Module No.

7 – Exclusions from Gross Income

Learning Outcome/s:
Master the list of exclusions from gross income

Core Values/Biblical Principles:

“Have I not commanded you? Be strong and courageous. Do not be frightened, and do not be dismayed,
for the Lord your God is with you wherever you go.” – Joshua 1:9 (ESV)

Introduction:
Exclusions are income or receipts which are excluded from gross income. These are not included in the
determination of a taxpayer’s gross income, hence, these are not subject to income tax.

Body:
The following items shall not be included in gross income and shall be exempt from income tax:

1. Proceeds of life insurance upon death of the insured

 The proceeds of life insurance are treated more as an indemnity for the life lost instead of as
gain, profit or income. However, interest payments made by the insurer constitutes income to
the recipient.

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.
Yung insured, naoutlived nya yung policy, ibig sabihin hindi sya namatay,, yung mga premiums
na buwan buwan nya binabayaran babalik sa kanya. Yung excess sa biayaran nya, magiging part
yun ng gross income subject to RIT
 The excess of the proceeds received over the premiums paid is included in gross income.
 Participating dividends distributed to life insurance policy holders are actually a return of
overpaid premiums, hence, excluded from gross income of the insured.

Illustration
Mr. A is insured in a Php 1,000,000 life insurance policy with annual premium payments of Php
20,000 for 10 years. If Mr. A outlives the policy after the 10 th year, he will be paid a Php 500,000
maturity value.
 If Mr. A died within 10 years, the entire Php 1,000,000 insurance proceeds collected by his
heirs is not taxable.
 In case the insurance company negotiated for an extension of the payment of proceeds
wherein the company shall pay Php 1,100,000 on the extended payment. The Php 1,000,000
proceeds will not be taxed upon collection, but the excess Php 100,000 representing interest
is a taxable item of gross income.
 If Mr. A outlived the policy, the Php 300,000 return on capital (500,000 – 200,000) is an item
of gross income.

3. Gifts, bequests, and devices

 These are subject to transfer taxes.
 The income from the lease, sale, exchange, investment or other disposition of such property
shall be subject to income tax. – Pag nagkaincome ka from the gift, yung income nay un subject
sa income tax RIT

Illustration
Mr. A received a restaurant business as a gift on May 1, 2020 wherein the restaurant had total
properties amounting to Php 500,000 including a Php 100,000 cash income earned since the start of
 2020. Further, the restaurant earned an income of Php 200,000 from May 1, 2020 to December 31,
2020.
 The Php 500,000 transfer of business properties is subject to transfer tax.
 The Php 100,000 donated income is included in the gross income of the donor.
 The Php 200,000 income is included in the gross income of Mr. A, the donee.

4. Compensation for injury or sickness

 Amounts received through accident or health insurance, or under Workmen’s Compensation
Act, as compensation for personal injuries or sickness
 Amount of damages received, whether by suit or agreement, on account of injuries or sickness
 Damages representing compensation for personal injuries arising from libel, defamation,
slander, breach of promise to marry, or alienation of affection (i.e., moral damages and
exemplary or corrective damages)

Illustration
A resident citizen was hit by a truck. He spent 2 months in the hospital and paid Php 150,000 for
hospitalization expenses. He sued the truck driver and was awarded by the court a total indemnity
of Php 400,000 divided as follows: Php 60,000 for his lost salaries, Php 150,000 for reimbursement
of the hospital expense, and Php 190,000 indemnity for his pain and suffering.
 Only the Php 60,000 is included in his gross income since it is a recovery of lost profit.

5. Income exempt under treaties

6. Retirement benefits, pensions, gratuities, separation pay which are exempt from income tax
 As a general rule, retirement benefits, pensions, separation pay are all taxable.
 As exception, the following are exempt from income tax:
a. Retirement benefits and/or pensions which are exempt from income tax
i. Under R.A. No. 7641 (Retirement Pay Law), in the absence of a retirement plan for
employees, employers are required to pay a retirement benefit equal to at least ½
month salary for every year of service.

Requisites:
1. The employee has reached the age of 60 or more but not beyond 65; and
2. The employee has served for at least 5 years in the same establishment.

ii. Under the Tax Code, retirement benefits and/or pension amounts received by
officials and employees of private firms, whether individual or corporate, shall be
exempt from income tax.

