person res1dmg m the
(·. Phil'1 e aws o t ne ni e · •
I· · PPines.
'
r,,
 . T . Exclusion from l;,fO~::> II lvVI I''-'
V

Chapter 8 _ Regular Income ax.

Illustration . . an from the Jraqui war. He married a b ·

Mr Jackson is a retired US serVIcem . . $1 000 hl eauti~ .
Filipina and settled in the Philippines . He is rece1vmg a , mont y benefit fro~
the USVA.
The USVA benefit is excluded in gross income. The same rule _applies t~ USVA benefits tor
beneficiaries of Filipino veterans who fought under the Amencan flag in World War//.
3.
5. Social Security Systems(SSS) benefits under RA 8282 t b,
6. GSIS benefits under RA 8291 including retiremen t gratuity received by c.
governme nt officials and employees d.

G. Miscellan eous items

1. Income derived on investmen ts in the Philippin es in loans, stocks, bondsI
or other dom_estic securities, or from interest on deposits in banks in the
Philippines by:
a. Foreign governme nts
b. Financing institution s owned, controlled , or enjoying refinancin g from foreign 5.
governme nt ind
c. Internation al or regional financial institution s establishe d by foreign
governme nts The
Phil
These are exempt under the exemption doctrine of internatio nal comity.
exe;
2. Income derived by the government and its politi I bd.1v1s1ons
• • .
a. Any public utility or ca su from. Und
b. Exercise of essential governmen t function com
Governme nt agencies and instrument alities I SSS
The general rule with governmen t agen . d . 1 Ibig
because of their public service nature. Ho;ies an in~trumen tahties is exemption J
1
in income-pr oducing activities which are Pever,_ taxation applies when they engage 1 11us
.. . ropnetary or commercial in nature. / Ah E
This exempt10n does not extend to governme nt o i dnd
. ns ( GOCCs ) . GOCCs are generall d and control Jed · 1:
p ·
l
corporatio - wne 80
because their operations are proprietar y in n1tu~abl e as regular corporations : .
1h~~
3. Prizes and Awards made primarily in recon ·t· . t
. I •t· i·t an11ono frel,n·1 I ;
scien_tific, edu_catJona, art1s 1c, 1 erary, or civic a cn1eveme
,£.. .::1 0us., charitab e,_J_:
nts but J . .
a · The recipient was selected without any action on h 1s ' on Y if:
. part to
or proceedm g; and enter the contest 1
b, The recipient is not required to render substantia l f ;
condition to receiving the prize or award. uture services as a j
 .· . G
.,apter 8 - Regular Income Tax: Exclusion from
C11 ross Income

prizes of this kind partake the nature of a uni I- . . . . .

f · in income tax. These transfers a re ·ll ate i al trans fer and hence, exempt
0
r~ipient exerted effort for the grant .:0 t: tt exen~pt hy law fro m tra. nsfer tax. If the
. ·
rel . · · 1e pnze such ·1s · · · · ·
·equired to render service for its grant ti .· · . ' , J01t11ng a con test or 1s
1
· n exchanae · hence taxab le as · ' l e pi ize woul d be co nstrued as received
in a ·0 ' · • ' ~ 111come.

Examples of exempt prizes:

a. Nobel Prize award
b. Gawad ng Sining Award
c. CNN Hero of the Yea r
d. Mos t Outstandi ng Citizeh

4. Prizes and A w_ards in Sports Competitions granted to athletes:

a. In local or mternatio nal.J;OlllPe.t.i.ti.Q.~ and tourname nts·
b. W.h erher~d in the Philippin es or abroao; and . ,.. ,
c. ~Lun.e d ·by their national sports associatio.!!,?,

5. ~<}'!triblj ~ions_ Jor.. ~ SIS, SSS, Phi/Healt h, Pag-lbig and Union dues of
individuals

These pertain to the ~mploy ee~share. in the premium contribut ions to GSIS, SSS,
PhilHeaJth, Pag-lbig and union dues·. The portion of the salary thus contribut ed is
exempt from income tax.

Under RMC No. 21-2011, the exclusion pertains only to the mandator y or
compulsory monthly contribut ions. Voluntary contribut ions to Pag-Ibig II, GSIS or
SSS in excess of the mandato ry monthly contribut ion are taxable. Note that Pag-
lbig is now called the Home Developm ent Mutual Fund or HDMF.

