15/10/2023

Chapter 8
RIT – EXCLUSIONS FROM
GROSS INCOME

EXCLUSIONS FROM GROSS INCOME :

Exclusions from Gross Income
- are income in which will not be subject to income tax.
- they are not included in gross income subject to regular tax, capital gains tax
or final tax.

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EXCLUSIONS FROM GROSS INCOME :

1) Proceeds of life insurance policy
- the proceeds of life insurance policies paid to heirs or beneficiaries upon
death of insured, whether in a single sum or otherwise, is a return of
capital.
- however, if held by the insurer to pay interest thereon, interest payments
shall be included in gross income.

EXCLUSIONS FROM GROSS INCOME :

2) Amount received by the insured as a return of premium
- the amount received by the insured as a return of premiums 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.
- is a return of capital, hence, it is excluded from gross income.

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EXCLUSIONS FROM GROSS INCOME :

2) Amount received by the insured as a return of premium
Life insurance of company officers
- the proceeds of life insurance wherein the company is the beneficiary, the
entire proceeds is an exempt return of capital.
(not taxable per NIRC)

EXCLUSIONS FROM GROSS INCOME :

2) Amount received by the insured as a return of premium
Property insurance contracts
- the proceeds of property insurance contracts in excess of the tax basis of
the property lost or destroyed is a taxable return on capital. (taxable)

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CHARACTERISTICS OF REGULAR INCOME TAX :

3) Gifts, Bequests, Devises or Descent
- the value of property acquired by gifts, bequest, devises or descent is
subject to transfer tax not income tax. (taxable as transfer tax)
- however, the income from such property or from any property in cases of
transfers of dividend interest, shall be included in gross income.

CHARACTERISTICS OF REGULAR INCOME TAX :

3) Gifts, Bequests, Devises or Descent
Example : Answer :
A received a restaurant business as a gift on April Subject to Transfer Tax : 400,000
1, 2021. On that date, the properties amounted Income Tax - Donor: 50,000
to 400,000 including 50,000 cash income earned Income Tax - Donee: 150,000
since January 1, 2021.

In addition, the restaurant posted additional

150,000 cash income from April 1 - December
31,2021.

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CHARACTERISTICS OF REGULAR INCOME TAX :

4) Compensation for injuries and sickness
- amounts received through accident or health insurance or under Workmen's
Compensation Acts as compensation for personal injuries or sickness plus
the amount of damages received whether by suit or agreement.

Example : Answer :
Andrew was hit by a jeepney. He sued the
jeepney driver and awarded indemnity of
340,000 divided as follows, 100,000
hospitalization expenses and 200,000
indemnity for pain and 40,000 for his lost
salaries.

CHARACTERISTICS OF REGULAR INCOME TAX :

4) Compensation for injuries and sickness
Injury to Rights or Property
- the law pertains to personal physical injury rather than injury to rights or
property.

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CHARACTERISTICS OF REGULAR INCOME TAX :

5) Income exempt under Treaty
- income items that are excluded by international agreement to which the
Philippine government is a signatory are excluded from income tax.
(international comity)

CHARACTERISTICS OF REGULAR INCOME TAX :

6) Retirement benefits, pensions, gratuities and other benefits
a. Retirement benefit 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 for exemption :
1. The employer maintains a reasonable private benefit plan.
2. The retiring official or employee has been in the service of the same employer
for at least 10 years. (cumulative years)
3. The retiring employee is at least 50 years of age at the time of retirement.
4. This is the first time availment of retirement benefit exemption.

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CHARACTERISTICS OF REGULAR INCOME TAX :

6) Retirement benefits, pensions, gratuities and other benefits
b. Separation or Termination
Requisites for exemption :
1. The separation or termination must be due to job-threatening sickness, deaths, or
other physical disability, and
2. The same must be due to any cause beyond the control of the employee or official
such as ; (involuntary)
a. Redundancy
b. Retrenchment
c. Closure of employer’s business
d. Employee lay-off
e. Downsizing of employer’s business
f. Sickness or death of the employee

CHARACTERISTICS OF REGULAR INCOME TAX :

6) Retirement benefits, pensions, gratuities and other benefits
b. Separation or Termination
The exemption of termination or separation does not extend to ;
1. Back wages or illegal deductions repaid by the employer upon termination.
(unpaid salary)
2. Terminal leave pay or the commutation of accumulated unused leave credits

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CHARACTERISTICS OF REGULAR INCOME TAX :

6) Retirement benefits, pensions, gratuities and other benefits
c) Social Security Benefits, Retirement Gratuities, and other similar
benefits from foreign government agencies and other institutions (private
or public) received by a resident and non-resident citizens or resident aliens
who come to settle permanently in the Philippines. (situs of income rule)

CHARACTERISTICS OF REGULAR INCOME TAX :

6) Retirement benefits, pensions, gratuities and other benefits
d) United States Veteran Administration (USVA) - administered benefits
under the laws of the United States received by any person residing in the
Philippines. (resident citizen and resident alien).
- USVA benefit is excluded in gross income.
- the same rule applies to USVA benefits for beneficiaries of Filipino veterans
who fought under the American flag in WWII.

