Income Taxation

Reviewer from TAX CODE (2023)

Legend:

Green – The buts and exemptions

Yellow – Topics or important terms

Underline – Includes another law

PN: Personal Note

Terminologies:

Income – in the broad sense, meaning all wealth which flows into the tax-payer other than as a mere
return of capital. It includes the forms of income specifically described as gains and profits, including
gains derived from the sale or other disposition of capital assets. Income cannot be determined merely
by reckoning cash receipts, for the statute recognizes as income determining factor other items, among
which are inventories, accounts receivable, property exhaustion, and accounts payable for expenses
incurred.

Gross Income – In broad sense, the “Taxable Income”. It is all income less income that are not taxable.
The term ‘taxable income’ means the pertinent items of gross income specified in this Code (See Section
32), less the deductions, if any, authorized for such types of income by this Code or other special laws.
[40]

Persons – Can be Natural (which are people, the tax payers) and Juridical (Business Entity, including
trust)

Corporation – Hereby includes One Person Corporation, Partnership, joint-stock companies, joint
accounts (cuentas en participacion), associations, or insurance companies, except General Professional
Partnership

Sec. 23 General Principles

Who and what type of income to tax:

Who Taxable when income is derived

Resident Citizen Within & Without
Non-Resident Citizen Within only
Overseas Worker Within only
Alien Individual Within only
Domestic Corporation Within and without
Foreign Corporation Within only

Key point: Only Resident Citizen and Domestic corporation are taxed from their income whether its
derived from within or without the Philippines, all other ‘who’ are taxed only from income from within.
Sec. 32

Gross Income Computation

Gross income = Income – Exemptions (Income but not taxable)

Listed in Sec. 32 are the following items included in Gross income (But not limited to):

Under Section (A):

1. Compensation for services in whatever form paid, including, but not limited to fees, salaries,
wages, commissions, and similar items;
2. Gross income derived from the conduct of trade or business or the exercise of a profession;
3. Gains Delivered from dealings of Property;
4. Interests;
5. Rents;
6. Royalties;
7. Dividends;
8. Annuities;
9. Prizes and Winnings;
10. Pensions;
11. Partner's distributive share from the net income of the general professional partnership

Exemptions from Taxation under this Title, Section (B):

1. Life Insurance. – 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 thereon, the interest payments shall be included
in gross income.
2. 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.
3. Gifts, Bequests, and Devises. – 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.
4. 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
5. Income Exempt under Treaty. – Income of any kind, to the extent required by any treaty
obligation binding upon the Government of the Philippines. (PN: International Comity?)
6. Retirement Benefits, Pensions, Gratuities, etc
(a) Retirement benefits received under Republic Act No. 7641 and those received by
officials and employees of private firms, whether individual or corporate, in accordance
with a reasonable private benefit plan maintained by the employer; Provided
 (1) That 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.
(2) Provided, further, That the benefits granted under this subparagraph shall be
availed of by an official or employee only once

Important Note: For purposes of this Subsection, the term ‘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 its 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.

(b) Any amount received by an official or employee or by his heirs from the employer as 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.
(c) The provisions of any existing law to the contrary notwithstanding, social security
benefits, retirement gratuities, pensions and other similar benefits received by resident
or nonresident citizens of the Philippines or aliens who come to reside permanently in
the Philippines from foreign government agencies and other institutions, private or
public.
(d) Payments of benefits due or to become due to any person residing in the Philippines
under the laws of the United States administered by the United States Veterans
Administration.
(e) Benefits received from or enjoyed under the Social Security System in accordance with
the provisions of Republic Act No. 8282.
(f) Benefits received from the GSIS under Republic Act No. 8291, including retirement
gratuity received by government officials and employees.
7. Miscellaneous Items –
(a) Income Derived by Foreign Government. – Income derived from investments in the
Philippines in loans, stocks, bonds or other domestic 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, and (iii)
international or regional financial institutions established by foreign governments.
(b) Income Derived by the Government or its Political Subdivisions. – Income derived from
any public utility or from the exercise of any essential governmental function accruing to
the Government of the Philippines or to any political subdivision thereof.
(c) Prizes and Awards. – Prizes and awards made primarily in recognition of religious,
charitable, scientific, educational, artistic, literary, or civic achievement but only if:
(i) The recipient was selected without any action on his part to enter the
contest or proceeding; and
(ii) The recipient is not required to render substantial future services as a
condition to receiving the prize or award.
 PN: those that are taxable were done thru effort. Those that are not done without
effort are not taxable.