Illustration
An employee has a gross compensa tion income of P400,000 in 2016. His employer
deducted PS,000 SSS, P4,000 PhilHealth, P3,000 HDMF, P2,000 union dues and
P80,000 creditable withholdi ng tax.
Thus) the gross income subject to regular tax shall be computed as follows:

Gross compensa tion income P 400,000

Less: Ex..:l uded compensa tion income or contributi ons
Contributions to SSS P 5,000
Contributions to PhilHealth 4,000
Contributions to HDMF 3,000
Union dues 2.000 14.000
P 386 ,000
Gross taxable compensa tion income
. ble wi.t hh
Note· Th e cred ita Id ' tax 1·5 not an exclusion in gross income but a tax credit which
. · · o mg
is deductib le agai ns t the income tax due of th e taxpayer.
257
 Gross income
. ,c Exclusion trorn . . .
u\ar income Ta d HDMF contnbu t1ons s n0
1
8 - Reg o 1th, an · t : ~€
ChaPter GSIS philr1ea . against gross income.
, h e in S5S,
1
f deductio n .
: Lt
The employers s ar. ome but an item o
exclusion frotn gross inc . t Account (PERA) '

. to Personal Equity Retiremecncount establis hed from qualified '. G :

contributwt ns etiremen t aIoyer for the so Ie purpos e of being
6· · . •butor' s voluntary r · .
PERA lS a con n 'butor and or his emp ;r
contribu~ons of_the coEnRAtn investment products. ', IT

invested m qualified p . to P200 ooo per year to a PERA account. a

Each OFW is allowed tdoPcloOnOtro1bouot::!ribution; per year. Husban d and wife can ; "
Non-OFWs are allowe , . . .
each contribute up to the maximum allowable contribu tion.

Contributions to PERA accounts are exclusions in gross income. This is an

I additional exclusion and is separate with the exclusion for contrib utions to SSS or . 1
GSIS. Moreover, PERA contributors are allowed to claim 5% of their PERA . (
contributi ons as tax credit a2ainst any internal revenue taxes.

I 7. P~RA investment income and PERA distributions

PERA mvestment income are exempt from t . .
final tax,
.
capital
.
gains tax and

I
regular income tax). The PERA axes (1.e.
contributor either in lump sum 1~;count. assets will be distribu ted back to the
f ss , he pension O~ m · ·
mS t allment upon reachin g the
.._ age 0 . or to his heirs or benefici •
are likewise exclus· . anes upon his or herd h
beneficiaries as th ions m gross income of th ~at . PERA distribu tions
e case may be. e contribu tor or his heirs or
8. 13th M r f 1n -Aj.~ t'}. ~ ('
. onth Pay and O'ther B
pubh~ entit i eneJits rece· d by offic• I
esnotexc eed· ive
13th month pay and other b mg P90,000 la s and employ ees of
. II\- \,. enefits Will be di
9 .. Gams from sale o uy.. l ~"~h ..,. scuss~d i~ detail i
with a maturity o~ if bonds, debent . n Chapter 10.
'l more than 5 ures or .
This exemption . ~ , other certifi_
indebtedness is di~s grounded upon cate o/ indebte dness
beneficial to the de:;~ed to the financin the same as
The term "gain" opment of the c g of long-te sumptio n
Company of the Ph~owever, does no~Untry, rrn Projects Wh~hha~ long-ter rn
'PPmes vs. CIR CT include ... ic 1s viewed as
Illustration , A Case No 61Ilterest." (N·
On September 1, 20 . . 142] 'PPon Life Insuranc e
P1,100,ooo Th 20, an LndiVidual t
previous! · ~se bonds bear so . axpaYer
y acquired at Pl 000 1/o interest Sold a 6-
, ,000 face Val Payable Year terrn b
ue on J ever ond. .
anuary 1 Y Decernb erinvestrn ent for
, 202
0· 31
· a nd were
258
 napter 8 - Regular Income Tax- E .
C . Xclus,on from G
. . ross Income
·fhe gain on sale will be computed .
as follows:
selling price_
Less: Cost of bonds sold p 1,100,000
Interest accrued (Pl M x so1. x 9 1,000,000
,o mos./12
Gain on sale mos.) 60,00.Q
L A.Dtfilill
The gain from
•
the sale of the /ong-t b
erm -onds 1s
.
maturity penod of more than S years. How exempt because the bonds hav
. b. . . ever, the accru d. . . ea
gross income su ~ect to regular Income tax. e mterest tncome ,s an item of

10 Gains realized from redemption of sh .

th; investor ares m a mutual fund company by

The term mutual fund company shall mean an open-end d I d .investment

fi an c ose-en
company as d e ire d under the Investment Company Act.

