EXCLUSIONS FROM GROSS INCOME

Exclusions from Gross Income are income which will not subject to income tax. They are not included in gross
income subject to regular tax, capital gains tax, or final tax.

Under the NIRC, the following items shall not be included in gross income, and shall be exempt from taxation:
1. Proceeds of life insurance policy
2. Amount received by the insured as a return of premium
3. Gifts, Bequest, Devise or Descent
4. Compensation for injuries, or sickness
5. Income exempts under Treaty
6. Retirement benefits, pensions, gratuities, etc.
7. Miscellaneous items:
a. Income in the Philippines of foreign govt. or foreign govt-owned and controlled corporations
b. Income of the govt. and its political subdivisions
c. Prizes and awards in foreign recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievements
d. Prizes and awards in athletic sports competitions
e. Contributions to GSIS, SSS, Philhealth, Pag-ibig and Union dues
f. 13th months’ pay and other benefits not exceeding P 90,000
g. Gains from sale of bonds, debentures or certificates of indebtedness with maturity of more
than 5 years
h. Gains from redemption of shares in mutual fund.
PROCEEDS OF LIFE INSURANCE POLICY
A. Proceeds of life insurance policy – Life is regarded as a capital item with infinite value. Hence, the
proceeds of life insurance are a return of capital.
The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the insured,
whether in a single sum or otherwise, however, if such amounts are held by the insurer under an
agreement to pay interest thereon, the interest payments shall be included in gross income.
B. Amount received by the insured as a return of premium – The amount received by the insured as a
return of premiums paid by him under life insurance, endowment, or annuity contracts, either during
the term or at the maturity of the term mentioned in the contract or upon surrender of the contract.
The amount received by the insured as a return of premium or any insurance contract is a return of
capital, hence, it is excluded from gross income.

ILLUSTRATION
Alberto is insured in a P 1 M insurance policy with annual premiums of P 20,000 for 10 years. If Alberto
outlives the policy after the 10th year, he will be paid a P 500,000 maturity value.

Scenario 1
Alberto died on the 8th year of coverage and his heirs collected the P 1M proceeds. The entire
insurance proceeds of P 1 M is not taxable.

Scenario 2
Upon the death of Alberto, the insurance company negotiated for an extension of the payment of the
proceeds wherein the insurance company shall pay P 1,050,000 of the extended payment. The P 1 M
proceeds will not be taxed upon collection, but the P 50,000 excess representing interest is a taxable item of
gross income.

Scenario 3
Alberto outlived the policy and collected the maturity value of P 500,000.
The total proceeds shall be analyzed as:
Total proceeds 500,000
Return of premium (20,000 x 10 years) 200,000
Return on capital (item of gross income) 300,000

GIFTS, BEQUESTS AND DEVISES OR DESCENT

Gifts are characterized by pure liberality or disinterested generosity and are given without any
consideration or compensation.
 Exchanges are given but always involves a consideration.
Bequest is the act of giving personal property, by will. The person to whom gifts of personal property
are given by virtue of a will is known as legatee.
Devise is the transmission of real property by virtue of a will. Devisee is a person to whom gifts of a
particular real property are given by virtue of a will.
Descent is also referred to as succession. “Title by descent” is defined as the title by which one person,
on the death of another, acquires the estate of the latter as his heit at law.

The value of the property acquired by gift, bequest, devise or descent shall be excluded from gross income.
Provided, however, that the gifts and bequests must be in consideration of pure liberality. If is in
consideration of services performed, it becomes subject to income tax.

The reason for the exemption is that such transfers are subject to either donor’s tax or to estate tax. But the
income from such property shall be included in the gross income.

The value of the property received during the lifetime of the donor (donations inter vivos) and
transfers at death (donations mortis causa) are excluded from gross income. However, the recipient of such
property is taxed on the income produced by the property after the transfer.

ILUSTRATION
Mark received a restaurant business as a gift on April 1, 2019. On that date, the restaurant had total
properties amounting to P 400,000 including P 50,000 cash income earned since January 1, 2019. The
restaurant posted an additional P 150,000 cash income from April 1 to December 31, 2019.

ANSWER: The transfer of properties worth P 400,000 to Mark is a gratuity subject to transfer tax, not income
tax. However, the P 50,000 donated income shall be included in gross income, but in the income tax return of
the donor. The P 150,000 income of the donated property after the perfection of the donation is included as
item of gross income in the tax return of Mark, the donee.