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CHARACTERISTICS OF REGULAR INCOME TAX :

6) Retirement benefits, pensions, gratuities and other benefits
e) Social Security System (SSS) Benefits under RA 8282

f) GSIS Benefits under RA 8291 including retirement gratuity received

by government officials and employees.

CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
a) Income derived on investments in the Philippines in loans, stocks,
bonds, or other domestic securities, or from interest on deposits in banks
In the Philippines by : (international comity)
1) Foreign governments
2) Financing institutions owned, controlled or enjoying refinancing from foreign
government
3) International or regional financial institutions established by foreign governments

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CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
b) Income derived by the government and its political subdivisions from ;
1) Any public utility
2) Exercise of essential government function

Government agencies and instrumentalities (GOCC)

- is exempt for public service nature but taxation applies when they are engaged in
income-producing activities which are proprietary or commercial in nature.

CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
c) Prizes and Awards made primarily for religious, charitable, scientific,
educational, artistic, literary or civic achievements only if ;
1) The recipient was selected without any action on his part to enter the contest or
proceeding
2) The recipient is not required to render substantial future services as a condition to
receiving the price or award.

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CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
d) Prizes and Awards in Sports Competition granted to athletes ;
1) In local or international competition or tournaments.
2) Whether held in the Philippines or abroad.
3) Sanctioned by their National Sports Association.

CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
e) Contributions for GSIS, SSS, PHIC, HDMF and Union dues of individuals ;
- the exemption/exclusion pertains to employees share (portion of the salary) in the
premium contribution.

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CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
f) 13th month pay, and other benefits received by officials and
employees of public or private entities not exceeding.
• OLD NIRC – 82,000
• TRAIN / CREATE – 90,000

CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
g) Contributions to Personal Equity Retirement Account (PERA)
h) PERA investment income and PERA distributions

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CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
i) Gains from sale of bonds, debentures or other certificate of
indebtedness with a maturity of more than 5 years.
This exemption grounded upon the assumption that long-term indebtedness is
diverted to the financing of long-term projects which is viewed as beneficial to
the development of the country.

The term gain does not include interest.

CHARACTERISTICS OF REGULAR INCOME TAX :

7. Miscellaneous Items
j) Gains realized from redemption of shares in a mutual fund company
by the investor.

Exemption is intended to mitigate double taxation, as most of the items of

income of mutual funds are subject to FIT at source.

Exemption may be intended to promote growth of mutual funds which widely

provides liquidity in most financial markets.

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CHARACTERISTICS OF REGULAR INCOME TAX :

OTHER EXEMPT INCOME UNDER THE NIRC OR SPECIAL LAWS
1) Minimum Wage Earners
Is exempt from income tax on the minimum wage which including holiday pay,
overtime pay, night differential pay and hazard pay.

Basic & HHON

CHARACTERISTICS OF REGULAR INCOME TAX :

OTHER EXEMPT INCOME UNDER THE NIRC OR SPECIAL LAWS
2) Barangay Micro-Business Enterprise (RA 9178 - BMBE)
Income of BMBE from their operations are exempt, hence, excluded from the
gross income subject to RIT.

* however, their non-operating income, passive and capital gains are subject to
the appropriate type of tax.

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CHARACTERISTICS OF REGULAR INCOME TAX :

OTHER EXEMPT INCOME UNDER THE NIRC OR SPECIAL LAWS
3) Cooperatives
a. Income of cooperatives that transacts business purely w/ members --- (exempt)

b. Income of cooperatives that transacts business w/ non-members --- (exempt)

if their accumulated reserves or undivided savings (unrestricted RE)
do not exceed 10 million.

c. Income of cooperatives from non-related sources --- (taxable)

CHARACTERISTICS OF REGULAR INCOME TAX :

OTHER EXEMPT INCOME UNDER THE NIRC OR SPECIAL LAWS
4) Income of Non-Stock Non-Profit entities
a. Income from Related Sources --- exempt
b. Income from Unrelated Sources --- taxable

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CHARACTERISTICS OF REGULAR INCOME TAX :

OTHER EXEMPT INCOME UNDER THE NIRC OR SPECIAL LAWS
5) Income from Qualified Employee Trust Fund
Requisites for exemption :
1. 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
2. The asset of the fund shall not be diverted for other purposes other than the
exclusive benefit of the employees.

CHARACTERISTICS OF REGULAR INCOME TAX :

EXCLUSIONS vs DEDUCTIONS
Exclusions
- exclusions from gross income are not included in the amount of reportable gross
income in the ITR.

Deductions
- are amounts initially included in the amount of gross income but is separately
presented as deduction against gross income in the ITR.

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