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Lesson 5

EXCLUSIONS FROM GROSS INCOME

Lesson Objectives:

At the end of this lesson, the students should be able to:

a. Define exclusions from gross income in taxation
b. Learn what are the items that are excluded from gross income
c. Apply, practice, solve, analyze, and evaluate problems relating to the exclusions from the
gross income

Discussion

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Exclusions. items that are not included in the determination of gross income either because:
a. They represent return of capital or are not income, gain or profit
b. They are subject to another kind of internal revenue tax
c. They are income, gain or profit that are expressly exempt from income tax under the constitution, tax
treaty, Tax Code, or general or special law.

a. Exclusions from 1. Proceeds of life insurance

gross income 2. Amount received by insured as returns of premium
3. Gifts, bequests and devises
4. Compensation for injuries or sickness
5. Income exempt under tax treaty
6. Retirement benefits, pensions, gratuities, etc
7. Miscellaneous items
a. Income derived by foreign government
b. Income derived by government or its political subdivision
c. Prizes and awards
d. Prizes and award in sports competition
e. 13th month pay and other benefits
f. GSIS, SSS, Philhealth and other contributions
g. Gains from sale of bonds, debenture or other certificate of indebtedness with maturity of
more than 5 years
h. Gains from redemption of shares in mutual fund
b. Used to be 1. interest on government securities (now subject to 20% final tax)
excluded but now 2. Income derived as informer’s reward to persons instrumental in the discovery of violations
subject to final tax of the NIRC and in the discovery and seizure of smuggled goods (now subject to 10% final
tax based on 10% of the revenues, surcharges or fees recovered and/or fine or penalty
imposed or P1,000,000 per case whichever is lower)

Life insurance The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of insured,
whether in a single sum or otherwise, but if such amounts are held by the insurer under an agreement
to pay interest thereon, the interest payments shall be included in gross income
Amount received by The amount received by the insured as a return of premiums paid by him under life insurance,
insured as return of endowment, or annuity contracts, either during the term or at the maturity of the term mentioned in
premium the contract or upon surrender of the contract.
If the amounts, when added to amounts received before the taxable year under such contract, exceed
the aggregate premium paid, whether or not paid during the taxable year, then the excess shall be
included in gross income.
In the case of a transfer for a valuable consideration by assignment or otherwise, of a life insurance,
endowment or annuity contract or any interest therein, only the actual value of such consideration and
the amount of the premiums and the sums subsequently paid by the transferee are exempt from
taxation.
Participating dividends are not income to the insured. They are treated as return of capital
Gifts, bequests, and devises The value of property acquired by gift, bequest, devise, or descent
Gifts, bequests and devises are subject to transfer taxes.
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

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Alimony or an allowance based on a separation agreement is not taxable income

Compensation for injuries Amounts received, through accident or health insurance or under workmen’s compensation acts, as
or sickness 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
Recoveries of damages, representing compensation for personal injuries arising from libel,
defamation, slander, breach of promise to marry, alienation of affection are not subject to income tax
and shall not be included in gross income
Income exempt under Income of any kind to the extent required by any treaty obligation binding upon the Government of
treaty the Philippines
Examples of income exempt under treaty:
1. Salaries of officials of the United Nations assigned in the Philippines if paid by the United
Nations and certified of Secretary General of the United Nations
2. Salaries, allowances fees, or wages received by citizens of the United States of America
working in consular offices in the Philippines are exempt from all taxes
3. Salaries of diplomatic officials and agents
As a general rule, the provisions of the Philippine Tax Code (domestic law) shall apply on the
income, gain or profit of any person liable to income tax
In case of conflict between the provisions of a tax treaty and domestic law, the provisions of the tax
treaty generally prevail over the provisions of the domestic law
Where the rate of tax imposed under the domestic law is lower than the rate imposed under the tax
treaty, the lower tax rate under the domestic law shall prevail

Retirement Benefits
Retirement benefits received under RA a. Retirement benefits received under RA 7641 and thos received by officials
7641 and those received by officials and and employees of private firms, whether individual or corporate, in
employees of private firms accordance with a reasonable private benefit plan maintained by the
employer
b. The retiring official or employee has been in the service of the same
employer for at least ten (10) years and is not less than fifty (50) years of age
at the time of his retirement
c. The benefits granted shall be availed of by an official or employee only once
d. The term reasonable private benefit plan means:
1. A pension, gratuity, stock bonus or profit-sharing maintained by an
employer for the benefit of some or all of his officials or employees
2. 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
3. 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
Any amount received by an official or Any amount received by an official or employee or by his heirs from the employer as
employee as a consequence of separation a consequence of separation of such official or employee from the service of the
employer because of death, sickness or other physical disability or for any cause
beyond the control of the said official or employee
The disease or illness should be type which would affect the performance of duties
and endanger the life of the employee if he/she continues working
Social security benefits, retirement The provisions of any existing law to the contrary notwithstanding, social security
gratuities, pensions and other similar benefits, retirement gratuities, pensions and other similar benefits received by resident