Mutual funds pool the money invested by different investors and invest the money to
earn investment income which shall add up to the net assets of the fund. A
participating investor must purchase participation shares from the fund at their Net
Asset Value (NAV). Upon redemption of his participation shares, the investor gains or
losses by his proportionate share in the increase or decrease in the Net Asset Value of
the fund.

Illustration
Ataxpayer bought 10,000 shares from Golden Dragon Mutual Fund at P120 NAV per
. h ares. h the NAV per share was P180.
share. The taxpayer redeemed hiss w en
. [(P180 - P120) x 10,000}, on redemption is excluded
The P600,000 gam, computed as .
from gross income; hence, exempt from taxatwn.
. . . d to mitigate double taxation. Most of the
The exemption 1s apparently mte nd e . f 1tax at source. The subsequent
items of income of mutual funds are subject to t1_na should no longer be subject to
. . at redemp wn t
distribution of these to the mve st0 rs . y have been intended to promo. e I
income tax. On the other hand, the exemptl~~~a regarded as key participants m
the growth of mutual funds which arekwti
·al mar e 5 ·
Providing liquidity in most financi
NIRC AND SPECIAL LAWS
OTHER EXEMPT INCOME UND::
1. Minimum wage and certain . 0
!:! of Minimum wag~a;~;~
Enterprises Act (
2 M. Business
· Income of Baranga~ icro- )
3 9520
· Income of cooperatives (RA . ft entities
4· Income of non•stock,
non-pro :rust funds ·
S. Income of qualified employee _

259
 .on troff\ ur v :,;::1 l ' . ~"-' . , ...., .
Tax: Exc1us 1
Chapter 8 - Regular income '.;
. self-employed and or pro fe ssionJ:, ,. i
. .1 income of
. _ rofess10na •?:.. ~
6 Business or p . tax ·1
J.
opte
d. to the 8% mcome
· .
·
ners . ien t of a min irnu m ,,vage as fix"-11 ~ ,j

Minimum Wage Ear er is an indi vidua l reo p and Pro duc tivi ty Board
• · n wage earn . 1·ty Wage · {/'. \ l ,
A rmmm~, .
t Regional npaiT . ..+-ite
1.,
Produc ttv
nt A
.
mm 1
·mu m wage ear ner 1s exe mpt·i/'- t,
t ,e t f Labor and Employn:e . ct· g holiday . ··
Departmen
.
° ..
tax on the mm1mum wag e incl u 111
pay , ove rtim e pay~night ,;,·." I
•• '. 1
.' t ,

income :
differential pay and hazar d pQ\'
J. \

Barangay Micro-Busin . rise (BMBE) .

ess Enterp . aged in the pro duc t10n , pro cessino
i
r ent .. \
A BMBE is a business ent1 ·ty
° erp rise eng
d·t· es inc lud ing . t: . l
agr o-p roc ess mg, tradir.::,
manufacturing of pro ducts or .comma l l
arising from Ioan s b u t exc lusiv cr.,i~ ,
,
1
d. tho se
and services, whose total a~s mbc ~ mg entity'
the land on which the particuets
lar usmess
s office, pla nt, and equipment ar~ \
situated, do not exceed P3,000,000. \
f
.
The tern service exc1udes th ose rendered by lice nse d professionals and ,
partnership and corporations engaged in con d • d · •i
s~ltancy, a vis o~ an · sim i a~ \:
services which are essentially carried out through
licensed pro fes swn als. l
A BMBE shall include any individual own
ing such bus ine ss ent i~ o_r enterp rise, \
partnership, coo perative, corporation, association, or oth er
and/organized and existing under Philippine law ent ity mcorporated .
s and reg iste red wit h the office of \
the treasurer of a city or municipality.
\
To qualify as a BMBE, an enterprise must not be
a bra nch or a sub sid iary of a large \
scale enterprise and its policies, and modus ope
randi mu st not be det erm ine d by a I
large scale enterprise such as in the case of fran 1
chises. \
To avail of the benefits and privileges of a
BMBE, an app lica nt mu st secure a \\
certificate of authority to operate as a BMBE from
city or municipality tha t has jurisdiction the Office of the Tre asu rer of the
.
Tax Exemption on Income from Operations
Aside from oth er incentives afforded by the
law, the income of BMBE from their
?pe rab on is exempt;. hence, excluded from
_the gross income sub jec t to regular
mcome tax. BMBEs file an Annua! Information
Return in lieu of the income taX
return. Howevec the ir non-operatmg, passive
app rop riat e typ e of income tax. , and capital gains are sub jec t to the

IJJustration
\,Vilham has a bakery with total assets of P4,
000,000 inclusive of a lot wit h a book
value of P1.200,000.

