Regular Income Tax: Exclusions

from Gross Income

Chapter 8
 Exclusions from gross income
• Not subject to regular tax, capital gains tax or
final tax
A. Proceeds of Life Insurance Policy
• Life is regarded as a capital item with infinite
value; hence proceeds of life insurance is a
return OF capital not subject to tax
 B. Amount received by the insured as
return of premium
• This is considered return OF capital, hence not
subject to tax
• In case of property insurance, proceeds in
excess of the tax basis of the property lost is
TAXABLE
 Illustration 1
Alberto is insured in a P1,000,000 life insurance
policy with annual premium payments of
P20,000 for 10 years. If Alberto outlives the
policy after the 10th year, he will be paid
P500,000 maturity value.
 Scenario 1
Alberto died on the 8th year of coverage & his
heirs collected the P1,000,000 proceeds.

The entire proceeds 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 P1,050,000 on the extended
payment.
The P1,000,000 proceeds will not be taxed upon
collection, but the P50,000 excess representing
interest is a taxable item of gross income.
 Scenario 3
Alberto outlived the policy and collected the
maturity value of P500,000.

Total proceeds P500,000

Return of premium (not taxable) 200,000
Return on capital (taxable) P300,000
========
 Scenario 4
After 6 years of payment, Alberto assigned the policy to
Glino who paid him P130,000. Glino continued the
premium payments for 2 more years after which Alberto
died. Glino collected the P1,000,000 insurance proceeds.

Upon assignment, the P10,000 gain (P130,000 –

P120,000) is taxable return on capital

The receipt of the insurance proceeds by Glino is taxable

to the extent of P830,000 gain (P1,000,000 – P170,000)
 Scenario 5
If it is the Alberto’s employer insuring him with
the employer as the beneficiary, receipt of the
P1,000,000 by the employer upon the death of
Alberto is not taxable.
 Illustration 2
Aztec Company secured a fire insurance
covering the entire P2,000,000 fair value of its
office building. The building was completely
destroyed by fire when its depreciated cost (tax
basis) was P1,800,000. Aztec recovered the
P2,000,000 insurance proceeds.

The excess of proceeds over tax basis of

P200,000 (P2M-P1.8M) is taxable
 C. Gifts, bequests and devises or
descent
• Receipt of property is subject to transfer tax
• Income generated by the property is taxable
 Illustration
Mark received a restaurant business as a gift on April 1, 2020.
On that date, the restaurant had total properties amounting
to P400,000 including P50,000 cash income earned since
January 1, 2020. The restaurant posted an additional
P150,000 cash income from April 1 to December 31, 2020.
Analysis:
The transfer of business properties worth P400,000 to Mark is
a gratuity subject to transfer tax, not income tax. However,
the P50,000 donated income shall be included in gross income
of the donor, not the donee. The P150,000 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.
 D. Compensation for injuries and
sickness
• An exclusion because health is a capital item
with infinite value
• Includes indemnity for damages done and
reimbursement for hospitalization
• Indemnity for lost salary or profits is an item
of gross income
 Illustration
Mr. Vivid was hit by a jeepney. He spent
P100,000 for hospitalization. He sued the
jeepney driver & was awarded by court
indemnity of P340,000 broken down into:
– P200,000 indemnity for pain & sufferings
– P100,000 refund for hospitalization
– P40,000 for lost salaries
➢The first 2 are NON-TAXABLE returns of capital
➢P40,000 is TAXABLE return on capital
 E. Income Exempt under treaty
• Income items excluded in accordance with the
doctrine of international comity
F. Retirement Benefits, Pensions,
Gratuities & Other Benefits
 1. Retirement Benefit under RA 7641
Requisites:
1. The employer maintains a reasonable private benefit plan
2. Employee must render at least 10 years of service to the
same employer
3. Employee must be 50 years old upon availment
4. Availment of exemption can only be availed once in a
lifetime
The benefit plan must be a “trusteed plan” free from employer &
employee control.
 2. Retirement Benefit under RA 7641 in the
absence of a retirement plan

Requisites:
1. Retiring employee is at least 60 years of age
2. He must have served the employer for at least 5 years
This exemption criteria applies also in cases where the
retirement plan is not approved by BIR.
 3. Separation or Termination
Requisites:
1. Must be due to job-threatening sickness, death or other
physical disability
2. Must be beyond employee’s control such as redundancy,
retrenchment, closure of business, lay-off, downsizing,
sickness or death of employee
The exemption does not extend to:
1. Backwages or illegal deductions repaid by employer upon
termination
2. Terminal leave pay or commutation of accumulated leave
credits

Requires request for ruling or certificate of exemption from BIR

4. Social security benefits, retirement gratuities
& other similar benefits from foreign
government & other institutions, private or
public, received by resident or non-resident
citizens or aliens who come to settle
permanently in the Philippines
 Other benefits under item F
5. US Veterans Administration-administered
benefits received by any person residing in PH
6. SSS benefits under RA8282
7. GSIS benefits under RA8291
G. Miscellaneous Items
1. Income derived on 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 government
c. International or regional financial institutions
established by foreign governments
 2. Income by government & its
political subdivisions from:
a. Any public utility
b. Exercise of essential government function

