CHAPTER 8

REGULAR INCOME TAX - EXCLUSIONS FROM GROSS INCOME

Chapter Overview and Objectives:

After this chapter, readers are expected to demonstrate knowledge on the following:
1. Mastery of the list of exclusions from gross income
2. Comprehension of exclusion conditions or limitations of certain items of income
3. Knowledge of the list of entities exempt under the NIRC and special laws

EXCLUSIONS FROM GROSS INCOME

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

Under Sec. 32(B) of the NIRC, the following items shall not be included in gross income and shall be exempt
from taxation:

A. PROCEEDS OF LIFE INSURANCE

General Rule: Exempt from tax since it is a mere reimbursement for the loss of life
Exception: The following shall be taxable:
1. The beneficiary was chosen for a valuable consideration
2. The interest earned on the insurance policy.

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.
Return of Premium - Exempt
In Excess - Income

C. GIFTS, BEQUESTS, AND DEVISES OR DESCENT

The value of the property acquired by gift, bequest, devise, or descent: Provided, however, that income
from such property as well as gift, bequest, devise, or descent of income from any property in cases of
transfers of divided interest, shall be included in gross income.

D. COMPENSATION FOR INJURIES AND SICKNESS

Amounts received through accident or health insurance or under Workmen’s Compensation Acts 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.

E. INCOME EXEMPT UNDER TREATY

Income items that are excluded by the international agreement to which the Philippine Government is a
signatory are excluded from Income Tax. It must be recalled that the treaty agreements override provisions
of our revenue tax laws in case of conflict under the exemption doctrine of International Comity.

F. RETIREMENT BENEFITS, PENSIONS, GRATUITIES AND OTHERS BENEFITS

1. Retirement benefit under RA. 7641 and those received by officials and employees of private firms in
accordance with a reasonable private benefit plan maintained by the employer
Requisites of Exemption:
a. The employer maintains a reasonable private benefit plan
b. The retiring official or employee has been in the services of the same employer for at least 10 years.
c. The retiring employee is at least 50 years of age at the time of retirement
d. This is the first time availment of retirement benefit exemption.

A reasonable private benefit plan means a pension, gratuity, stock bonus or profit sharing plan maintained
by an employer for the benefit of some or all of his officials or employees, wherein contributions are made
by such employer for the officials or employees, or both, for the purpose of distributing to such officials
and employees the earnings and principal of the fund thus accumulated, and wherein it is provided in said
plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any
purpose other than for the exclusive benefit of the said officials and employees.

To be exempt, the retirement benefit plan must be a “trusteed” plan where the fund is held under the
management of a trustee free from both employer and employee control.

2. Separation or Termination
Requisites of Exemption:
a. The separation or termination must be due to job-threatening sickness, deaths, or other physical
disability; and
b. The same must be due to any cause beyond the control of the employee or official such as:
1. Redundancy
2. Retrenchment
3. Closure of employer’s business
4. Employee lay-off
5. Downsizing of employer’s business
6. Sickness or death of the employee

The phrase “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. Backwages or illegal deductions repaid by the employer upon termination (BIR Ruling 054-2001)
2. Terminal leave pay or the commutation of accumulated unused leave credits (BIR Ruling No. 199-2011)

3. Social Security Benefits, Retirement Gratuities, and Other Similar benefits from foreign government
agencies and other institutions, private or public, received by resident or non-resident citizens or aliens
who come to settle permanently in the Philippines

4. United States Veterans Administration (USVA) - administered benefits under the laws of the united
states received by any person residing in the Philippines.
5. Social Security Systems benefits under RA 8282
6. GSIS Benefits under RA 8291 including retirement gratuity received by government officials and
employees.

EXCLUSION VS. DEDUCTIONS

Exclusion from gross income are not included in the amount of reportable gross income in the income tax
return. The amount of deductions is initially included in the amount of gross income but is separately
presented as deduction against gross income in the income tax return.