260
 ter _Regular Income Tax: Excius· . f
cnaP 8 ion rom Gross Income

•ncome from sales of b read

Gross l . .
est on pr omissory notes of r etail sto re 1' P 300,000
Jnterlties on sale of r ecipe books c tents 12,000
R~~adend income from domestic stocks 36,000
QJ\Tl
10,000
te that William's total asset is P2 800 000 ct·
No .f. BM . . , , , exc I u mg the lot. Hence, Wi!J ia m's
business quah 1es as a
h f 11 . .
BE. If Wilham obtained a ·t·f· ,. .
ce1 l icate of authority to operate
as a BMBE, t e o owmg items of operating income are exempt fr om mcom .
e tax:
Gross income from sales of bread p 300 ,
000
Other operating income:
Interest income from client promissory notes
12,000
Total exempt income p 312,000
Assuming William's bakery is not registered as a BMBE, the P312,000 total operational
income will be subject to the regular income tax.

Either way, the royalty income and dividend income are exclusions in the gross
income subject to regular tax but are inclusions in the gross income subject to final
tax.

Another illustration
Chris Santana has an accounting and auditing firm with total assets of P2,500,000. He
derived a total operating income of Pl,000,000 in 2014.
The entire Pl,000,000 is taxable since Mr. Santana is a professional service provider
not qualified to be a BMBE.

Revocation of BMBE Tax Exemptio ns .

The mcome
· . f BMBE may be revoked for any of the following
tax exemption o a
reasons:
L Transfer of place of business
2· Value of assets
exceeds P3,000,000 .
3 v T t of Authority
· oluntary surrender of t~e ~e~tI ica e . violation or non-compli ance with
4· Death of the
registered ind1v1dual owner,

5 the provisions of RA 9178 . . hich is not eligible to be a BMBE

· Merger or consolidat ion with ~n entlity ~o rietorship without prejudice to the
6
· Sale or transfer of the BMBE if a so e P p
_ transferee applying for registratio n
7
8· Submission of fake or falsified docu~en/ts spension of operations for one year
Rer r cessation su
9. M k1~ement from business, 0 ·red declaration s or statements . .
a lng false or omitting requi .
- c napter S- Regu\ar
\ncorne 1 a)(.
. E'xc\us,on from Gross \ncome
1
·I

1.
\
\
'
I
..

i
.
members are exem t f
cooperatiVesth at tr . s pu rely with p rorn 1l\ \
an sa ct businhest transact . s w ith n
..
coo9e rativ es
d f es cooµer atives t1 a busi~es accumulaon-members ar"
ted rese rve an~ \
taxes an e i\ . t fr
om a\\ taxes anP d fees l· f the ir.
\i\{ewise exen ? l OM. Otherwise, the amount of surp \u!· \
d' · do no t exceed . t to re
un w, dedf sa·n vmgs
terest · \ is sub1ec g u la r tax. \
a\\o cate d or l on cap1ta s \
\ te d so urces is fully taxab\ t \
How ev er. . e of any co op er a tive fr om n o n -r e a
I the mcom
to regu\ar tax.

\
\
\
Non-Stockand _Non- rofit Entities .
\
Non-stock ent1t1es th!t are not organized for profi exempt from incom
e x on
H w ev er th ei r in t are f m unrelated sourta
I their income from .
taxable.
op
.
erat1ons. o . '
co m e ro ces is \
\

