TAMBIO, SHERWIN PAUL L.

EXCLUSIONS FROM GROSS INCOME

Exclusions defined: Exclusions are income or receipts which are excluded from gross income and are not
subject to income tax. They do not form part of the gross income.

Exclusions vs. Exemptions vs. Deductions.

Exclusions and exemptions are both exempt from income tax. However, they differ only in their legal bases
on why are these exempt. Exclusions are those granted under the Tax Code (specifically those enumerated
in Section 32(B) of the Tax Code) while exemptions trace their origin from other special laws. Both are not
presented in the income tax return (ITR) to compute for the income tax due. On the other hand, deductions
include but not limited to those enumerated under Section 34 of the Tax Code. These are initially presented
in the amount of reportable gross income and will be separately presented as deductions against gross
income.

Section 32(B) of the Tax Code enumerates the following exclusions from gross income:

1) Proceeds from a life insurance policy

Per provisions of the Tax Code, life is a capital item. Thus, the proceeds from a life insurance is a
return of capital rather than a return on capital. Remember that what is only being taxed is the
return on capital, hence, this shall be excluded from gross income.

Note: Interest payments made by the insurer constitutes income to the recipient. This is because
this is already a return on capital thus taxable. Further, exemption of the proceeds of the life
insurance received is applicable only when the beneficiary is other than the insured.

2) Amount received by insured as return of premium.

Note: The excess of the proceeds received over the premiums paid is included in gross income.

Return of capital – premiums paid to the policy; excluded

Return on capital – any excess over the premiums paid; taxable

Summary of items 1 and 2 regarding the tax treatment of proceeds from life insurance policies
Beneficiary Income Tax Estate Tax
Irrevocable  
Revocable  ✓

This material contains information in summary form and is therefore intended for general guidance and academic purposes only. Reference should be made to the
particular issuance, circular, memorandum or advisory. In providing this material, I have relied upon my understanding from the Taxation books I currently have and
incorporated any relevant information I acquired from the review center I was previously enrolled in. As it is, I am giving credit where credit is due. Do not redistribute
or reproduce without my permission. This material is exclusively for MMSU Accountancy undergraduates only.
 TAMBIO, SHERWIN PAUL L.

Amount Received

Return of premiums YES

NOT TAXABLE
paid?

NO Income Tax – NOT TAXABLE

Estate Tax – NOT TAXABLE
Is the proceeds due to YES
the death of the YES Irrevocable
insured? beneficiary?
Income Tax – NOT TAXABLE
NO
Estate Tax – TAXABLE

Interest income TAXABLE

NO

Received by the Amount in excess of

insured premiums paid is
TAXABLE

3) Gifts, bequests, and devices.

These are subject to transfer taxes (estate tax or donor’s tax) and not to income tax. However,
income from such property shall be subject to income tax (i.e. you inherited a commercial land
from your grandfather. Since it is located away from your home, you opted to sell this to a buyer
hence the related gain shall be taxable to income tax). Moreover, neither alimony nor an allowance
based on a separation agreement is taxable.

4) Compensation for injuries or sickness

Note: Exemplary damages are imposed by way of example or correction for the public good. These
are not compensatory in nature, hence, subject to income tax and should be included in the gross
income of the taxpayer. Only personal damages shall be exempt from income tax, (i.e.
compensation received for the damages caused to your properties are taxable)

This material contains information in summary form and is therefore intended for general guidance and academic purposes only. Reference should be made to the
particular issuance, circular, memorandum or advisory. In providing this material, I have relied upon my understanding from the Taxation books I currently have and
incorporated any relevant information I acquired from the review center I was previously enrolled in. As it is, I am giving credit where credit is due. Do not redistribute
or reproduce without my permission. This material is exclusively for MMSU Accountancy undergraduates only.
 TAMBIO, SHERWIN PAUL L.

5) Income exempt under treaty

Income of any kind to the extent required by any treaty obligation binding upon the Government
of the Philippines is exempt from taxation. Currently, the Philippines has tax treaties with 54
countries (you may look this up in the BIR website). Most income items covered by these treaties
are dividends, interests and capital gains. Note that these treaties do not only cover exemptions
but also lowered tax rates. (i.e. lower final tax rates imposed on interest income earned abroad)

The following are some examples of income exempt under treaties:

1. Salaries of officials of the United Nations assigned in the Philippines if paid by the United
Nations and certified by the Secretary General of the United Nations;
2. Salaries, allowances, fees, or wages received by citizens of the United States of America
working in consular offices in the Philippines are exempt from all taxes;
3. Salaries of diplomatic officials and agents.

6) Retirement benefits, pensions, gratuities, and other benefits

As a general rule, retirement benefits, pensions and other benefits are taxable.

