Kinds of income and
income tax of individuals
Income tax formula for
individuals
Gross Income
Less: Deductions (either
itemized or optional standard
deduction)
Taxable Income
x Tax Rate
Tax Due
Citizens (resident and
nonresident) and resident
aliens
Take note:
 Income tax is imposed
upon taxable compensation
or employment income,
business income, and
income derived from the
practice of professions
derived by citizens and
resident aliens.
 Married individuals shall
compute separately their
Individual income tax based
on their respective total
taxable income.
 Minimum wage earners are
exempt from the payment
of income tax on their
taxable income. Holiday
pay, overtime pay, night
shift differential pay, and
hazard pay received by
them are likewise exempt
from income tax.
- A MWE who receives
taxable income in excess
of the minimum wage
will be taxed on the
excess, but the MWE will
not lose his/her status as
such. Workers who
receive the statutory
minimum wage as their
basic pay remain MWEs.
- Also, the receipt of other
income during the year
does not disqualify them
as MWEs.
- Hence, bonuses and
other benefits received
above the present
statutory limit (now
P90,000 because of
TRAIN) are taxable.
(Soriano v. Secretary of
Finance)
The tax treatment of the
following taxpayers:
(1) Individuals earning
purely compensation
income: taxed under the
graduated rates
Compensation income is all
remuneration for services
performed by an employee for
his employer under an
employer-employee
relationship.
As long as there's an
employer-employee
relationship, remuneration
arising from it will be
considered compensation
income.
(2) Self-employed
individuals earning
income purely from self-
employment or practice
of profession whose
gross sales/ receipts and
other non-operating
 Income do not exceed
P3,000,000, a.k.a. the
VAT threshold: given two
choices— either: a)
under the graduated
rates or b) 8% income
tax rate
A self-employed individual is a
sole proprietor or an
independent contractor who
reports income earned from
self-employment.
A professional is a person
formally certified by a
professional body belonging to
a specific profession (like a
lawyer or a doctor). It also
refers to a person who
engages in some art or sport
for money as a means of
livelihood, rather than as a
hobby.
self-employed individuals and
professionals have a choice to
avail of:
(a) The graduated rates;
or
(b) An 8% tax on gross
sales/receipts and
other non-operating
income in excess of
P250,000 in lieu of the
graduated income tax
rates and the
percentage tax under
Section 116, NIRC.
Rules on availing the 8% tax
rate: TAKE NOTE!
 The first P250,000 is not
subject to tax, since what is
taxed is anything in excess
of P250,000.
 If you choose the 8% tax
rate, then you won't be
liable for the 3%
percentage tax under
Section 116.
 The taxpayer must signify
his or her intention to use
the 8% tax rate in the 1st
quarter of the percentage/
income tax return. If not,
he or she is deemed
considered to have chosen
the graduated rates.
Take note! What happens if
your gross sales/receipts and
other non-operating income
exceed the P3,000,000 VAT
threshold?
 You are automatically
subject to the graduated
rates and can no longer
use the 8% income tax
rate.
 You will also be subject
to other business taxes,
if any.
Take note of the different tax
base for computing the
graduated rates and the 8%
income tax rate.
 Graduated rates: taxable
income
 8% income tax rate:
gross sales/receipts and
other non-operating
income to be reduced by
P250,000.
o Gross receipts
include all kinds of
deposits. However,
returnable deposits
or deposits held in
trust and recorded
as liability are
 excluded. (RMC 50-
2018).
The 8% tax rate option is not
available to the following:
 Purely compensation
income earners (since they
have to use the graduated
rates);
 VAT-registered taxpayers,
regardless of their gross
sales/receipts and other
income;
 Non-VAT taxpayers whose
gross sales/ receipts and
other non-operating income
exceeded the P3,000,000
VAT threshold;
 Taxpayers subject to Other
Percentage Taxes (except
those under Section 116,
NIRC);
 Partners of a general
professional partnership
since their distributive
share from the GPP is
already net of costs and
expenses; and
 Individuals enjoying income
tax exemption (like those
registered as Barangay
Micro Business
Enterprises).
(3) Mixed income earners, or
those who earn Income
from both compensation
and from self-
employment: taxed
under the graduated
rates for their
compensation income
and for their self-
employment income, it
will depend on VAT
threshold.