Qualified Employee \
s' Trust Fund
An em ployees' tr us t fund t f a en si o n
sharing plan of an which form st o c k b o n u s o
employer for th e s p ar f o
be ne fi
p ll h is em p lo y ee s is r profit I
from any income ta
x under the N\RC
t o so m e o r a exem pt \
. \
conditions for exem
ptions of employe
a. Contributions e trust funds
are made to th e tr
for the purpose of u st by su ch em p 1
lo y er , o r em p lo
distributing to su
ch em pl oy ee s th y ee s, 0 _r bo th
. a1
of the fund accum e ea rn in g s a n d p
ulated by th e tr u st n n cip
b . The asset of th in ac co rd an ce w
e fund shall no t be it h su ch p la n .
exclusive benefit of di ve rt ed for o th
the employees. er p u rp o se s o th
e r th an the
QUALIFICATION O
F EXEMPTION OF EX
Tax incentive or
exemption is high EMPT ENTITIES
.-:~'.
I

~-/4 . h
Taxpayers w it ex . ly di sf av or ed in
f~ emptio . l \
must establish th ns or tax mcentives u n aw . t m at
eir entitlement by d er a . 1t 1s n o t a u
o iC-
BMBEs need to se filing re q u ir e~ \e .sti. trac ts
cure a Certificate x i n g laws _o r
Certificate of Tax
Exemption/Rulin
of Authority. C co n BIR \
g f( o cu ?1 en ts w it h th e
operates prospect 'l'E)
s n ee d to secu a
'!,.
ively. oo pe ra
·<:~ j
\. l , 0 ne e ex
em p t t1 ve . re _
,.:.:.:t
io n is es ta b li sh ed , it on \v 1
INCOME OF SELF
-EMPLOYED OR , : l

·r} 8% INCOME TAX PROFESSIONALS I

i
\
The income of se WHO OPTED T
lf-employed and O BE TAXED ft.1
income tax shall be or profession l
if/ . .
tax is in Heu of the ex cl ud ed in gross
i;~~~ 3% percentage ta in c o m e s: :, :~ op te d to be ta
x and th e pr o xe d to th e sOio
~_., , ,.~~ · .0
\:j ?· { gressive ~e gu la r tax. T h
in co n-. _ ¾.
•ll e t~ . e 80 o m e 01ne
/j/~~·', . __
#:t
·.•._ .-~!) ~.
?',· :ti\- :•
262
 , l ~ t-{tl~_lUl-0! lncome Ta~ r:xc~.·1uc1·0·n fro 1 G
"' . 1;:
,_,..,•),t' v 0
- r 1 · ross Inco me
"--'\~{•
('APJ'fAl .
~Hu~ SUHtHCf TO l,. INAl. TAX OR • GAI NS TAX
t~l " ~ . ,
. , . , 1 il h'l HH' tlut ~trt- S\thJ.L'ft
1 to r, ,., 1 .· . .
11 1 " tth omt• t ·l x . .. ·
ltr,,, , \ · {'
. . H)t• l'lx Also i
ll \·,,, lll(() 01 Cc.tp1ta .
1 gain s tax are not
, . \ \t" n•' t\'~~ inn )nw snhjPct lo ft\"l . h
·it'\l1 :>-
rlw l'. l'Vt'
t,
l".tg (' nf final hx ) 1. ., , • . · ~ , nco me item s t at are
· ,,111 ntcd1 .11
1
'• < t\ lJ)1lal gains tax arc not taxable to the
,'\ .. ,
. •\'11h
{ · f l\H t .l~ .
..,
•~'1'Ul.l
~ \

f \t:l HSlONS VS. DEll\JC'flONS

11 in the amount of reportab le gross
(Vlu ,1tm ,: l't~m ~l\> s: inr~1 me _: ·~.n ot included ini tia lly included in
: I ht> amo unt of deductions is
.»,\>U\,' Ill Ih1 _"H om t t,t x t'I lll "
I O bu I ts separately presented as deduction against gross
!h,' .11111,unt nI gn >ss nrtaxme
n ~turn .
;:i1.\1 mt' iu tht' 1nco1ne

~1 Nott• to ren der s

exceptions to the general scope
l
t\1·/usio n in gross in com e rep rese nts one of the
advised to _master ..or, at least,
u( rh t• rflJ LLlor income tax. Rea ders are
J /i1u, iliuri;:e them selv es with the
list and their respective .~x_cJusion criteria
11-t·ton.' µroc erdm9 to the nex t chapters
of the book. This 1s important m
1 t1ssi:,ti11g T't!aders in
mas tering th e regular income tax.
u -- = -- -- -- -- -- --
t
;

Tl -t
I
' \

t ' \.t I
j ( .· II J -=1~ .-~;
f

~,rl_ ·.
263
. •.
.,·'
( ~.~~,{,, ~..... ·.r-.

'." ~ ·:~'.;