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benefits received from foreign government or nonresident citizens of the Philippines or aliens who come to reside permanently in
agencies and other institutions, private or the Philippines from foreign government agencies and other institutions, private or
public public
United States Veterans Administration Payments of benefits due or to become due to any person residing in the Philippines
benefits under the laws of the United States administered by the United States Veterans
Administration
Social Security System (SSS) Benefits Benefits received from or enjoyed under the Social Security System (SSS)

Government Services Insurance System Benefits received from the GSIS including retirement gratuity received by
(GSIS) benefits government officials and employees

Miscellaneous Items
Income derived by Foreign Income derived from investments in the Philippines in loans, stocks, bonds or other domestic
Governments securities, or from interest on deposits in banks in the Philippines by:
I. Foreign governments
II. Financing institutions owned, controlled or enjoying refinancing from foreign
governments
III. International or regional financial institutions established by foreign governments
Income derived by Income derived from any public utility or from the exercise of any essential governmental function
government or its political accruing to the Government of the Philippines or to any political subdivision thereof
subdivision
Prizes and awards Prizes and awards made primarily in recognition of religious, charitable, scientific, education, artistic,
literary, or civic achievement but only if:
1. The recipient was selected without any action on his part to enter the contest or proceeding
2. The recipient is not required to render substantial future services as a condition to the prize or
award
Prizes and award in sports All prizes and awards granted to the athletes in local and international sports competitions and
competition tournaments whether held in the Philippines or abroad and sanctioned by their national sports
associations
13th month pay and other 13th month pay equivalent to the mandatory one (1) month basic salary of official and employees of the
benefits government (whether national or local), including government owned or controlled corporations
and/or private offices received after the twelfth month pay
Other benefits such as Christmas bonus, productivity incentives, loyalty award, gift in cash or in kind,
and other benefits of similar nature actually received by official and employees of both government
and private offices, including the Additional Compensation Allowance (ACA) granted and paid to all
officials and employees of the National Government Agencies (NGAs) including State Universities
and Colleges (SUCs), Government owned and/re Controlled Corporations )GOCCs), Government
Financial Institutions (GFIs) and Local Government Units (LGUs)
The above stated exclusions shall cover benefits paid or accrued during the year, provided that the total
amount shall not exceed P90,000
The exclusion shall not apply to other compensation received by an employee under an employer-
employee relationship such as basic salary and other allowances
The exclusion from gross income is not applicable to self-employed individuals and income generated
from business
GSIS, SSS, Philhealth and GSIS, SSS, Philhealth, Pag-ibig contributions and union dues of individuals
other contributions Any contribution in excess of the mandatory GSIS, SSS, Philhealth and Pag-ibig or Home
Development Mutual Fund contributions are not excludible from gross income of the individual
taxpayer and therefore, are subject to income tax and the consequently, to withholding tax

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Gains from sale of bonds, Gains realized from the same or exchange or retirement of bonds, debentures or other certificate of
debenture or other indebtedness wi with a maturity of more than five (5) years
certificate of indebtedness
Gains from redemption of Gains realized by the investor upon redemption of shares of stock in a mutual fund company
shares in mutual fund Mutual fund company is an open-end and close-end investment company

Other Tax-Exempt Items

1. Compensation income including holiday pay, overtime pay, night shift differential pay, and hazard pay
earned by minimum wage earner, who has no other reportable income
2. Salaries and stipends in dollars received by non-Filipino citizens as staff of International Rice Research
Institute or the Ford Foundation
3. Allowances paid to military personnel
4. Compensation for casual employment like house helper/maid, not connected in the conduct of business
of the employer
5. Interest on the price of land covered by Comprehensive Agrarian Reform Program (CARP)
6. Compensation of Statutory Minimum Wage Earner
7. Income generated from commercial use of the invention for 10-year period which start from the date of
the first commercial sale
8. Income registered Barangay Micro Business Enterprise (BMBE)
9. Income of duly registered cooperatives dealing/transacting business with members only

Summary of the Lesson

The lesson defined what is exclusions from gross income in taxation. It also discussed the various items
excluded from the computation of the gross income. The lesson focused also in illustrating the application and
evaluation of problems relating to exclusions from gross income.

