TAXATION 1 – INCOME TAXATION ​

2020

Chapter 5  

EXCLUSION FROM GROSS INCOME  

“Exclusion,” as used in income taxation, refers to items or receipts not included in determination 
of the taxable income because the law or treaty provides that they are exempt from income tax.  

Classifications of Exclusion from Gross income  

1. According to law  
​a. Exclusion under Section 32(B) of the NIRC  
b. Exclusion under Special Laws  

2. According to the nature of receipts  

​a. Nontaxable compensation  
b. Nontaxable other receipts  

Non-taxable Compensation Income  

This  refers  to  the  earnings  that  are  compensation  in  nature  but  which  the  law  specifically 
excludes  as  part  of  the  gross  income  for  taxation  purposes.  Specifically,  these  non-taxable 
compensation incomes are:  

1. Compensation income including holiday pay, overtime pay, night shift differential pay, and 
hazard pay earned by minimum wage earners, who has no other reportable income.  

2.  Compensation  income  and/or  business  income  earned  outside  the  Philippines  by  a  Filipino 
Overseas  Contract  Worker,  Nonresident  Filipino  Citizen,  resident  alien  and  foreign 
corporation.  

3. 13​th ​month pay, bonuses and other benefits not exceeding ₱90,000 per year (other benefits 
include excess amount of the prescribed ceiling of de minimis benefits);  

4. Compensation received under employer’s convenience benefit rule;  

5. Proceeds of life insurance policies paid to the heirs upon the death of the insured;  

6.  Amounts  received  through  accident  or  health  insurance,  or  under  the  Workmen’s 
Compensation  Act,  as  compensation  for  personal  injuries  or sickness, plus the amounts of any 
damages received whether by suit or agreement, on account of such injuries or sickness.  

7.  Retirement  benefits  under  RA  7641  and  those  received  by  officials  and  employees  of  private 
firms,  whether  individual  or  corporate,  in  accordance  with  a  reasonable  private  plan 
maintained by the employer. The following conditions must be met:  

a. The retiring official or employee has been in the service of the same employer for at least 10 
years.  
b. He/she is not less than 50 years of age at the same time at the time of retirement; and 
c. He/she has not availed of similar benefit in the past.  

8.  Any  amount  received  by  an  official  or  employee  or  by  his  heirs  from  the  employer  as  a 
consequence  of  separation  of  such  official  or  employee  from  the  service  of  the  employer 
because  of  death,  sickness  or  other  physical  disability  or  for  any  case  beyond  the  control  of 
the said official or employee; 
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TAXATION 1 – INCOME TAXATION ​
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9.  Social  Security  benefits,  retirement  gratuities,  pensions  and  other  similar  benefits  received  by 
resident  or  nonresident  citizens  of  the  Philippines  or  aliens  who  came  to  reside  permanently 
in the Philippines, from foreign government agencies and other institutions, private or public;  

10. Benefits received from or enjoyed under the Social Security System (SSS), including 
maternity benefits as stipulated in RA. 8282;  

11. Benefits received from the GSIS including the retirement gratuity received by government 
officials and employees;  

12. GSIS/SSS, Medicare (Phil-health) and Pag-ibig contributions and union dues of individuals; 

13. De minimis benefits without the prescribed ceiling;  

14. Salaries and stipends in dollars received by non-Filipino citizens serving as staff of the 
International Rice Research Institute and Food Foundation;  

15. Tax exemption of allowances paid to military personnel; and  

16. Casual employment like house helper/ maid not connected in the conduct of business of 
employer.  

Nontaxable Other Receipts  

1.  The  amount  received  by  the  insured  as  a  return  of  the  premiums  paid  by  him  under  life 
insurance,  endowment  or  annuity  contract  either  during  the  term  or  at  the  maturity  of  the 
term mentioned in the contract or upon the surrender of the contract.  

2. The value of property by gift, bequest, devise or descent of income from any property, in case 
of transfers of dividend interest, shall be included in the gross income.  

3. Income of any kind to the extent required by any treaty obligation binding upon the 
government of the Philippines.  

4. Payments of benefits due to any person residing in the Philippines under laws of the United 
States administered by the United States Veterans Administration (USVA).  

5. Income derived from investments in the Philippines in loans, stocks, bonds or other domestic 
securities or from interest on deposits in banks in the Philippines by:  
a. Foreign governments;  
b. Financing institutions, owned, controlled or enjoying refinancing from foreign 
governments; and  
c. International or regional financial institutions established by foreign governments.  

6.  Income  derived  from  any  public  utility  or  from  the  exercise  of  any  essential  governmental 
function  accruing  to  the  Government  of  the  Philippines  or  to  any  political  subdivision 
thereof.  

7. Prizes and awards made primarily in recognition of religious charitable, scientific, 

educational, artistic, literary, or civic achievement, but only if the recipient was (is) a. selected 
without any action on his part to enter the contest of proceeding, or b. not required to render 
 substantial future services as a condition to receive such prize or award. 

