EXCLUSIONS FROM GROSS INCOME

Handout No. 1-05 A.G. DULAY

A. EXCLUSIONS DEFINED
It means income or receipts which are excluded from gross income and are not subject to
income tax.

B. EXCLUSIONS FROM GROSS INCOME

a. Proceeds of life insurance

b. Amount received by insured as returns of premium
c. Gifts, bequests and devises
d. Compensation for injuries or sickness
e. Income exempt under treaty
f. Retirement benefits, pensions, gratuities, etc.
g. Miscellaneous items:
1. Income derived by foreign government
2. Income derived by the government or its political subdivision
3. Prizes and awards
4. Prizes and awards in sports competition
5. 13th month pay and other benefits
6. GSIS, SSS, Medicare and other contributions
7. Gains from the sale of bonds, debenture or other certificate of indebtedness with maturity
of more than 5 years
8. Gains from redemption of shares in mutual fund

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(EXCLUSIONS FROM GROSS INCOME EXPLAINED)

A. PROCEEDS OF LIFE INSURANCE

Rule: Proceeds of life insurance -> excluded from gross income

Interest on proceeds -> included in the gross income

B. AMOUNTS RECEIVED BY INSURED AS RETURN OF PREMIUM

What amount is excluded in the gross income?

The amount received by the insured, as a return of premium paid by him under the 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.

What amount is included in the gross income?

If the amounts, when added to amounts received before the taxable year under such contract,
exceed the aggregate premium paid, whether or not paid during the taxable year, then the
EXCESS shall be included in the gross income.

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Handout No. 1-05 A.G. DULAY

Excluded amount in case of a transfer for a valuable consideration by assignment or otherwise, of life
insurance:
In the case of a transfer for a valuable consideration by assignment or otherwise, of a life
insurance, endowment or annuity contract or any interest therein, only the actual value of such
consideration and the amount of the premiums and the sums subsequently paid by the
transferee are exempt from taxation.

Participating dividends:
These are not income to the insured. They are treated as return of capital.

C. GIFTS, BEQUESTS AND DEVISES

Rule: These are subject to transfer taxes (either estate tax or donors tax).

What are those that are included in the gross income?

a. Income from property derived from its investment, sale or otherwise
b. Gift, bequest, devise or descent of income from any property, in cases of transfers of divided
interest

Alimony or an allowance based on a separation agreement:

Neither is taxable income

D. COMPENSATION FOR INJURIES OR SICKNESS

What are those that are excluded in the gross income?

a. Amounts received through Accident or Health Insurance or Under Workmens Compensation Act
b. Amounts of any damages received, whether by suit or agreement, on account of such injuries or
sickness
c. Recoveries of damages, representing compensation for personal injuries arising from libel,
defamation, slander, breach of promise to marry, alienation of affection which are not subject to
income tax

E. INCOME EXEMPT UNDER TREATY

Rule: Income of any kind to the extent required by any treat obligation binding upon the
Government of the Philippines is exempt from taxation.

Examples:
a. Salaries of officials of the United Nations (UN) assigned in the Philippines if paid by the UN and
certified by the Secretary General of the UN
b. Salaries, allowances, fees or wages received by citizens of the United States of America working
in consular offices in the Philippines are exempt from all taxes
c. Salaries of diplomatic officials and agents

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EXCLUSIONS FROM GROSS INCOME
Handout No. 1-05 A.G. DULAY

F. RETIREMENT BENEFITS RECEIVED UNDER RA NO. 7641

Refer to those received by officials and employees of private firms, whether individual or
corporate, in accordance with a reasonable private pension plan maintained by the employer.

Provided, that the retiring official or employee has been in the service of the same employer for
at least 10 years and is not less than 50 years of age at the time of his retirement.

Rule: The benefits granted shall be availed of by an official or employee ONLY ONCE.

What are those that are excluded in the gross income?

a. 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 physical disability or for any cause beyond the control of the said
official or employee
b. Social security benefits, retirement gratuities, pensions and other similar benefits received from
foreign government agencies and other institutions, private or public by resident or nonresident
citizen of the Philippines or aliens who come to reside permanently in the Philippines
c. Benefits under the United States Veterans Administration
d. Benefits received from or enjoyed under the Social Security System (SSS)
e. Benefits received from Government Service Insurance System (GSIS) including retirement
gratuity received by government officials and employees

G. MISCELLANEOUS ITEMS
1. Income derived by governments
a. Income derived by foreign governments, financing institutions owned, controlled or enjoying
refinancing from foreign governments and international or regional financial institutions
established by foreign governments from investment in loans, stocks, bonds and other
domestic securities, or from interest on deposits in banks in the Philippines

b. Income accruing to the Philippine Government derived from any public utility or from the
exercise of any essential government functions

2. Prizes and awards

a. Prizes and awards made primarily in recognition of achievements in the following fields:
Religious
Charitable
Scientific
Educational
Artistic
Literary
Civic

Conditions for exemption:

The recipient was selected without any action on his part to enter the contest or
proceedings; and

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EXCLUSIONS FROM GROSS INCOME
Handout No. 1-05 A.G. DULAY

The recipient is not required to render substantial future services as a condition to

receiving the prize or award.

b. All prizes and awards granted to athletes to local and international sports competitions and
tournaments whether held in the Philippines or abroad and sanctioned by their national
sports association

3. 13th month and other benefits

Gross benefits received by officials and employees of public and private entities provided
that the total exemption shall not exceed P82,000 (Revenue Regulations No. 3-2015).

4. GSIS, SSS, Medicare and Pag-ibig contributions, and union dues

5. Gains realized
a. Gains realized from the sale or exchange of retirement of bonds, debenture or other
certificate of indebtedness with maturity of more than 5 years

b. Gains realized by the investor upon redemption of shares in a mutual fund company (an
open-end and close-end investment company)

Sources:
1. The 1997 National Internal Revenue Code
2. Various BIR Regulations
3. Income Taxation by Valencia and Roxas 6th edition
4. Review Notes from various Review Centers

The happiest people in the world do not have the best things in life.
Perhaps they are just very good in finding the best in whatever it is that they have.
-Anonymous

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