(d) Prizes and Awards in sports Competition. – All prizes and awards granted to athletes in
local and international sports competitions and tournaments whether held in the
Philippines or abroad and sanctioned by their national sports associations. (PN: RA7549)
(e) 13th Month Pay and Other Benefits. – Gross benefits received by officials and employees
of public and private entities: Provided, however, That the total exclusion under this
subparagraph shall not exceed Ninety thousand pesos (P90,000) [41] which shall cover:
(1) Benefits received by officials and employees of the national and local
government pursuant to Republic Act No. 6686;
(2) Benefits received by employees pursuant to Presidential Decree No. 851, as
amended by Memorandum Order No. 28, dated August 13, 1986;
(3) Benefits received by officials and employees not covered by Presidential
Decree No. 851, as amended by Memorandum Order No. 28, dated August 13,
1986; and
(4) Other benefits such as productivity incentives and Christmas bonus.
(f) GSIS, SSS, Medicare and Other Contributions. – GSIS, SSS, Medicare and Pag-Ibig
contributions, and union dues of individuals.
(g) Gains from the Sale of Bonds, Debentures or other Certificate of Indebtedness. – Gains
realized from the same or exchange or retirement of bonds, debentures or other
certificate of indebtedness with a maturity of more than five (5) years.
(h) Gains from Redemption of Shares in Mutual Fund. – Gains realized by the investor upon
redemption of shares of stock in a mutual fund company as defined in Section 22 (BB) of
this Code.
(i) Income Derived from the Sale of Gold Pursuant to Republic Act No. 7076. – Income
derived from the following transactions pursuant to Republic Act No. 7076, otherwise
known as the “People’s Small-scale Mining Act of 1991”:
(1) The sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale
miners, as defined under Republic Act. No. 7076, and accredited traders; and
(2) The sale of gold by registered small-scale miners to accredited traders for
eventual sale to the Bangko Sentral ng Pilipinas.

Tax on Individuals

Sec. 24

(A) Rates of Income Tax on Individual Citizen and Individual Resident Alien of the Philippines. –
(1) An income tax is hereby imposed on:
(a) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within and without the Philippines be every
individual citizen of the Philippines residing therein;
(b) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within the Philippines by an individual
 citizen of the Philippines who is residing outside of the Philippines including
overseas contract workers referred to in Subsection(C) of Section 23 hereof;
and
(c) On the taxable income defined in Section 31 of this Code, other than income
subject to tax under Subsections (B), (C) and (D) of this Section, derived for
each taxable year from all sources within the Philippines by an individual alien
who is a resident of the Philippines.
(2) Rates of Tax on Taxable Income of Individuals. – The tax shall be computed in accordance
with and at the rates established in the following schedule:
(a) Tax schedule Effective Jan 1 2018 only up to Dec. 31, 2022:

(b) Tax schedule effective Jan 1, 2023, onwards:

Individuals (2023, onwards)

Amount of Net Taxable Income Tax Rates
Over But Not over Fixed Variable
0.00 250,000.00 0%
250,000.00 400,000.00 0.00 15% Over 250,000.00
400,000.00 800,000.00 22,500.00 20% Over 400,000.00
800,000.00 2,000,000.00 102,500.00 25% Over 800,000.00
2,000,000.00 8,000,000.00 402,500.00 30% Over 2,000,000.00
8,000,000.00 2,202,500.00 35% Over 8,000,000.00

Additional note: For married individuals, the husband and wife, subject to the provision of Section 51
(D) hereof, shall compute separately their individual income tax based on their respective total taxable
income: Provided, That if any income cannot be definitely attributed to or identified as income
exclusively earned or realized by either of the spouses, the same shall be divided equally between the
spouses for the purpose of determining their respective taxable income.

Provided, That minimum wage earners as defined in Section 22(HH) of this Code shall be exempt from
the payment of income tax on their taxable income: Provided, further, That the holiday pay, overtime
pay, night shift differential pay and hazard pay received by such minimum wage earners shall likewise be
exempt from income tax.