Take note! it's basically just a
combination of the rules.
Mixed income earners are
taxed in this way:
 For compensation income,
straight out use the
graduated rates;
 For income from business
or practice of profession,
it’ll depend whether their
gross sales/receipts and
other non-operating income
exceed the VAT threshold:
o If it exceeds the VAT
threshold, then
straight out use the
graduated rates for
that too.
o If it does not exceed
the VAT threshold,
then the taxpayer has
a choice to use either
 the graduated
rates; or
 8% income tax
based on gross
sales/receipts
and other non-
operating income
in lieu of the
graduated rates
and percentage
tax under Section
116.
Take note! The total income
tax liability of the mixed
income earner is the sum of
the liability for compensation
income and liability for the
income from business or
practice of profession.
Take note! Mixed income
earners are not entitled to the
P250,000 reduction because
this has already been applied
in computing the income tax Prizes exceeding 20%
P10,000 (prizes
on compensation. amounting to
P10,000 or less
shall be taxed
under Section
PASSIVE INCOME 24[A])
Winnings (except 20%
PCSO and Lotto
winnings
Take note! That passive
amounting to
income is usually subject to P10,000 or less,
final tax. In other words, the which shall be
exempt)
income from these passive Dividend from a 10% (vs. 20%
sources is not used in domestic for nonresident
computing the gross income corporation, or aliens engaged in
from a joint trade/ business)
to determine the tax bracket stock company,
of the individual. The tax insurance or
liabilities from this passive mutual fund
company, and
income are withheld with regional
finality by the income payor; operating
headquarters of
hence, their nature as "final" multinational
taxes. company or
share in the
- Final Income tax are distributive net
interests, royalties, income after tax
of a partnership
awards, dividends, (except a
capital gains on sale of general
shares, realty professional
partnership),
Tax Rate on Final Tax joint stock or
Certain Passive joint venture or
Income on consortium
Citizens and taxable as a
Resident Aliens corporation
Interest under 15% (vs. exempt Interest on long- exempt
the expanded for nonresident term deposit or
foreign currency aliens engaged in investment in
deposit (FCD) trade/business) banks (with
system (see R.R. maturity of five
10-98 below) years or more)
Nonresident
citizens: exempt
Royalties from 10% For nonresident citizens and
books, literary
aliens, the passive income
works, and
musical from abroad is not taxable in
compositions the Philippines. Take note!
Royalties other 20%
than above
Royalties and other income
Interest on any 20% must come from within the
current bank Philippines since these
deposit, yield or
other monetary taxpayers are only taxed from
benefits from sources within the Philippines.
deposit However, note that dividends
substitute, trust
fund and similar from a foreign corporation
arrangement may be considered sourced
within the Philippines under lenders) other than by way of
Section 42. If these dividends deposit with banks through
can be grounded locally, the the issuance of debt
income here enters into the instruments (like banker's
computation of taxable acceptances, promissory
income under Section 24(A). notes, repurchase
agreements, certificates of
For resident citizens, passive
assignment or participation).
income that come from
outside the Philippines goes - when funds are
into their gross income (and simultaneously obtained
thus subject to the graduated from more than 20
rates under Section 24[A]) lenders/investors —
because resident citizens are whether in the primary
taxed from income sourced or secondary market —
worldwide. the instrument is
deemed a deposit
A note on interest income
substitute.
from foreign currency
deposits Type of Tax Rate Basis
income
Tax Rate on Interest Income Interest or 20% (Final Section
from Foreign Currency Deposit yield from Withholdin 24(B)
(FDC) deposit g) (1);
Interest income 15% substitute Section
actually received 25(A)
by a resident (2)
citizen or Interest Exempt Section
resident alien income from 24 (B)
from FCD long-term (1);
If it was Exempt deposits or Section
deposited by an placements 25 (A)
OCW or seaman with banks (2)
or nonresident Interest 5% if the Section
citizen income if remaining 24(B)
If it was in a 50% exempt/ preterminat maturity is (1);
bank account in 50% final ed 4 years to Section
the joint names withholding tax less than 5 25(A)
of an OCW and Of 15% years, (2)
his spouse (who 12%, if the
is a resident) remaining
interest income 15% maturity is
actually received 3 years to
by a domestic less than 4
corporation or years, 20%
resident foreign if the
corporation from remaining
FCD maturity is
less than 3
years
A note on deposit
substitutes
Capital Gains Tax (CGT)
A deposit substitute is a
Capital gains tax only applies
means of borrowing money
to the sale or disposition of
from the public (20 or more
the following:
individual or corporate
 Shares of stock of a the final capital gains tax of
domestic corporation not 15%
traded through the local o Subject to tax only if it
stock exchange; and results into a gain.