Requisites:
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 10 years;
3. The retiring official or employee is not less than 50 years of age at the time of
his retirement; and
4. The benefits of exemption granted shall be availed of only once.
Eto yung 1-10-50 Rule, meaning pag nagretire na si employee tapos nameet yung
requirements na to, di taxable ang retirement benefits nya

b. Separation pay due to a cause beyond the control of the employee – exempt from income
tax regardless of age or length of service; however, it does not cover salaries, 13th month
pay and other benefits which are properly taxable to the employee.
i. Death
ii. Sickness
iii. Other physical disability
 iv. Any cause beyond the control of the said employee (e.g., redundancy,
retrenchment, closure of the employer’s business, employee lay-off, downsizing of
employer’s business, etc.)

c. Social security benefits, retirement gratuities, pensions and other similar benefits received
by resident or non-resident citizens or resident aliens, from foreign agencies and other
institutions private or public.

d. Payment 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 Veteran Administration
Nagserve sa army tapos sa Phil na nakatira, di kasama sa gross income
e. Benefits received from or enjoyed under the Social Security System (SSS)

f. Benefits received from GSIS including retirement gratuity received by government officials
and employees

g. Maternity benefits advanced by the employer to the employee

7. Miscellaneous items
 Income derived by foreign governments, financing institutions owned or controlled by foreign
governments, and international or regional financial institutions established by foreign
governments from investments or deposits in the Philippines. International Comity

 Income derived by the Philippine government or its political subdivisions from the exercise of
any governmental functions. (Note: This does not extend to GOCCs since they are generally
taxable as regular corporations because their operations are proprietary in nature.)

 Prizes and awards primarily in recognition of religious, charitable, scientific, educational, artistic,
literary or civic achievements but 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 reward.

 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
association.

 13th month pay and other benefits received by officials and employees of public and private
entities as “13th month pay and other benefits” which shall include:
a. The 13th month pay, and other incentives such as productivity incentives and Christmas
bonus; and
b. The excess of the “de minimis” benefits over their respective ceilings.
Provided, that the total exclusion shall not exceed Php 90,000.
De minimis benefits – eto yung benefits na narereceice ni employee pero minimal lang such as
rice allowance, clothing allowance etc. Meron tong ceiling, pag lumagpas sa ceilings yung allowance,
other benefits yun dito. Taxable income pag excess ng 90,000 (before 2018 82,000 sya.)

 Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare (PHIC), and

PAGIBIG, and union dues of individuals.
a. These are actually deductions but are labelled as exclusions in the Tax Code.
b. Contributions in excess of the mandatory contributions are not deductible from gross
income.
 Gains from the sale, exchange or retirement of bonds, debentures, or other certificate of
indebtedness with a maturity of more than 5 years.

 Gains from redemption of shares in a mutual fund. (Note: Mutual fund company means an
open-end and close-end investment company as defined under the Investment Company Act.)

 Income of non-residents from transactions with domestic depository banks and OBUs under the
Expanded Foreign Currency Deposit System.
Off-shore Banking Units – Pag resident ka, 15% FIT. Pag nonresident hindi taxable
 Personal Equity and Retirement Account (PERA ) – refers to the voluntary retirement account of
an individual (contributor) established from his own Qualified PERA Contributions and/or
Qualified Employer Contributions, for the purpose of being invested solely in qualified or eligible
PERA investment products.
a. The Qualified Employer’s Contributions shall be excluded from the employee’s taxable gross
income.
b. Investment income of a Contributor earned from the investments of his PERA assets shall be
exempt from income taxes, provided:
i. That each specific investment product is approved by the concerned regulatory
authority; and
ii. The non-income taxes, if applicable, relating to the investment income, shall be
imposed. Such taxes shall include percentage taxes, VAT, stock transaction tax, and
documentary stamp tax.
c. Qualified PERA Distributions shall be excluded from gross income if:
i. After the contributor and/or his employer has made the Qualified PERA Contributions
and/or Qualified Employer’s Contributions for at least 5 years (which need not be
consecutively made), and after the contributor reaches the age of 55; or
ii. Upon death of the contributor, irrespective of his age or number of yearly
contributions made at the time of his death.
d. Early withdrawals in the following circumstances shall be excluded from gross income:
i. Withdrawal of PERA assets from the administrator by reason of the suspension or
revocation of the accreditation of the administrator, provided that the entire PERA
assets are transferred to another administrator within 2 working days from receipt of
the contributor’s advice on the chosen administrator;
ii. For payment of accident or illness-related hospitalization in excess of 30 days; or
iii. For payment to a contributor who has been subsequently rendered permanently and
totally disabled.