 (b) Rate of Tax on Income of Purely Self-employed Individuals and/or Professionals Whose
Gross Sales or Gross Receipts and Other Non-operating Income Does Not Exceed the Value-
added Tax(VAT) Threshold as Provided in Section 109(BB). – Self-employed individuals and/or
professionals shall have the option to avail of an eight percent (8%) tax on gross sales or gross
receipts and other non-operating income in excess of Two hundred fifty thousand pesos
(P250,000) in lieu of the graduated income tax rates under Subsection (A)(2)(a) of Section 24 and
the percentage tax under Section 116 of this Code.

 (c) Rate of Tax for Mixed Income Earners. – Taxpayers earning both compensation income and
income from business or practice of profession shall be subject to the following taxes:
1. All Income from Compensation – The rate prescribed under Subsection (A)(2)(a) of
section 24.
2. All Income from Business or Practice of Profession –
(a) If Total Gross Sales and/or Gross Receipts and Other Non-Operating
Income Do Not Exceed the VAT Threshold as Provided in Section 109(BB)
of this Code. – The rates prescribed under Subsection (A)(2)(a) of this
Section on taxable income, or eight percent (8%) income tax based on
gross sales or gross receipts and other non-operating income in lieu of
the graduated income tax rates under Subsection (A)(2)(a) of this
Section and the percentage tax under Section 116 of this Code.
(b) If Total Gross Sales and/or Gross Receipts and Other Non-operating
Income Exceeds the VAT Thresholds Provided in Section 109(BB) of this
Code. – The rates prescribed under Subsection (A)(2)(a) of this Section.

(B) Rate of Tax on Certain Passive Income

(1) Interests, Royalties, Prizes, and Other Winnings:
 Interests from any bank deposits, yield or any other monetary benefit from
deposit substitutes, and similar arrangements – is Subjected to Final Tax of
20%
 Royalties, except on books, as well as other literary works and musical
compositions – is subjected to Final Tax of 10%.
 Prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which
shall be subject to tax under Subsection (A) of Section 24; and other winnings
(except winning amounting to Ten thousand pesos (P10,000) or less [13] from
Philippine Charity Sweepstakes and Lotto which shall be exempt Provided,
however, That interest income received by an individual taxpayer (except a
nonresident individual) from a depository bank under the expanded foreign
currency deposit system shall be subject to a final income tax at the rate of
fifteen percent (15%) [14] of such interest income [4]:
 Provided, further, That interest income from long-term deposit or investment in
the form of savings, common or individual trust funds, deposit substitutes,
investment management accounts and other investments evidenced by
 certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall
be exempt from the tax imposed under this Subsection:
 Provided, finally, That should the holder of the certificate pre-terminate the
deposit or investment before the fifth (5th) year, a final tax shall be imposed on
the entire income and shall be deducted and withheld by the depository bank
from the proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:
(1) Four (4) years to less than five (5) years – 5%;
(2) Three (3) years to less than (4) years – 12%; and
(3) Less than three (3) years – 20%
(2) Cash and/or Property Dividends – Final tax rate = 10%
Where: imposed upon the cash and/or property dividends actually or constructively
received by an individual from a domestic corporation or from a joint stock company,
insurance or mutual fund companies and regional operating headquarters of
multinational companies, or on the share of an individual in the distributable net income
after tax of a partnership (except a general professional partnership) of which he is a
partner, or on the share of an individual in the net income after tax of an association, a
joint account, or a joint venture or consortium taxable as a corporation of which he is a
member or co-venturer:
(C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange.-
Except shares sold, or disposed of through the stock exchange, A Final Tax of 15% imposed on
net capital gains realized during the Taxable Year. Read Sec 39 (B).
(D) Capital Gains from Sale of Real Property
(1) In general, a Final tax of 6% based on the Gross selling price or current fair market value
as determined with accordance to Section 6 (E), Whichever is Higher.