As exception, the following benefit and payment is EXEMPT from income tax:

Requisites:
1. There must be a reasonable private benefit plan maintained by the employer.
2. The retiring official or employee has been in the service of the same employer for at least ten
(10) years. This need not be consecutive, the counting of 10 years can be on a cumulative basis;
3. The retiring official or employee must not be less than 50 years old at the time of his or her
retirement;
4. The retiring official or employee should not have previously availed of the exemption of the
retirement benefit plan. (first time availment)

7) Separation pay – the separation must be caused by death, job-threatening sickness or physical
disability or for any cause beyond the control of the said official or employee. (i.e., when an
employee resigns voluntarily and receives his separation pay, the same is taxable since the cause
was NOT beyond the control of the employee)

Note: The exemption does not extend to the employee’s salaries and taxable benefits. These are
still taxable under the applicable tax schemes.

8) Social security benefits, retirement gratuities, and other similar benefits from foreign government
agencies received by resident or non-resident citizens or aliens who come to settle permanently in
the Philippines
9) United States Veterans Administration (USVA) benefits due to residents of the Philippine
10) Benefits from SSS and GSIS

This material contains information in summary form and is therefore intended for general guidance and academic purposes only. Reference should be made to the
particular issuance, circular, memorandum or advisory. In providing this material, I have relied upon my understanding from the Taxation books I currently have and
incorporated any relevant information I acquired from the review center I was previously enrolled in. As it is, I am giving credit where credit is due. Do not redistribute
or reproduce without my permission. This material is exclusively for MMSU Accountancy undergraduates only.
 TAMBIO, SHERWIN PAUL L.

11) Mandatory contributions of employee to GSIS, SSS, PhilHealth, Pag-ibig, and Union Dues of
Individuals. Voluntary contributions are taxable to the employee.

On the other hand, contributions made by the employer are claimable as deductions against gross
income to arrive at the net taxable income of the employer.

12) Prizes and Awards in recognition of religious, charitable, scientific, educational, artistic, literary,
or civic achievements

Conditions for the exemption of prizes and awards:

• The recipient was selected without any action on his part to enter the contest or
proceedings; and
• The recipient is not required to render substantial future services as a condition to receiving
the prize or award.

13) Prizes and awards in sports competitions granted to athletes

14) Gains from sale of bonds, debentures or other certificate of indebtedness with a maturity of more
than 5 years.

The exemption is granted to encourage financing long-term projects which can be beneficial to the
development of the country. Correspondingly, the losses from the sale of bonds, debentures or other
certificate of indebtedness with a maturity of more than 5 years shall be treated as nondeductible.

15) Gains realized from redemption of shares in mutual fund by the investor.

Income from mutual funds are generally subject to final tax. This exemption is to mitigate double
taxation.

16) 13th Month Pay and other benefits not exceeding P90,000
17) De minimis benefits

This material contains information in summary form and is therefore intended for general guidance and academic purposes only. Reference should be made to the
particular issuance, circular, memorandum or advisory. In providing this material, I have relied upon my understanding from the Taxation books I currently have and
incorporated any relevant information I acquired from the review center I was previously enrolled in. As it is, I am giving credit where credit is due. Do not redistribute
or reproduce without my permission. This material is exclusively for MMSU Accountancy undergraduates only.
 TAMBIO, SHERWIN PAUL L.

OTHER EXEMPT INCOME UNDER SPECIAL LAWS

1) Minimum wage earners – exempt from income tax (still subject to FT and CGT) on the minimum
wage including holiday pay, overtime pay, night shift differential, and hazard pay.

For ease of recalling, exempt income of MWEs can be abbreviated as BHHON (Basic pay, Holiday
Pay, Hazard pay, Overtime pay, Night shift differential pay)

Any income earned by the MWE aside from BHHON shall be taxable.

2) Barangay Micro-Business Enterprise (BMBEs)

Requisites:
• Must be engaged in production, processing or manufacturing of products
• Total assets excluding land and PPE must not exceed P3,000,000.

Note: Non-operating, passive and capital gains of BMBEs are still subject to the appropriate
type of income tax.

3) Cooperatives
Only exempt when:
• Transacts business purely with members
• Transacts with non-members if their accumulated reserves do not exceed P10,000,000
Note: The exemption only covers income earned from the cooperative’s related sources.
Cooperatives are taxable when it derives income from non-related sources.

This material contains information in summary form and is therefore intended for general guidance and academic purposes only. Reference should be made to the
particular issuance, circular, memorandum or advisory. In providing this material, I have relied upon my understanding from the Taxation books I currently have and
incorporated any relevant information I acquired from the review center I was previously enrolled in. As it is, I am giving credit where credit is due. Do not redistribute
or reproduce without my permission. This material is exclusively for MMSU Accountancy undergraduates only.