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EXCLUSIONS FROM

GROSS INCOME

REASONS FOR EXCLUSION

Exclusion - refers to income received or earned but is not taxable as income


because exempted by law or by treaty. Such tax-free income is not to be
included in the income tax return unless information regarding it is
specifically called for.

1. The item of receipt does not fall within the definition of income for
income tax purposes.

“Income – in its broad sense, means all wealth which flows into the taxpayer
other than as a mere return on capital. It includes the forms of income
specifically described as gains derived from sale or other disposition of
capital assets.”

 Damages recovered in libel and slander suits


 Damages recovered for alienation of affection
 Damages recovered for breach of promise to marry
 Damages recovered for loss of life of spouse
 Damages recovered in annulment of marriage

2. A provision of the Tax Code or special law exempts it from income tax.

This is expressly provided in “The National Internal Revenue Code of the


Philippines under Section 32, as amended by R.A. 10963 (TRAIN LAW)

EXCLUSIONS FROM GROSS INCOME

1. Proceeds of life insurance - (life insurance policies). The proceeds


paid to beneficiaries upon the death of the insured, whether in a single sum
or otherwise, but if such amounts are held by the insurer under an
agreement to pay interest thereon, the interest payments shall be included
in gross income.

Reason: They are considered more as an indemnity rather than as gains or


profits. The contract insurance is a contract of indemnity.

Exception: Interest payments shall be included in gross income if such


amount is held by the insurer under the agreement to pay interest thereon.
However, proceeds of life insurance where the beneficiary is revocable is
subject to estate tax. The exclusion from income taxation applies regardless
of who the beneficiary is, whether a family member, or other individual,
corporation or partnership.

Case: El Oriente v. Posadas, 56 Phil. 147

“Exclusion applies to group insurance, death benefits under the Workmen’s


Compensation Insurance or under health or accident insurance contract
having the characteristics of life insurance proceeds by reason of death.”

Proceeds of life insurance

Transfer of insurance contract – amount excludible should only be the


amount or value of actual consideration paid and the premiums paid later by
the transferee.

Where the consideration and premiums paid exceed the proceeds, no


amount is includible in the gross income of the transferee.

Other tax implications of life insurance proceeds:

A. Included in the gross estate:


Third person is revocably designated as beneficiary; Estate, executor or
administrator is designated as beneficiary, revocable or irrevocable

B. Excluded from the gross estate: (2007 Bar)


Third person is irrevocably designated as beneficiary; Proceeds of group
insurance

2. Amount received by insured as return of premium. – The amount


received by the insured, as a return of premium or 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 the
surrender of the contract;

Case: Com. V. Winslow, 113F [Ed.] 418.)

“Cash surrender value of the policy is also non-taxable. Return of premium


means a repayment of a part or the whole of the premiums paid.”
Reason: The return of premium amounts to a return of capital.

Exception: Interest payments shall be included in gross income if such


amount is held by the insurer under the agreement to pay interest thereon.

3. Gifts, bequests, and devises. – The value of property acquired by gift,


bequest, devise, or descent; but the income from such property as well as
gift, etc. of income from any property, in cases of transfers of divided
interest, shall be included in gross income.

Reason: They are subject either to estate tax or donor’s tax.

Gifts are subject to donor’s tax, whereas bequests and devises are subject to
estate tax (1994 Bar). But the income from such property is taxable. If the
taxpayer inherits securities, the value of such securities does not constitute
income but the dividends and interest paid on such securities are taxable.
Principal paid under a marriage settlement and alimony or allowance based
on separation agreement are considered as gifts.

4. Compensation for injuries or sickness – Amounts received through


accident or health insurance or under Workmen’s Compensation Act, as
compensation for personal injuries or sickness, plus the amount of any
damages received whether by suit or agreement on account of such injuries
or sickness;

Damages recovered are taxable if the amount represents loss of anticipated


profits; not taxable if it represents a return of capital or investment (BIR
Ruling, September 8, 1954).

If the recovery represents damages for lost profits, it is taxable as ordinary


income (36 T.C. 1173 [1961], Federal Income Taxation, Third Edition, Rose
and Chommie, p. 24). (2005 Bar)

Disability benefits paid under life insurance are also excluded although the
law refers to accidents and health insurance. (Wong v Wing Non, 18TC 205,
December 18, 1949).

Reason: Payment for such, adds nothing to the individual, for the very
concept which sanctions it, prohibits that it shall include a profit. (see
Lawkins vs. Comm., 6 B.T.A. 1032.) In other words, any damage rendered is
compensatory, being payment for the injuries or sickness sustained. The
statutory exemption extends to amounts received as moral damages for
personal injuries which are non-physical in character like alienation of
affection, defamation or libel, and breach of promise to marry.