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TAXATION 1 – INCOME TAXATION ​
2020

8.  Prizes  and  awards  granted  to  athletes  in  local  and  international  sports  competitions  and 
tournaments  whether  held  in  the  Philippines  or  abroad  and  sanctioned  by  their  National 
Sports Associations.  

9. Gains realized from the sale or exchange or retirement of bonds, debentures, or other 
certificate of indebtedness with a maturity of more than 5 years.  

10.  Interest  on  long-term  deposits  or  investments  in  banks  (with  maturity  of  five  years  or  more) 
received  by  individuals  (except  Nonresident  aliens  not  engaged  in  business  or  practice  of 
profession in the Philippines).  

11. Interest received by a nonresident individual or nonresident corporation from deposits with 
the depository banks under the expanded foreign currency deposit system.  

12. Interest on the price of land covered by CARP (Comprehensive Agrarian Reform Program). 

13. Interest on government bonds, especially when provided in the bond issue.  

14. Gains realized by the investor upon redemption of shares of stock of a mutual fund 
company.  

15.Intercorporate dividend, or dividend received by domestic corporation from another domestic 

corporation.  

16. Philippines charity Sweepstake winnings and Philippine Lotto 

winnings. ​Tax Exemption of Statutory Minimum Wage Earner (MWE)  

Statutory  Minimum  Wage  (​ SMW)  shall  refer  to  the  rate  fixed  by  the  Regional  tripartite  Wage 
and  Productivity  Board  (RTWPB),  as  defined  by  the  Bureau  of  Labor  and  Employment 
Statistics (BLES).  

Holiday pay, overtime pay, night shift differential pay and hazard pay earned by the 
aforementioned MWEs shall be covered by income tax exemption.  

13​th ​Month Pay, Bonuses, an Other Benefits  

13​th ​month pay, bonuses and other benefits not exceeding ₱90,000 are tax-exempt. 

Gifts, Bequest, and Devises  

The value of property acquired by gift, bequest, devise, or descent shall be excluded from gross 
income, provided that income from such property shall be included in gross income.  

Gift ​refers to personal property legally and validly transferred from one person to another for 
free.  

Bequest ​refers to personal property transferred from one person to another by will. 
Devise ​is a real property transferred from one person to another by will.  

Retirement Benefits, Pensions, Gratuities, Etc.  

a. ​Retirement benefits with a reasonable private benefit plan  
b​. Separation pay beyond the control of employee  
c​. Social security retirement benefits 

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TAXATION 1 – INCOME TAXATION ​
2020

d. ​Benefits received under United States Veteran Administration  

e​. Benefits received as provided by Social Security Act  
f​. Benefits received from GSIS  

Tax Exempt Government Income  

The following earnings are not subject to tax:  

a. Income derived by foreign government in the Philippines; and   

b. Income derived by the government or its political subdivisions.  

Tax Exempt Prizes and Awards  

Prizes a​ nd award made primarily in recognition of religious, charitable, scientific, educational 
artistic, literary, or civic achievement are not taxable, provided that the recipient was/is   

1. Selected without any action on his part to enter the contest or proceeding, and 2. Not 
required to render substantial future services as a condition to receive the prize or award.  

Prizes and Awards in Sports Competition  

  ​All  prizes  and  awards  granted  to  athletes  in  local  and  international  sports  competitions  and 
tournaments,  whether  held  in  the  Philippines  or  abroad  and  sanctioned  by  their  respective 
national sports associations, shall not be included in gross income and shall be tax exempt.  

Tax Exempt Interest Income  

Interest  income  derived  by  Philippine  National  Red  Cross  (PNRC)  from  currency  bank 
deposits  substitutes  and  from  trust  from  currency  bank  deposit  and  yield  or  any  monetary 
benefit  from  deposits  substitutes  and  from  trust  funds  and  similar  arrangements  are  exempted 
from 20% final tax imposed under Sec 27.D.  

Tax Exempt Educational Institution   

The following educational institutions are exempt from income tax.  

1. Government educational institutions; and  

2. Non-stock and nonprofit educational institutions  

Revenue  or  income  from  trade,  business  or  other  activity,  the  conduct  of  which  is  not  related  to 
the  exercise  or  performance  by  such  educational  institutions  of  their  educational  purposes  or 
functions  shall  be  subject  to  internal  revenue  taxes  when  the  same  is  not  actually,  directly  or 
exclusively used for the intended purposes.  

Tax Exempt Qualified Senior Citizen  

  ​The  income  of  a  qualified  senior  citizen  is  exempt  from the payment of income tax provided  his 
annual  taxable  income  does  not  exceed  the  property  level  of  P60,000  per  year,  except  interest 
income.  

Tax Exempt Inventors and Inventions  

Sec. 5 and 6 of R.A. 7459 (The Inventors and Inventions Act of 1991) provides tax exemption 
for 10-year period which starts from the date of first commercial sale.  

Tax Exempt Cooperative Income  

Cooperative incomes derived from transaction with members are not subject to tax. However, 
cooperatives are not exempt from the following:  

b. Value-added tax on its purchases;  

c. 20% final tax on interest income; and  
d. 7.5% tax on foreign currency deposit. 

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