(2) Exception. – The provisions of paragraph (1) of this Subsection to the contrary
notwithstanding, capital gains presumed to have been realized from the sale or
disposition of their principal residence by natural persons, the proceeds of which is fully
utilized in acquiring or constructing a new principal residence within eighteen (18)
calendar months from the date of sale or disposition, shall be exempt from the capital
gains tax imposed under this Subsection: Provided, That the historical cost or adjusted
basis of the real property sold or disposed shall be carried over to the new principal
residence built or acquired: Provided, further, That the Commissioner shall have been
duly notified by the taxpayer within thirty (30) days from the date of sale or disposition
through a prescribed return of his intention to avail of the tax exemption herein
mentioned: Provided, still further, That the said tax exemption can only be availed of
once every ten (10) years: Provided, finally, That if there is no full utilization of the
proceeds of sale or disposition, the portion of the gain presumed to have been realized
from the sale or disposition shall be subject to capital gains tax. For this purpose, the
gross selling price or fair market value at the time of sale, whichever is higher, shall be
multiplied by a fraction which the unutilized amount bears to the gross selling price in
order to determine the taxable portion and the tax prescribed under paragraph (1) of
this Subsection shall be imposed thereon.
Summarization of Income Tax rates of Individuals

Ordinary Income of Resident Individual Citizen (Within and Without), Nonresident Individual Citizen
including OFW described in Section 23 (Within only), Resident Individual Alien (Within only), will be
taxed According to Tax Schedule from SEC 24:

 Purely Self-employed Individuals and/or Professionals Whose Gross Sales or Gross Receipts
and Other Non-operating Income Does Not Exceed the Value-added Tax(VAT) Threshold as
Provided in Section 109(BB) – eight percent (8%) tax on gross sales or gross receipts and other
non-operating income in excess of Two hundred fifty thousand pesos (P250,000) in lieu of the
graduated income tax rates under Subsection (A)(2)(a) of Section 24 and the percentage tax
under Section 116 of this Code.
 Mixed income earners:
(a) All income from compensation: Taxable according to tax schedule in sec 24.
(b) All income from business or practice of profession:
(1) if total GS or GR and Other NO Income does not exceed VAT threshold: 8% in excess of
250k
(2) if it Exceeds: Taxed according to Tax schedule in Sec 24.
Rate of Tax on Certain Passive Income

All are subjected to FINAL TAX accordingly:

Certain Passive income Final Tax rate

Interests from any bank deposits, yield or 20%
any other monetary benefit from deposit
substitutes, and similar arrangements
Other Royalties 20%
Royalties on Books as well as other literary 10%
works and musical Compositions
Prizes which is 10,000 or Less Tax Table
Prizes which is More than 10,000 20%
Winnings from PCSO Amounting to more 20%
than 10,000
Winnings from PCSO amounting to less than Exempt
10,000
Other winnings 20%
Interest on banks under expanded Foreign 15
Currency Deposit System

Interest income from long-term deposit or investment in the form of savings, common or individual trust
funds, deposit substitutes, investment management accounts and other investments evidenced by
certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax
imposed under this Subsection

Provided finally, that should the holder of the certificate pre-terminate the deposit or investment before
the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld
by the depository bank from the proceeds of the long-term deposit or investment certificate based on
the remaining maturity thereof:

Remaining Years to maturity Final Tax Rate

More than 5 years Exempt
4 years to Less than 5 Years 5%
3 Years to less than 4 years 12%
Less than 3 years 20%

Cash and/or Property Dividends. – 10% if from Domestic Corporation, actually or constructively
Received by an individual. Key note, DOMESTIC, for the 10% to be applicable.

Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange. - a final tax at the rate of
fifteen percent (15%) [16] is hereby imposed upon the net capital gains realized during the taxable year
from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except
shares sold, or disposed of through the stock exchange.

Capital Gains from Sale of Real Property. – a final tax of six percent (6%) based on the gross selling price
or current fair market value as determined in accordance with Section 6€ of this Code, whichever is
higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or
other disposition of real property located in the Philippines, classified as capital assets, including pacto
de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided,
That the tax liability, if any, on gains from sales or other dispositions of real property to the government
or any of its political subdivisions or agencies or to government-owned or controlled corporations shall
be determined either under Section 24 (A) or under this Subsection, at the option of the taxpayer;

Exception. – The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital
gains presumed to have been realized from the sale or disposition of their principal residence by natural
persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence
within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the
capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of
the real property sold or disposed shall be carried over to the new principal residence built or acquired:
Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30)
days from the date of sale or disposition through a prescribed return of his intention to avail of the tax
exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of
once every ten (10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or
disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be
subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of
sale, whichever is higher, shall be multiplied by a fraction which the unutilized amount bears to the gross
selling price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this
Subsection shall be imposed thereon.