Exemption does not include GOCCs

3. Prizes & awards made primarily in recognition
of religious, charitable, scientific, educational,
artistic, literary or civic achievements but only if:
a. Recipient was selected without any action on
his part to enter a contest
b. Recipient is not required to render
substantial future services
 4. Prizes & awards in sports
competitions granted to athletes
a. In local or international competitions or
tournaments
b. Whether held in the Philippines or abroad
c. Sanctioned by their national sports
associations
5. Contributions for GSIS, SSS, Philhealth, HDMF
& Union Dues - MANDATORY EMPLOYEE SHARE
6. Contributions to Personal Equity Retirement
Account (PERA)
- Contributions are exclusions in gross income
- OFWs are allowed to contribute up to P200k/year
- Non-OFWs are allowed to contribute up to P100k/year
- PERA contributors are allowed to claim 5% of
their PERA contributions as tax credit against
any internal revenue taxes
7) PERA investment income & PERA distributions
- Investment income are exempt from taxes
(all 3 schemes)
- PERA distributions when contributor reaches
the age of 55 (either lumpsum, pension or
installment) is an exclusion from gross income
8. 13TH month pay and other benefits received
by officials & employees of public or private
entities not exceeding P90,000
9. Gains from sale of bonds, debentures, or
other certificate of indebtedness with maturity
of more than 5 years
 Illustration
On September 1, 2020, an individual taxpayer sold a 6-year
term bond investment for P1,100,000. These bonds bear 12%
interest payable every December 31 and were previously
acquired at P1,000,000 face value on January 1, 2020. Gain on
sale is computed as follows:
Selling price P1,100,000
Less: Cost of bonds sold P1,000,000
Interest accrued 80,000 1,080,000
Gain on sale P 20,000
=========
The gain P20,000 is not taxable but the accrued interest of
P80,000 is taxable
10. Gains realized from redemption of shares in
a mutual fund company by the investor
Example: A taxpayer bought 10,000 shares from Silver Dragon Mutual Fund at
P120 NAV per share. The taxpayer redeemed his shares when the NAV per share
was P180.

The gain of P600,000 [(180-120) x 10,000] is EXEMPT from tax

11. Income derived from sale of gold pursuant
to RA7076 or People’s Small Scale Mining Act of
1991 & RA11256 or Act to Strengthen Gross
Internal Reserve (GIR) by:
1. Small scale miners registered with BSP
2. Gold traders registered with BSP
Other Exempt Income Under NIRC &
Special Laws
 1. Minimum Wage Earners
• Exempt on the minimum wage including
holiday pay, overtime pay, night shift
differential and hazard pay
 2. COVID-19 Benefits under RA11494
a. COVID 19 special risk allowance
b. Actual hazard duty pay
c. Compensation to health workers who
contracted COVID-19:
1. P1M in case of death
2. P100,000 for severe or critical
3. P15,000 for mild or moderate
3. Limited retirement benefit exemption during
pandemic under RA 11494
• Retirement benefits received by employees of
private firms from June 5, 2020 to December
31, 2020 are exempt from income tax
• Conditions:
a. Amount in accordance with retirement plan
registered with BIR
b. Employee must not be re-employed by the same
firm & its related parties within 12 months from
retirement
4. Barangay Micro-Business Enterprise
• Business entity engaged in production, agro-processing,
trading & services
• Covers sole proprietorships, partnerships, cooperatives,
corporations, associations or other entities formed under
Philippine laws
• Total assets must not exceed P3M (including those arising
from loans but exclusive of the land where business is
situated)
• Excludes services by licensed professionals
4. Barangay Micro-Business Enterprise…(continued)
• Must not be a branch or subsidiary of large scale
enterprise or franchises
• Must secure certificate of authority from Treasurer’s
office
• Tax exemption from regular tax scheme covers all
income from their operations
• Passive income are subject to final tax & capital gains
from sale domestic stocks directly to the buyer &
sale of real property capital assets are subject to CGT
 4. Barangay Micro-Business Enterprise…(continued)
Tax exemption may be revoked by any of these reasons:
1. Transfer of place of business
2. Value of assets exceeds P3M
3. Voluntary surrender of Certificate of Authority
4. Death of registered owner
5. Merger or consolidation w/entity not eligible as BMBE
6. Sale of business
7. Submission of fake or falsified documents
8. Retirement from business/suspension of operation for 1 year
9. Making false or omitting required declarations or statements
 3. Cooperatives
• Exempt from all taxes if they transact only
with members for related activities
• Exempt even if they transact w/non-members
if accumulated reserve & undivided savings do
not exceed P10M
• Income from unrelated activities are fully
taxable
 4. Non-stock, non-profit entities
• Exempt from income tax on income from main
operations
• Taxable on income from unrelated activities
5. Qualified Employees’ Trust Fund
• Contributions are made by employer,
employees or both for distribution in
accordance with plan
• Asset shall not be diverted for other purposes
other than exclusive benefit of employees
 Qualification of exemption of exempt
entities
• Exemption is not automatic
• To establish entitlement, required documents
must be filed with BIR (e.g., certificate of
authority for BMBEs)
Income of self-employed or professionals who
opted to be taxed at 8% income tax
Income subject to final tax or capital gains tax
are not taxable under regular income tax
 Exclusion vs. deductions
• Exclusions are not included in gross income
while deductions are initially included in gross
income but separately presented as deduction
in the ITR