Chapter 8 Exclusions From Gross Income

EXCLUSIONS FROM GROSS INCOME
Exclusions from Gross Income

 Item of income not subjected to income tax and is not reported in the ITR, such as:
1. Proceeds of life insurance policy – proceeds from a life insurance received by heirs or
beneficiary upon death of the insured is exempt from taxation, except interest accruing thereof
under an agreement of deferred payment
2. Amount received by the insured as a return of premium – it is a return of capital, hence

not taxable, but the following are included as an item of gross income:
 Excess of amount received over the premium paid upon surrender or maturity of the policy
 Gain realized from the assignment or sale of the policy
 Excess of proceeds received by the assignee over the acquisition cost plus premium paid
thereon
3. Gift, bequest, devise, or descent – a unilateral or gratuitous transfer, hence, subject to

transfer tax, except:
 any income accruing from such property from the date of receipt (subject to RIT)
 employment gratuities (subject to RIT)
 transfer of properties to managerial or supervisory employees (subject to fringe benefits
tax)
4. Compensation for physical injury or sickness – health has infinite value same as life,
hence, any amount received for indemnification of damages whether by suit or agreement is a
return of capital, hence, not taxable, except of course recovery from lost profits or salary
5. Income exempt under treaty – exempt under doctrine of international comity, it overrides
provisions from tax laws
6. Retirement benefits, pensions, gratuities

 Retirement benefits – requisites to avail exemption are:
a. First time availment
b. Retiring employee or official is in service of the same employer accumulates at least
(10) years (need not be continuous)
c. Retiring employee or official is at least (50) years old at the time of retirement
d. The employer maintains a reasonable private benefit plan that:
 The funds, including any income thereof, is not used from any other purpose
other than the benefit of the official or employee designated and
 Is a trustee plan (i.e. the fund is held under the management of a trustee free
from both employer and employee control)
 Separation or Termination pay – requisites to avail exemption are:

 The separation or termination must be due to:
 job-threatening sickness, death, or other physical disability that renders the
employee incapable of working or
 to any cause beyond the control of the employee, such as:
 retrenchment (reduction of business expenses in the form of employee
reduction)
 redundancy (employee termination due to job inadequacy or no longer
needed)
 business closure
 lay-off
 business downsizing
 the employee or his heirs shall request a ruling of Certificate of Exemption from the
BIR and must be filed including other required documents to the RDO of the employer
where he registered his business
Note: Exemption from termination and separation pay does not extend to:
 back wages or illegal deductions repaid by the employer
 Terminal leave pay or accumulated unused leave paid by the employer
 Social security benefits, retirement gratuities, and other similar benefits from foreign
government and other institutions, private or public – such benefits are earned abroad
when the taxpayer is non-resident, thus, not taxable even if the taxpayer decided to reside
permanently in the Philippines and receives the same
 Unites States Veterans Administrations (USVA) administer benefits – retirement benefits as

a war veteran received by any person regardless of the classification as a taxpayer is
exempt from taxation
 SSS & GSIS retirement benefits – are exempt from taxation
7. Miscellaneous items – the following are also exempt from income taxation:
 Income in the Philippines of foreign government-owned and controlled corporations
(exempt under the doctrine of international comity)
 Income of the Philippine government and its political subdivisions – from:

a. Any public utility
b. Exercise of essential government function primarily for public service, except:
 GOCCs – these are proprietary or commercial in nature, thus subject to RIT
 Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,

literary, or civic achievements, provided:
a. The recipient was selected without any action on his part to enter into the contest
b. The recipient is not required to render substantial future services
 Prized and awards in sports competitions granted to athletes, provided the sports
competition is sanctioned by their respective national sports associations, regardless if:
a. It is a local or international competition and
b. It is held in the Philippines or abroad
 Mandatory contributions to GSIS, SSS, Philhealth, HDMF, and union dues by the employee
Note:
 Any voluntary contributions in excess of the mandatory contributions required is
taxable
 Employer’s share in the GSIS, SSS, Philhealth, and HDMF contributions is not
exclusion from gross income but rather an item of deductible against the gross
income
 Withholding tax is not an exclusion
 Contributions to Personal Equity Retirement Account (PERA)