 Representation and transportation allowance (RATA ) granted under Section 34 of the General
Appropriation Act to certain officials and employees of the government from the rank of
Department Secretaries to Division Chiefs are not subject to income tax and to the withholding
tax.

 Personnel Economic Relief Allowance (PERA) granted to all employees of the National
Government, Local Government Units, including government owned or controlled corporations,
is considered remuneration/compensation for services performed by the employees in the
performance of official duties, hence, not taxable income.

 Capital contributions to corporations/partnerships are not income of the

corporation/partnership, hence, not subject to income tax.

 Project-related income from the development of socialized housing sites. The private sector
(e.g., contractors) shall be exempt from payment of project-related taxes (including CGT) on a
per project basis on income realized from the development of socialized housing sites.
  Yield or income from any low-cost or socialized housing-related asset-backed security.

 Income from the commercialization of technologies developed by local inventors or researchers

under R.A. No. 7459 during the first 10 years from the date of the first sale.

 Proceeds which constitute a fund held in trust by the taxpayer, and which do not redound to the
benefit of the taxpayer
If tagahawak lang sya, hindi sya taxable kasi walang income/benefits

 Income from the sale of gold pursuant to R.A. No. 7076 (People’s Small-Scale Mining Act of
1991)
a. Income from the sale of gold to the Bangko Sentral ng Pilipinas by registered small-scale
miners and accredited traders. (Note: Small-scale miners refer to Filipino citizens who,
individually or in the company of other Filipino citizens, voluntarily form a cooperative duly
licensed by the DENR to engage, under the terms and conditions of a contract, in the
extraction or removal of minerals or ore-bearing materials from the ground.
b. Income from the sale of gold by registered small-scale miners to accredited traders for
eventual sale to the Bangko Sentral ng Pilipinas.

Other Exempt Income under the Tax Code and Special Laws
1. Minimum wage and certain benefits of Minimum Wage Earners (MWEs)
 A minimum wage earner is an individual recipient of a minimum wage as fixed by the Regional
Tripartite Productivity Wage and Productivity Board of the DOLE. An MWE is exempt from
income tax on the minimum wage including holiday pay, overtime pay, night shift differential
pay, and hazard pay.

2. Income of Barangay Micro-Business Enterprises Act (BMBE) (R.A. No. 9178)

 A BMBE is a business entity or enterprise engaged in the production, processing, or
manufacturing of products or commodities, including agro-processing, trading and services,
whose total assets including those arising from loans but exclusive of the land on which the
particular business entity’s office, plant, and equipment are situated, do not exceed Php
3,000,000.

3. Income of cooperatives (R.A. No. 9520)

 Cooperatives that transact business purely with members are exempt from all taxes and fees.
 Cooperatives that transact business with non-members are likewise exempt from all taxes and
fees if their accumulated reserve and undivided savings do not exceed Php 10,000,000.
Otherwise, the amount of surplus allocated for interest on capitals is subject to regular tax.
 Income of any cooperative from non-related sources is fully taxable to regular tax.

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

 Income from unrelated sources is taxable.

5. Income of qualified employee trust funds

 Conditions for exemption:
a. Contributions are made to the trust by such employer, or employees, or both for the
purpose of distributing to such employees the earnings and principal of the fund
accumulated by the trust in accordance with such plan.
b. The asset of the fund shall not be diverted for other purposes other than the exclusive
benefit of the employees.

Summary:
Exclusions from gross income are income that are not included as items of gross income and, hence, not
taxable to the taxpayer.
References:
Income Taxation, Rex Banggawan 2019 Edition