 Sale of real property In the
Who are liable for capital
Philippines which is held as
gains tax?
a capital asset.
Tax Rate on Capital Gains
(1) Individual taxpayer,
On sale of shares 15% of the net whether citizen or alien;
of stock of a capital gains (2) Corporate taxpayer,
domestic
corporation not
whether domestic or
traded through a foreign;
local stock (3) Other taxpayers not
exchange held as
a capital asset falling under (1) and (2)
On sale of real 6% of the gross above, such as estate,
property in the selling price, or trust, trust funds and
Philippines held the current
as a capital asset market value at pension funds, among
the time of sale. others.
whichever is
higher Who are exempt from
Tax Rate on Income from Sale,
capital gains tax?
Barter, Exchange or other
Disposition of Shares of Stock of
(1) Dealers in securities (in
Domestic Corporations
If shares of stock 6/10 of 1% of terms of CGT for shares
are listed and the gross selling of stock);
traded through or gross value in
the local stock money of the
(2) Investors in shares of
exchange shares of stock stock in a mutual fund
If shares not 15% of the net company, as defined in
traded through capital gains
the local stock Section 22(BB), and
exchange Section 2(s) of R.R. 6-
2008, in connection with
Implications on shares of the gains realized by said
stock listed and traded in the investor upon
stock exchange from those redemption of said
that are not (applies also to shares of stock in a
corporations): mutual fund company;
and
 Those listed and traded is (3) All other persons,
subject to the final whether natural or
percentage tax of 6/10 of juridical, who are
1% on the GROSS SELLING specifically exempt from
PRICE. (Stock Transaction national internal revenue
Tax) taxes under existing
o Hence, imposed investment incentives
whether there was a and other special laws.
gain or not.
 Those NOT traded, the net
capital gain is subject to
 TAXABLE INCOME
-Sec. 31. Taxable Income
Defined. — The term taxable
income means the pertinent
items of gross income
specified in this Code, less the
deductions, if any, authorized
for such types of income by
this Code or other special
laws.
Gross Income
Less: deductions
Taxable income
Gross income means ALL
INCOME derived from
WHATEVER SOURCE. This
includes, but is not limited to,
the enumeration in the codal.
Take note! Gross receipts (and
thus, gross income) do not
include monies or receipts
entrusted to the taxpayer
which do not belong to them
and do not redound to the
taxpayer's benefit; and it is
not necessary that there must
be a law or regulation which
would exempt such monies
and receipts within the
meaning of gross receipts
under the Tax Code.
Not included in Gross Receipts
 Condominium association
dues, membership fees,
and other
assessments/charges are
not subject to income tax
because they do not
constitute profit or gain.
These are collected purely
for the benefit of the
condominium owners and
are the incidental
consequence of a
condominium corporation's
responsibility to effectively
oversee, maintain, or even
improve the common areas
of the condominium as well
as its governance. (BIR v.
First E-Bank Tower
Condominium Corp., G.R.
Nos. 215801 & 218924, 15
January 2020, which
invalidated the
controversial RMC 65-2012)
 Membership fees,
assessment dues, and
other fees of similar nature
of recreational clubs are not
subject to income tax.
These only constitute
contributions to and/or
replenishment of the funds
for the maintenance and
operations of the facilities
offered by the clubs to their
exclusive members.
(Association of Non-Profit
Clubs v. BIR, G.R. No.
228539, June 26, 2019).
Take note! As long as these
membership fees, dues, and
the like are treated as
collections as inherent
consequences of membership
and are, by nature, intended
for the maintenance,
preservation, and upkeep of
the recreational clubs' general
operations and facilities, these
cannot be classified as
income. It only forms part of
capital.
WHAT ARE INCLUDED IN
THE GROSS INCOME?
1. Compensation
-