COMPENSATION FOR INJURIES AND SICKNESS

Amounts received through accident or health insurance or under 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.

ILLUSTRATION 1
Andrew was hit by a jeepney. He spent 3 months in the hospital and paid P 100,000 for hospitalization
expenses. He sued the jeepney driver and is awarded by the court a total indemnity of P 340,000 divided as
follows:
P 200,000 – for his pain, anguish and sufferings
P 40,000 – for his lost salaries
P 100,000 – as reimbursement for his hospital bills.

ANSWER: The P 200,000 indemnity and the P 100,000 reimbursement for hospitalization expenses are non-
taxable returns of capital. However, the P 40,000 reimbursement for lost salary is a recovery of lost profit,
hence, an item of gross income.

ILLUSTRATION 2
Mr. P was driving his brand-new P 1,200,000 car when a truck bumped it resulting to the total
wreckage of his car. Luckily, he managed to escape the accident unharmed. He received P 1,300,000
indemnity from the accident.

ANSWER: The P 100,000 excess indemnity is an item of gross income. Note that the law permits to personal
physical injury rather injury to rights or property.

INCOME EXEMPT UNDER TREATY

Income items that are excluded by international agreement to which the Philippine govt. is a signatory
are excluded from income tax. It must be recalled that treaty agreements override provisions of our revenue
tax laws in case of conflict under the exemption doctrine of international comity.
RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHER BENEFITS
Retirement benefits under RA 7641 and those received by official and employees of private firms in
accordance with a reasonable private benefit plan maintained by the employer.
Requisites of exemption:
1. The employer maintains a reasonable private benefit plan.
2. The retiring official or employee has been in the service of the same employer for at least 10 years.
3. The retiring employee is at least 50 years of age at the time of retirement.
4. This is the first time availment for retirement benefit exemption.

ILLUSTRATION 1
Angel was employed in 1990 when she was 25 years old. In 2010, she availed of the early retirement
program of her employer.

ANSWER: Angel satisfied with the 10-year cumulative employment retirement, but she is only 45 years old at
the time of her retirement. The retirement benefit is taxable It is an inclusion in gross income as
compensation income.

ILLUSTRATION 2
Assume that Angel joined another employer and worked therein for 7 more years after which she
retired from her employment.

ANSWER: Although Angel is 50 years old by then, she is only 7 years under the employ of her second
employer. The second retirement benefit is also taxable as compensation income since she failed the
residency requirement.

ILLUSTRATION 3
Assume instead that Angel was 30 years old when she joined her first employer and worked therein for
20 years after which she retires at 50. She immediately joined another employer and retired after 10 years of
service when she was 60 years old.

ANSWER: The first retirement from the first employer is exempt since Angel is 50 years old and has rendered
at least 10 years of service (20 years). The second retirement benefit from the second employer is taxable
even if she met the residency and age requirements since this retirement benefit exemption can be availed of
only once in a lifetime.

SEPARATION OR TERMINATION
Requisites of exemption:
1. The separation or termination must be due to job-threatening sickness, deaths or other physical
disability, and
2. The same must be due to any cause beyond the control of the employee or official such as:
a. Redundancy
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

The term “beyond the control of the employee” connotes involuntariness on the part of the employee. In
other words, the separation must not be of his own making.

Abandonment of office such as the registration and subsequent appointment to another office is considered
as a voluntary separation and does not fall within the purview of the phrase “for any cause beyond the control
of such official or employee”

The exemption of termination or separation benefits does not extend to:

1. Back wages or illegal deductions repaid by the employer upon termination.
2. Terminal leave pay or the commutation of accumulated unused leave credits.
To avail of the tax exemption, the employee or his heirs shall request for a ruling or a Certificate of Exemption
(CTE) from the BIR. The request for a CTE and other required documents shall be filed at the RDO where the
employer is registered.

ILLUSTRATION 1
Mila is an employee of Golden Bee Trading which closed its business during the year. Mila’s last
paycheck shows the following details:
Unpaid salary in the last 2 months 30,000
Current month salary 15,000
Separation pays 100,000
Total pay 145,000

ANALYSIS: The current month salary and the P 30,000 back wages are subject to income tax. The P 100,000
separation pay is an exclusion from gross income, hence, not taxable

ILLUSTRATION 2
Mario’s employer was downsizing its business operations. Mario was identified among others to be
laid off. To avoid implications of inefficiencies on his part, Mario filed a resignation letter to the company and
received a separation pay of P 120,000.

