Regular Exclusions of

Income Tax Gross Income

 Income Taxation Scheme
Capital Gains Tax

Final Income Tax Regular Income Tax

Capital gain on the sale

of real property and
Certain Passive Income domestic stocks sold Catch basin
directly to the buyer
 Exclusions of Gross Income

A. Proceeds of a Life Insurance Policy

• 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.
• But if such amounts are held by the insurer under an agreement to pay
interest, the interest payments shall be included in gross income.
 Exclusions of Gross Income

B. Amount Received by Insured as 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.
Illustration I.
Marie took out a life insurance policy for P200,000 with her husband as beneficiary.
Under the policy, the insurer will pay Marie the amount of P200,000 when Marie reaches
the age of 45 years or to her beneficiary husband in case she dies before the maturity of
the policy. The total premiums that would be paid upon maturity of the policy is P100,000.

Required:

a. The policy matured when Marie reached age 45, and the insurer paid her the amount
of P200,000. Determine the nature of the amount of P200,000 which Marie received
under the policy.

b. Assume Marie died 4 years before the maturity of the policy and the insurer paid
P200,000 to the beneficiary husband. The premiums already paid when Marie died
was P50,000. Determine the nature of the amount of P200,000 which the beneficiary
husband received under the policy.
Illustration I.
The policy matured when Marie reached age 45, and the insurer paid her the
amount of P200,000. Determine the nature of the amount of P200,000 which Marie
received under the policy.

The gross profit or gross income realized from the insurance transaction is
P100,000, the excess of the amount received under the policy over the premiums
paid, shall be included in the gross income of Marie. The premiums paid of
P100,000 represent the cost of the insurance, hence, the return of capital, which
shall be excluded in the gross income.

One requisite in order for the proceeds of life insurance to be excluded in the gross
income is the death of the insured.
Illustration I.

Assume Marie died 4 years before the maturity of the policy and the insurer paid
P200,000 to the beneficiary husband. The premiums already paid when Marie
died was P50,000. Determine the nature of the amount of P200,000 which the
beneficiary husband received under the policy.

The proceeds of life insurance paid to the beneficiary husband upon death of the
insured is not subject to income tax. It is not an income to the beneficiary; it is an
indemnity which makes it excluded in the gross income.
 Exclusions of Gross Income

C. Gifts, Bequests, and Devices

• The value of 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.

• Gifts (donation during the lifetime of both the donor and done): Donor’s Tax
• Bequest (gifts of personal property upon the death of the donor): Estate Tax
• Devices (gifts of real property upon the death of the donor): Estate Tax
Illustration II.

Ruben Reyes is a manager of Piso-Piso Bank with an annual salary of P260,000. On August 1,
2013, he inherited from an aunt a lot with a 5-door apartment valued at P750,000. The
apartment, which is fully tenanted, has a monthly rental income of P60,000. Determine the gross
income of Ruben Reyes for 2013.

Salary P260,000
Rental income of the apartment (P60,000 x 5 months) 300,000
Gross Income P560,000

The value of the property inherited is an exclusion from the gross income, however, any income
or fruit from the property inherited shall be included in the gross income of Ruben.
 Exclusions of Gross Income

D. Compensation for Injuries or 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.

• The phrase “personal injury or sickness” does not only include awards for
sickness and physical injury, but also non-physical injury such as personal
embarrassment, injury to personal reputation in the community, mental pain
and suffering, fright, serious anxiety, wounded feelings, moral shock,
defamation, slander, breach of promise to marry, or libel.
Illustration III.
 Exclusions of Gross Income

E. Income Exempt Under Treaty

• Income of any kind, to the extent required by any treaty obligation binding
upon the Government of the Philippines. They are excluded by international
agreement to which the Philippine government is a signatory are excluded
from income tax.

