EXCLUSIONS AND EXEMPTIONS

REVIEW NOTES

What are Exclusions?

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:

• 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.

• Amount Received y 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.

Notes:

• The excess of the proceeds received over the premiums paid is included in gross income.

• Participating dividends distributed to life insurance policy holders are actually a return of
overpaid premiums. They are therefore excluded from gross income of the insured.
• Gifts, Bequests, and Devices

The value of property acquired by gift, bequest, devise or descent areexempt from income
taxation.

Note: The income from the lease, sale, exchange, investment, or other disposition of such
property shall be subject to income tax.

• Compensation for Injury or Sickness

• Amounts received, through accident or health insurance, or under Workmen’s

Compensation Acts, as compensation for personal injuries or sickness; plus

• The amounts of any damages received, whether by suit or agreement, on account of

such injuries or sickness.

• 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 of

correction for the public good.

• 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.

• 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:

• 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
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:
• There must be a reasonable private
benefit plan maintained by the
employer;
• The retiring official or employee has
been in the service of the same
employer for at least 10 years;
• The retiring official or employee is
not less than 50 years of age at the
time of his retirement;
• The benefits of exemption granted
shall be availed of by an official or
employee only once.

• 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:

• Death;

• Sickness;

• Other physical disability; or

• For any cause beyond the control of the said official or employee.
 Note: Separation pay due to the abovementioned causes are exempt from income tax
regardless of age or length of service of the employee.

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.

• 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.

• 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.

• Benefits received from or enjoyed under the Social Security System (SSS) inaccordance
with the provisions of Republic Act 8282.

• Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity
received by government officials and employees.

• Maternity benefits advanced by the employer to the employee are excluded from gross
income, and therefore exempt from withholding tax.

• Miscellaneous Items

• Income derived by foreign governments, financing institutions owned or controlled by

foreign governments, and international or regional financial institutions established by
foreign governments from investmentsor deposits in the Philippines.

• Income Derived by the Philippine Government or its Political Subdivisions from the
exercise of any governmental function.

• Prizes and awards primarily in recognition of religious, charitable, scientific, educational,

artistic, literary, or civic achievement but only if:

• The recipient was selected without any action on his part to enter the contest or
proceeding; and
 • The recipient is not required to render substantial future services as a condition to
receiving the prize or a ward.

• 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.

• 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:

• The 13th month pay, and other incentives such as productivity incentives and
Christmas bonus; and

• 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).

• Compulsory or mandatory contributions of employees to GSIS, SSS, Medicare (PHIC), and

PAGIBIG, and union dues of individuals.

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.

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

• Gains from Redemption of Shares in Mutual Fund

• Income of non-residents from transactions with Domestic Depository Banks and OBUs
Under the Expanded Foreign Currency Deposit System

• Personal Equity and Retirement Account (“PERA”)

PERA refers to the voluntary retirement account of an individual (called a “Contributor”)

established from his own Qualified PERA Contributions and/or Qualified Employer
Contributions, for the purpose of being invested solely in qualified or eligible PERA
investment products.

• The Qualified Employer’s Contribution shall be excluded from the employee’s taxable
gross income.

• Investment income of a Contributor earned from the investments of his PERA Assets
shall be exempt from income taxes, provided:

• That each specific investment product is approved by the concerned regulatory

authority; and

• That non-income taxes, if applicable, relating to the investment income, shall be

imposed. Such taxes shall include (a) percentage taxes; (b) VAT; (c) stock
transaction tax under Section 127 (A) and (B) of the Tax Code; and (d)
documentary stamp tax.

3) Qualified PERA Distributions shall be excluded from gross income if:

(a) After the Contributor and/or his employer has made the Qualified PERA
Contributions and/or Qualified Employer’s Contributions for at least five (5) years
(which need not be consecutively made), and after the Contributor reaches the age
of fifty-five (55); or

(b) Upon death of the Contributor, irrespective of the Contributor’s age or the number
of yearly contributions made at the time of his death.

4) Early Withdrawals in the following circumstances shall be excluded from gross income:

(a) Withdrawal of PERA Assets from the Administrator by reason of the suspension or
revocation of the accreditation of the Administrator , provided that the entire PERA
Assets are transferred to another Administrator within two (2) working days from
receipt of the Contributor’s advice on the choses Administrator;

(b) For payment of accident or illness-related hospitalization in excess of thirty (30)

days; or

(c) For payment to a Contributor who has been subsequently rendered permanently
and totally disabled as defined under the Employees Compensation Law or Social
Security System Law.
 (k) Representation and transportation allowance (“RATA”) granted under Section 34 of the
General Appropriation Act to certain officials and employees of the government from the
rank of Department Secretaries to Division Chiefs are not subject to income tax and to the
withholding tax.

(l) Personnel Economic Relief Allowance (“PERA”) granted to allemployees of the National
Government, Local Government Units, including government owned or controlled
corporations,is considered remuneration/compensation for services performed by the
employees in the performance of official duties, hence, not taxable income.

(m) Capital contributions to corporations/partnerships are not income of the

corporations/partnership, and hence not subject to income tax.

(n) Project-related income from the development of socialized housing sites. The private
sector (ex. Contractors) shall be exempt from payment of project-related income taxes
(including CGT) on a per project basis on income realized from the development housing
sites.

Yield or income from any low-cost or socialized housing-related asset-backed security.

(o) Income from the commercialization of technologies developed by local inventors or

researchers under R.A.No. 7459 during the first ten (ten) years from the date of the first sale.

(p) Proceeds which constitute a fund held in trust by the taxpayer, and which do not redound
to the benefit of the taxpayer.

Exercise 1:Mr. J. Cruz insured his life with his estate as beneficiary. In 20, after Mr. Cruz had paid
P65,000 in premiums, he assigned the policy to Mr. S. Santos for P60,000, and Mr. Santos collected the
total proceeds of P200,000. Mr. Santos, after the assignment, and before Mr. Cruz’s death, paid total
premiums of P80,000.

Compute for the:

• Exempted amount;

• The taxable amount;

Exercise 2
• Compute the tax-exempt and the taxable benefits: A rank and file employee of a
GOCC received the following benefits from his employer:

13th month pay P40,000

14th month pay 40,000
Christmas bonus 22,000
Loyalty award 15,000
Additional Compensation Allowance (ACA) 20,000
Total 13th month and other benefits P137,000
 • The following were received by a resident citizen employee, married, and with four (4)
qualified dependent children for the year 2019:
Salary, net of P20,000 withholding tax; P6,000 SSS contribution
(mandatory SSS contribution is P3,000); P2,000 union dues P600,000
13th month pay 50,000
14th month pay 50,000
How much was the taxable compensation income?

• Based on the following current year data compute the tax-exempt 13th month and other
benefits and contributions of an employee:
Salary, gross of withholding tax P 480,000
Allowance 20,000
Thirteenth month pay 40,000
Christmas bonus 40,000
Reimbursement for transportation expenses 5,000
Payroll deductions:
SSS contributions (mandatory contribution is P4,000) 6,000
Philhealth contributions (mandatory contribution is P3,000) 5,000
Pag- IBIG contributions (mandatory contribution is P2,400) 3,400
Charitable contributions by the employee to the employers 5,000
outreach program
Loan Payment 20,000
•