Chapter 8 & 9

What are the exclusions from income under Sec. 32 (B) of the NIRC?

SECTION 32 (B) - EXCLUSIONS FROM GROSS INCOME (exempt from taxation)

(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.

(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, 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: Provided, further, That the
benefits granted under this subparagraph shall be availed of by an official or employee only once.
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. (Separation Pay)

(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.

(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.

(e) 13th Month Pay and Other Benefits. - Gross benefits received by officials and employees of public and
private entities up to P90,000;

(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.

What are the 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) – BMBE’s (assets must not exceed
P3,000,000)

3. Income of cooperatives (RA 9520)

4. Income of non-stock, non-profit entities

5. Income of qualified employee trust funds

6. Business or professional income of self-employed and or professionals who opted to the 8% income tax
Ambo Sado procured a life insurance policy with a face value of P2,000,000, paying P 50,000 per year
for 8 years. If Ambo Sado will outlived the policy after 20 years, the face value of the insurance policy
will be given to him. Ambo Sado outlived the policy and the P2,000,000 insurance proceeds was given
to him. How much is the taxable income of Ambo Sado?

P1,600,000, computed as follows:

Proceeds – cost

P2,000,000 – P400,000* = P1,600,000

*Total Cost is P50,000 x 8 = P400,000

Genie Rose donated to Gika Loy-an a floating cottage business worth P800,000 on August 31, 2020,
including the income of the floating cottage as of August 31, 2020 amounting to P300,000. The
income of the cottage from September 1, 2020 to December 31, 2020 amounted to P400,000. How
much is the taxable income of Gika Loy-an for the floating cottage for the year 2020?

P400,000 because the floating cottage amounting to P800,000 and the income as of August 31 of P300,000
are subject to Donor’s Tax

The parked car of Atty. Huan with a book value of P1,200,000 was hit by a speeding Ceres Bus. No
one was injured in the incident and management of Ceres paid Atty. Huan the amount of P1,500,000
for the damage caused. How much is the taxable income of Atty. Huan?

P300,000, the excess amount of the book value of the car that was received as payment for damages or

P1,500,000 – P1,200,000 = P300,000

Dae Malason who was employed with Panglao Resort received the following upon the closure of the
resort due to covid 19: Unpaid Salary for the last three months, P60,000 and Separation pay of
P200,000. How much is the taxable income of Dae Malason?

P60,000 unpaid salary

What are the items of Gross Income subject to Regular Tax?

Section 32 (A) - INCLUSION, meaning they are part of the gross income and are hence taxable:

Under Section 32 (A), Except when otherwise provided in this Title, gross income means all income derived
from WHATEVER SOURCE, including, but not limited to the following items:

(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 derived from dealings in property;

(4) Interests; - interest income of loans

(6) Royalties; - income of intangibles used

(7) Dividends; - dividends declared which is income to the recipient

(8) Annuities; - are insurance contracts that provide a fixed income stream for a person's lifetime or a
specified period of time. An annuity can be purchased with a lump sum or a series of payments and begin
paying out almost immediately or at some point in the future. Annuities are often used as a way to fund
retirement

(9) Prizes and winnings;- not subject to final tax and not exempt

(10) Pensions; - those that are not exempted; and

(11) Partner's distributive share from the net income of the general professional partnership.
Thus, the pertinent items of gross income when earned by an RC (within and without), NRC (within), RA
(within), NRAETB (within) shall be reported and shall form part of their income.

Please take note that Tax Code did not distinguish the source of the income.

The definition did simply provide for WHATEVER SOURCE.

So this means that the income even proceeding from illegal sources like illegal gambling, bribes, kickbacks is
still taxable and needs to be reported in the Income Tax Return.

What are the other sources of Gross Income subject to Regular Income Tax?

1. Income distributions from taxable estates or trusts

A taxpayer received the following tax refunds: from the City of Tagbilaran, refund for excess business
tax P20,000 and the national government as refund for excess income tax paid, P30,000. How much is
the taxable income on the refund received by the taxpayer?

P20,000 because the P20,000 was claimed as a deduction for income tax purposes. (ning gamay ag income
tax liability kay apil ag P20,000 pag claim sa allowable deductions, so ug ma refund, e report as income para
ma insakto ag tax nga bayaran sa taxpayer)

The P30,000 income tax refund is not subject to tax because income tax cannot be claimed as allowable
deduction.

So the rule on refunds or recoveries is :

IF THE REFUND OR RECOVERY was previously claimed as an allowable deduction in the computation of
the income tax due, then the REFUND OR RECOVERY OF THE DEDUCTION is now taxable. ( kay ning
gamay ag tax sa una because of the expense nga na refund or na recover ra diay)