Chapter 8

Income Taxation – Regular Income Tax: Exclusions from Gross Income

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I. EXCLUSIONS FROM THE GROSS INCOME

 Not included in gross income subject to tax, capital gains tax, or final tax

Under Sec. 32(B) of NIRC, the following items shall not be included in gross income and shall be exempt from
income taxation:
1. Proceeds of life insurance policy
 Amount paid to heirs or beneficiaries upon death of the insured
 Life is regarded as capital item with infinite value, hence, the proceeds only serves as a return of
capital and should not be taxed

2. Amount received by the insured as a return of premium

 If the insured dies, the proceeds is not taxable
 If the insured dies, and the payment of proceeds is delayed with interest, the proceeds is not taxable,
but the interest will be subject to tax
 If the insured does not die, and the amount received by him before or upon maturity of the policy is
greater than the total premiums paid,
a. the amount equivalent to the total premiums paid is not subject to tax as it is considered as
a return of capital
b. however, the excess premium is taxable

3. Compensation for injuries or sickness

 Amounts received through accident or health insurance or Workmen’s Compensation act as
compensation for personal injuries or sickness
 Includes the amounts of any damages received
 Whether by suit or agreement

4. Gift, bequest, devise or descent

 These items are products of gratuitous (unilateral) transfers
 These are donations or transfers made during or after the lifetime of the giver
 Not subject to income tax, but may be subject to donor’s tax or estate tax

5. Retirement benefits, pensions, gratuities, etc.

A. SSS, Retirement Gratuities, and Other similar benefits from foreign government agencies and other
institutions, private or public, received by resident or non-resident citizens or aliens who come to
settle permanently in the Philippines
B. SSS benefits under RA 8282
C. GSIS benefits under RA 8291
D. USVA administered benefits
E. Separation or termination benefits, provided;
i. The separation or termination must be due to job-threatening sickness, death, or other
physical disability, and
ii. The same must be due to any cause beyond the control of the employee
F. Retirement benefits under RA 7641 and those received by officials and employees of private firms
in accordance with a reasonable private benefit plan maintained by the employer

Requisites of exemption:
a. This is the first time availment of retirement benefit exemption

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA
Chapter 8
Income Taxation – Regular Income Tax: Exclusions from Gross Income
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b. At least 10 years of service
c. At least 50 years of age at the time of retirement

6. Income exempt under treaty

7. Miscellaneous items
A. Income of foreign government or foreign government-owned and controlled corporations in the
Philippines
B. Income of the government and its political subdivisions
C. Prizes and awards in recognition of religious, charitable, scientific, educational, artistic, literary, or
civic achievements
D. Prizes and awards in athletic sports organization
E. Contributions to GSIS, SSS, PhilHealth, Pag-ibig, and union dues
F. Contributions to Personal Equity Retirement Account
G. PERA investment income and PERA distributions
H. 13th month pay and other benefits not exceeding P90,000

II. OTHER EXEMPT INCOME UNDER THE NIRC AND SPECIAL LAWS
1. Minimum wage and certain benefits of Minimum wage earners
 A minimum wage earner is an individual recipient of a minimum wage as fixed by the Regional
Tripartite Productivity Wage and Productivity Board of DOLE
 Benefits includes holiday pay, overtime pay, night shift differential pay & hazard pay

2. Income of Barangay Micro-Business Enterprises Act (RA 9178)

 BMBE is a business entity whose total assets (excluding land) do not exceed P3M
 BMBE must not be a branch or subsidiary of a large-scale enterprise
 BMBE does not include those that offer services rendered by licensed professionals and partnerships
and corporations engaged in consultancy, advisory and the likes
 BMBE must secure a certificate of authority from the Office of the Treasurer of the city or
municipality that has jurisdiction

3. Income of cooperatives (RA 9520)

 Income from members is not taxable
 Income from non-members is not taxable if accumulated reserve and undivided earnings do not
exceed P10m; the excess is subject to regular tax
 Income from non-related sources is taxable

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

5. Business or professional income of self-employed and or professionals who opted to the 8% income tax
 Regular income tax, 8% income tax and 3% percentage tax are mutually exclusive
6. Income subject to final tax or capital gains tax

Reference: Income Taxation, 2019 OBE Edition, Rex B. Banggawan, CPA, MBA