ANALYSIS:
The separation pay is taxable as compensation income since the underlying reason of the severance of
the employment (i.e., resignation) is within the control of the employee. If Mario got terminated without
resigning, the separation pay would be exempt.

ILLUSTRATION 3
Mr. S was diagnosed to have sexually transmitted disease (STD). Due to this, his employer decided to
terminate his services but granted him P 1,000,000 separation pay.

ANALYSIS:
The P 1,000,000 separation pay is taxable aa STD does not normally render the employee incapable of
working.

SOCIAL SECURITY BENEFITS, RETIREMENT GRATUITIES, AND OTHER SIMILAR BENEFITS FROM FOREIGN
GOVT. AGENCIES AND OTHER INSTITUTIONS, PRIVATE OR PUBLIC received by residents or non-resident
citizens or aliens who come to settle permanently in the Philippines.

ILLUSTRATION
John was an OFW employed by Microsoft in the USA. John retired and to permanently settle in the
Philippines. He is paid a $ 2,000 monthly pension from Microsoft’s pension fund and another $ 800 monthly
benefit from the US social security benefit.

ANALYSIS:
Both the pension and social security benefits are exempt. Note that these benefits were earned
abroad when the taxpayer was a non-resident. Under this rule the foreign income of non-residents is not
taxable in the Philippines. This holds true even if the taxpayer subsequently receives the income as a resident
of the Philippines.

SOCIAL SECURITY SYSTEM (SSS) BENEFITS under RA 8282 ANALYSIS:

PRIZES AND AWARDS MADE PRIMARILY IN RECOGNITION OF RELIGIOUS, CHARITABLE, SCIENTIFIC,

EDUCATIONAL, ARTISTIC, LITERARY, OR CIVIC ACHIEVEMENT, only if:
a. The recipient was selected without any action on his partto enter the contest or proceedings, and,
b. The recipient is not required to render substantial future services as a condition to receiving the prize
or award.
Prizes of this kind partake the nature of a unilateral transfer and hence, exempt from income tax.

PRIZES AND AWARDS IN SPORTS COMPETITIONS GRANTED TO ATHLETES:

 a. In local or international competitions and tournaments
b. Whether held in the Philippines or abroad; and,
c. Sanctioned by their international sports associations

CONTRIBUTIONS FOR GSIS, SSS, PHILHEALTH, PAG-IBIG AND UNION DUES OF INDIVIDUALS
These pertain to the employee share in the premium contributions to GSIS, SSS, Philhealth, Pag-ibig
and union dues. The portion of the salary contributed are exempt from income tax. The exclusion pertains
only to the mandatory or compulsory monthly contributions. Voluntary contributions to Pag-ibig II, GSIS or
SSS in excess of the mandatory monthly contributions are taxable. Note that Pag-ibig is now called the Home
Development Mutual Fund or HDMF.

ILLUSTRATION
An employee has a gross compensation income of P 400,000 in 2019. His employer deducted P 5,000
SSS; P 4,000 Philhealth; P 3,000 HDMF; P 2,000 Union dues and P 80,000 creditable withholding tax.

Thus, the gross income subject to regular tax shall be computed as follows:
Gross Compensation Income 400,000
Less: Excluded compensation income or contributions:
Contribution to SSS 5,000
Contribution to Philhealth 4,000
Contribution to HDMF 3,000
Union dues 2,000 14,000
Gross taxable compensation income 386,000
=======
Note: The creditable withholding tax is not an exclusion in gross income but a tax credit which is deductible
against the income tax due of the taxpayer. The employer’s share in SSS, GSIS, Philhealth and HDMF
contributions are not exclusion from gross income but an item of deduction against gross income.

OTHER EXEMPT INCOME UNDER N I R C AND SPECIAL LAWS

1. Minimum wage and certain benefits of Minimum Wage Earners.
2. Income of Barangay Micro Business Enterprise Act (RA 9178)
3. Income of Cooperatives (RA 9520)
4. Income of Non-stock, Non-profit entities
5. Income of Employee trust Funds.

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