Examples:
http://www.sas-ph.com/index.php?p=1_11_international-tax-treaties-philippines
 Exclusions of Gross Income

F. Retirement Benefits, Pensions, Gratuities, and Other Benefits

a. Retirement benefits under RA 7641 and those received by

officials and employees of private firms

(AN ACT AMENDING ARTICLE 287 OF PRESIDENTIAL DECREE NO. 442, AS AMENDED, OTHERWISE KNOWN
AS THE LABOR CODE OF THE PHILIPPINES, BY PROVIDING FOR RETIREMENT PAY TO QUALIFIED PRIVATE
SECTOR EMPLOYEES IN THE ABSENCE OF ANY RETIREMENT PLAN IN THE ESTABLISHMENT)
 Exclusions of Gross Income

F. Retirement Benefits, Pensions, Gratuities, and Other Benefits

Requisites for exemption:

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 can be in cumulative;
3. The retiring official or employee must at least be 50 years old at the time of his
or his/her retirement; and
4. The retiring official or employee should not have previously availed of the
exemption of the retirement benefit plan.
Illustration IV.

Illustration:
Alma received P120,000 retirement pay from Concepcion Industries. Indicate whether her income
is subject to tax or not based on the following independent cases:
Case Private Benefit Plan Years in Service Retirement Age Answer
1 Yes 12 40 Taxable
2 Yes 9 60 Taxable
3 None 15 65 Taxable
4 Yes 11 55 Not Taxable
 Exclusions of Gross Income

F. Retirement Benefits, Pensions, Gratuities, and Other Benefits

b. Separation Pay
Any amount receive by an official or employee, or by his heirs, from the employer because of
separation of such official or employee from the service of the employer due to:
• Death, job-threatening sickness, or physical disability; or
• Any cause beyond the control of the said official or employee, such as:
Redundancy
Retrenchment
Closure of employer’s business
Employee lay-off
Downsizing of the employer’s business
Illustration V.

In view of the heavy losses being suffered by Ballad Corporation, Watanabe and Abe were advised
by the manager to resign as they would be retrenched to make it appear that they voluntarily
resigned instead of having been involuntarily separated as the latter would have implications of
inefficiency on their part.

1. Suppose Watanabe resigned and received P50,000 separation pay. Is the P50,000 taxable to
him?

2. Due to refusal of Abe to resign, the corporation was forced to terminate her and was paid
P60,000. Is this amount taxable to her?
 Exclusions of Gross Income

G. 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

H. United States Veterans Administration (USVA) benefits due to residents of

the Philippines

I. Benefits from SSS and GSIS

J. Mandatory or compulsory contributions of employee to GSIS, SSS, PhilHealth,

Pag-ibig, and Union Dues of Individuals
 Exclusions of Gross Income

K. Prizes and Awards in recognition of religious, charitable, scientific,

educational, artistic, literary, or civic achievements
Only if:
a) the recipient was selected without any action on his part to enter the contest or
proceeding; and
b) the recipient is not required to render substantial future services as a condition to
receiving the prize or award.
 Exclusions of Gross Income

L. Prizes and Awards in Sports Competitions granted to athletes:

1. in local or international competitions and tournaments;

2. whether held in the Philippines or abroad; and
3. sanctioned by their national sports associations.
 Exclusions of Gross Income

M. Contributions to personal equity retirement account (PERA)

• PERA is a contributor’s voluntary retirement account established from qualified
contributions of the contributor and or his employer for the sole purpose of
being invested in qualified PERA investment products.

• OFW is allowed to contribute up to P200,000 per year. Non-OFW is allowed to

contribute up to P100,000 per year. Contributors can maintain a maximum of 5
PERA accounts.

• Contributions are excluded and contributors are allowed to claim 5% of their

PERA contributions as tax credit against any internal revenue taxes.
 Exclusions of Gross Income

N. PERA investment income and pera distributions

• PERA account assets will be distributed back to the contributors in either lump
sum, life pension, or in installment upon reaching the age of 55 or to his heirs or
beneficiaries upon his or her death.
 Exclusions of Gross Income

O. Gains from Sale of bonds, debentures or other certificate of

indebtedness with a maturity of more than 5 years.

P. Gains realized from redemption of shares in mutual fund by the

investor.

Q. 13th Month Pay and other benefits and De minimis Benefits

 Exclusions of Gross Income

O. Gains from Sale of bonds, debentures or other certificate of

indebtedness with a maturity of more than 5 years.

P. Gains realized from redemption of shares in mutual fund by the

investor.

Q. 13th Month Pay and other De minimis Benefits

Other exempt income under the nirc and special laws
1. Minimum wage and certain benefits of Minimum Wage Earners
2. Income of Barangay Micro-Business Enterprises Act (RA 9178)
3. Income of cooperatives (RA 9520)
4. Income of qualified employee trust funds