Enrichment Activity

Choose the letter of the correct answer

1. Proceeds of insurance taken by a corporation on the life of an executive to indemnify it against loss in
case of his death is:
a. Exempt from income tax
b. Part of taxable income
c. Subject to final tax
d. Partly exempt, partly taxable

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2. The proceeds received under a life insurance endowment contract is not considered part of gross
income:
a. If it is so stated in the life insurance endowment policy
b. If the price for the endowment policy was not fully paid
c. Where payment is made as a result of death of the insured
d. Where the beneficiary was not the one who took out the endowment contract

3. Which of the following may be excluded from the gross income of a taxpayer?
a. Income derived from bequests and devises
b. Interest on proceeds of life insurance policies
c. Interest received from a domestic corporation
d. None of the above

4. The following are examples of nontaxable compensation for injuries, except

a. Actual damages for injuries suffered
b. Compensatory damages for unrealized profits
c. Moral damages for grief, anxiety and physical sufferings
d. Exemplary damages

5. In order for gains realized from the sale or exchange or retirement of bonds, debentures or other
certificate of indebtedness be exempt from income taxation, what is the prescribed length of its
maturity?
a. 5 years or more
b. 5 years or less
c. More than 5 years
d. Exactly 5 year

6. A tax exclusion is defined as

a. An item or amount which the law allows to be deducted from gross income in order to arrive at net
income
b. The of immunity to particular persons or corporations from a tax which others within the same
taxing district are obliged to pay
c. Income received but which is not part of gross income as it is exempted by law or by treaty
d. A deduction from income tax due of any amount paid to a foreign country subject to limitation

7. Which of the following items is not part of gross income to be reported in the income tax return?
a. Increase in value of land
b. Gambling winnings

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c. Prize of P10,000
d. Gain from sale of store’s air conditioner

8. 1st statement: to be exempt from income taxation, long term bank deposit or investment should not be
terminated by the investor before the 5th year, otherwise, it shall be subjected to final tax rates of 5%, 12
%, or 20% on interest income earnings
2nd statement: for purposes of exemption from income taxation, the long term deposit or investment
above refer to those investments issued by banks and other financial institutions
a. Only 1st statement is correct
b. Only 2nd statement is correct
c. Both statements are correct
d. Both statements are incorrect

9. Which of the following government owned or controlled corporations, agencies or instrumentalities

shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations
engaged in similar business, industry or activity
a. Government Service Insurance System (GSIS)
b. Social Security System (SSS)
c. Philippine Amusement And Gaming Corporation (PAGCOR)
d. Philippine Charity Sweepstakes Office(PCSO)

10. Ana sued Pedro for breach of promise to marry. Pedro lost the case and duly paid the court’s award that
included, among others, P100, 000 as moral damages for the mental anguish Ana suffered. Did Ana earn
a taxable income?
a. She had a taxable income of P100,000 since income from whatever source
b. She had no taxable income because it was donation
c. She had taxable income since she made a profit
d. She had no taxable income since moral damages are compensatory

Assessment

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Compute what is being asked in every problem and provide supporting solutions in the back or excess space in
this module.

1. Pedro, single, received the following during the taxable year:

Proceeds of life insurance paid at an annual premium of P15,000 within 25 years P 2,000,000
Proceeds of his mother’s life insurance paid at an annual premium of P10,000 1,000,000
within 20 years
House and lot inherited from his mother 4,000,000
Rent income from inherited properties 200,000

For income tax purposes, how much of the above items must be included in his gross income?
a. P7,200,000
b. P1,200,000
c. P200,000
d. P1,825,000

2. Pedro insured his life with his estate as beneficiary. In 2016, after Pedro had paid P650,000 in premium,
he assigned the policy to Jose for P600,000. Jose continued paying the premiums. Pedro died in 2018
and Jose collected the total proceeds of P800,000. As a result of the above transactions, Jose:
a. May consider the proceeds of P2,000,000 as exempt from tax
b. Derived a taxable income of P550,000
c. Derived taxable income of P600,000
d. Answer not given

3. Marlon was hit by a car driven by Jaysee causing severe injuries to the former. It was found out during
trial that the driver was drunk at the time of the incident after the rial, the court awarded the following:
 P1,500,000 actual damages for hospitalization
 P300,000 exemplary damages
 P500,000 for loss of income
 P100,000 moral damages
Marlon also received a cash gift of P100,000 from Jaysee. The taxable income received by Marlon is:
a. P2,400,000
b. P1,900,000
c. P1,500,000
d. 500,000

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4. Mr. Joe, an American residing in Hongkong came to the Philippines to sing the American national
anthem on a professional boxing championship match held in the Araneta Coliseum. He was paid P1,
000,000 as talent fee. His Philippine income tax would be:
a. P320,000
b. P285,000
c. P250,000
d. P150,000

References

TAMAYO, LIM, CAIGA & MANUEL (2019). Income Tax (Exclusions from Gross Income). Taxation. The
Review School of Accountancy
TABAG, E (2020). Gross Income. CPA Reviewer in Taxation with Special Topics and Properly Filled BIR
Form. EDT Bookshop

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