a. PERA is a contributor’s voluntary retirement account established from qualified
contributions of the contributor and/or his employer for the sole purpose of being
invested in qualified PERA investment products
b. PERA annual allowable contribution:
 For OFWs – P200K/year
 For non-OFW – P100K/year
Note:
 Husband and wife are separate taxpayer, hence, each can contribute up to
the maximum allowable contribution
 Any excess of the allowed annual contribution is subject to regular income tax
c. PERA contributors are allowed to claim 5% of their PERA contributions as tax credit
against any internal revenue taxes
 PERA investment income and PERA distributions – any income and distribution from PERA
to the contributor or to the beneficiary is exempt from income taxation
 13th month pay and other benefits not exceeding P90,000 (exempt from taxation)
 Gains from sale of bonds, debentures, or other certificate of indebtedness with a maturity
of more than 5 years – exempt from income taxation with the same rationale of long-term
deposits, except, interest accruing thereof
 Gain realized from redemption of shares in a mutual fund company by the investor –
exempt from income taxation to mitigate double taxation because most of the income in
such fund is subject to final tax
 Mutual funds pool the money invested by different investors and use the same to earn
income, wherein, the investors purchase participation shares
 Other exempt income under NIRC and special laws

a. Compensation of minimum wage earners, including:
 Holiday pay
 Overtime pay
 Night shift
 Differential pay
 Hazard pay
b. Operating income of Barangay Micro-Business Enterprise (BMBE)

 Qualifications
 Total assets, excluding the land on which the business is located, do not
exceed P3M
 Not a branch or subsidiary of a large-scale enterprise (e.g. franchise)
 If service provider, it must not be carried out by licensed professionals for
practice of profession
 Secure a Certificate of Authority to operate as BMBE
Note: Non-operating incomes of BMBEs are subject to the appropriate income

tax.
c. Income of Cooperatives from exempt operations – required to secure a ruling or
Certificate of Tax Exemption to avail exemption, however, income from unrelated
sources (i.e. income from not exempt operations) are taxable
d. Income of non-stock and non-profit entities from exempt operations –

however, income from unrelated sources (i.e. income from not exempt operations) are
taxable
e. Income of qualified employees’ trust funds

 Conditions for exemptions:
 Contributions to such fund are made in the purpose of distributing the
earnings and principal of the fund to such employee designated in accordance
with the plan
 The fund shall not be diverted to other purposes other than the exclusive
benefit of the employees designated
QUALIFICATION OF EXEMPTION OR EXEMPT ENTITIES

 Tax exemption is construed against the taxpayers; thus, exemption is not automatic. Hence, anyone
qualified must submit to the BIR all required documents to be entitled of the exemption applied.

Chapter 8 Exclusions From Gross Income

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EXCLUSIONS FROM GROSS INCOME

Exclusions from Gross Income

2. Amount received by the insured as a return of premium – it is a return of capital, hence

3. Gift, bequest, devise, or descent – a unilateral or gratuitous transfer, hence, subject to

6. Retirement benefits, pensions, gratuities

 Separation or Termination pay – requisites to avail exemption are:

 Unites States Veterans Administrations (USVA) administer benefits – retirement benefits as

 SSS & GSIS retirement benefits – are exempt from taxation

 Income of the Philippine government and its political subdivisions – from:

 Prizes and awards in recognition of religious, charitable, scientific, educational, artistic,

 Contributions to Personal Equity Retirement Account (PERA)

 Other exempt income under NIRC and special laws

b. Operating income of Barangay Micro-Business Enterprise (BMBE)

Note: Non-operating incomes of BMBEs are subject to the appropriate income

d. Income of non-stock and non-profit entities from exempt operations –

e. Income of qualified employees’ trust funds

QUALIFICATION OF EXEMPTION OR EXEMPT ENTITIES

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