5. Income exempt under treaty – Income of any kind, to the extent


required by any treaty obligation binding upon the government of the
Philippines;

This is premised on our adherence to the generally accepted principles of


international law. In this category, the following items of income are tax
exempt:

Income derived by the US Consular officials in the Philippines in connection


with such consular service (USPI Consular Convention).

Income exempt under tax treaty with foreign countries.

6. Retirement benefits, pensions, gratuities, etc., -

a. Retirement benefit received by officials and employees of private firms,


individuals or corporations.

Requisites for exclusions:

1. Reasonable private plan maintained by employer duly approved by the


BIR for exclusive benefit of the members-employees;
2. Retiring official or employee who has rendered at least 10 years of
service;
3. At least 50 years of age at the time of the retirement;
4. The benefit of exclusion shall be availed of only once (Santos v. Servier
Philippines, Inc., 572 SCRA 487).

b. Retirement benefits paid to employees who have reached the age of 60


or more but not beyond 65 years with at least five (5) years of credited
services.

c. Separation benefits due to death, sickness or other physical disability or


for any cause beyond the control of the said official or employee.
d. Social Security benefits, retirement gratuities received by resident or
non-resident citizens or resident aliens from foreign government agencies
and other private or public institutions. (2007 Bar)

Pensions received by retirees from foreign sources (BIR Ruling 72-87, March
12, 1987).

e. Benefits received from US Veterans Administration (R.A. No. 360) by


veterans residing in the Philippines.

f. Payment of benefits under the Social Security System in accordance with


the provisions of R.A. No. 8282.

g. Benefits received from the GSIS under R.A. No. 8291 including
retirement guaranty.

7. Miscellaneous Items -

a. Income received by foreign governments from their investments


in the Philippines.

Reason: To lessen the burden of foreign loans inasmuch as the interest of


these loans are, by contractual arrangement, borne by the domestic
borrowers. Foreign governments include financing institutions owned,
controlled and financed by them and international or regional financing
institutions established by governments.

b. Income derived by the Government of the Philippines or any


political subdivision from any public utility or from the exercise of
any essential governmental function (e.g. income derived by a
municipality from the operation of a market or an electric power
plant) – This is in recognition of the principle of exemption from taxation of
government agencies or entities.

c. Prizes and awards under the following conditions (2000 Bar):

 Received in recognition of religious, charitable, scientific, educational,


artistic, literary or civic achievement.
 Recipient was selected without any action on his part to enter the
contest or proceeding.
 Recipient is not required to render substantial future services as a
condition to receiving the prize or award.
d. Prizes and awards in sports competition granted to athletes whether held
in the Philippines or abroad and sanctioned by their national sports
associations (1996, 2011 Bar).

e. 13th Month Pay and Other Benefits.— Gross benefits received by


officials and employees of public and private entities: Provided, however,
That the total exclusion under this subparagraph shall not exceed Ninety
thousand pesos (₱90,000

* Other benefits such as productivity incentives and Christmas bonus. (As


amended by R.A. 10963 (TRAIN LAW)

f. GSIS, SSS, Medicare and other contributions.

g. Gains from the sale or exchange of retirement of bonds, debentures, or


other certificate of indebtedness with a maturity or more than five (5) years.

h. Gains from redemption of shares in Mutual Fund Company.

Tax-exempt income under special laws/agreements

i. Prizes received in charity, horse racing, sweepstakes from the PCSO


(R.A. No. 1169)

ii. Salaries and stipend in dollars received by non-Filipino citizens serving


as staff of:

 International Rice Research Institute (R.A. No. 2707);


 Ford Foundation Grants (R.A. No. 3538);
 Agricultural Department of the Southeast Asian Fisheries Development
Center (SEAFDEC) (P.D. No. 246);
 Population Council of New York (P.D. No. 246).

iii. Income from bonds and securities: For sale in the international market
(P.D. No. 81); Issue by EPZA (P.D. No. 66)

iv. Income derived from the installment sales of houses to their


employees and workers or to low-income groups in housing projects or
income derived from rentals thereof (P.D. Nos. 745 and 1217 – Housing
Program of the government).
v. Officers and staff of Asian Development Bank (ADB), experts and
consultants performing missions for the Bank shall be exempt from
Philippine Income Tax. (Art. XII, Sec. 45, Government Agreement with ADB)

vi. Awards given by the Ramon Magsaysay Award Foundation (RMAF) are
exempt from the payment of income tax. (R.A. No. 2062)