GROSS INCOME
Gross income means all profits/income and gains earned or received during the taxable year by a taxpayer
from whatever sources (legal or illegal). It may be in the form of cash, properties, debt instruments issued by
the other party or even services. Gross Income as defined by the Tax Code does not include all income subject
to final taxes and all income exempted or excluded in the NIRC and special laws or treaties. It includes, but not
limited to:
A. Compensation for services, including but not limited to fees, salaries, wages, commissions and similar items
(already discussed).
B. Gross Income derived from the conduct of trade or business, or exercise of profession (Basic Computation
discussed previously)
C. Gains derived from dealings in property
D. Interests
E. Rents
F. Royalties
G. Dividends
H. Annuities
I. Prizes and winnings
J. Pensions
K. Partner’s distributive share from net income of a general professional partnership (to be discussed in a
separate chapter for partnerships)
EXCLUSIONS FROM GROSS INCOME
Exclusions are income or receipts which are excluded from gross income, i.e. these are not included in the
determination of a taxpayer’s gross income.
Hence, these incomes or receipts are not subject to income tax. However, despite their non-inclusion from
gross income, such income items may be subject to taxes other than the income tax.
Exclusions Under the Tax Code
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 policies paid to the heirs or beneficiaries upon death of the insured shall
be exempt from income tax. The proceeds of life insurance are treated more as an indemnity for the life
lost instead of as gain, profit, or income.
Note: 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.
3) Gifts, Bequests, and Devices
The value of property acquired by gift, bequest, devise or descent are exempt from income taxation.
Note: The income from the lease, sale, exchange, investment, or other disposition of such property
shall be subject to income tax.
(4) Compensation for Injury or Sickness
a) Amounts received, through accident or health insurance, or under Workmen’s Compensation Acts,
as compensation for personal injuries or sickness; plus
b) The amounts of any damages received, whether by suit or agreement, on account of such injuries
or sickness.
c) Damages representing compensation for personal injuries arising from libel, defamation, slander,
breach of promise to marry, or alienation of affection.
- Includes moral damages. Moral damages include physical suffering, mental anguish, fright,
serious anxiety, besmirched reputation, wounded feelings, moral shock, social humiliation, and similar
injury.
- Includes exemplary or corrective damages. These are imposed by way of example or correction
for the public good.
(5) Income Exempt Under Treaties
Income of any kind, to the extent required by any treaty obligation or international agreement to be
exempt from taxation by the Republic of the Philippines.
(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 exceptions, the following benefits and payments are EXEMPT from income tax:
(a) Retirement benefits and/or pensions which are exempt from income tax:
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 for exemption:
i) The employee has reached the age of 60 or more, but not beyond 65; and
ii) The employee has served for at least 5 years in the same establishment.
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 when the
requisites for exemption in the Tax Code are complied with.
Requisites for exemption:
i. There must be a reasonable private benefit plan maintained by the employer;
ii. The retiring official or employee has been in the service of the same employer for at least 10 years;
iii. The retiring official or employee is not less than 50 years of age at the time of his retirement;
iv. The benefits of exemption granted shall be availed of by an official or employee only once.
(b) Separation Pay Due to a Cause Beyond the Control of the Employee
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 due to:
(1) Death;
(2) Sickness;
(3) Other physical disability; or
(4) For any cause beyond the control of the said official or employee.
Retirement pay given due to redundancy/retrenchment is also excluded from gross income.
Notes:
(1) Separation pay due to the abovementioned causes are exempt from income tax regardless of
age or length of service of the employee.
(2) The exemption does not cover salaries, 13th month pay and other benefits in excess of
₱90,000, and other payments which are properly taxable to the employee.
(c) Social security benefits, retirement gratuities, pensions and other similar benefits received by
resident or non-resident citizens of the Philippines, or aliens who come to reside in the Philippines,
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.
(e) Benefits received from or enjoyed under the Social Security System (SSS) in accordance with the
provisions of R.A. No. 8282.
(f) Benefits received from the GSIS under R.A. No. 8291, including retirement gratuity received by
government officials and employees.
(g) Maternity benefits advanced by the employer to the employee.
(7) Miscellaneous Items
(a) 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.
- Includes exemption from the stock transaction tax
(b) Income Derived by the Philippine Government or its Political Subdivisions from the exercise of
any governmental function.
(c) Prizes and awards primarily in recognition of religious, charitable, scientific, educational, artistic,
literary, or civic achievement but only if:
(1) The recipient was selected without any action on his part to enter the contest or
proceeding; and
(2) The recipient is not required to render substantial future services as a condition to
receiving the prize or award.
(d) 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.
(e) 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:
(1)The 13th month pay, and other incentives such as productivity incentives and Christmas
bonus; and
(2)The excess of the “de minimis” fringe benefits over their respective ceilings.
Provided, however, that the total exclusion shall not exceed Ninety Thousand Pesos (₱90,000).
(f) Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare (PHIC), and
PAGIBIG, and union dues of individuals.
- These are actually deductions, but are labelled as exclusions in the Tax Code.
Note: Contributions in excess of the mandatory contributions are not deductible from gross income.
Moreover, GSIS Educational Plan, GSIS Optional Insurance, GSIS Unlimited Optional Insurance, and
GSIS Memorial Plan premiums shall not be deductible.
