Gross Income: INCLUSIONS and EXCLUSIONS

Gross income The income required to be reported less income which is by statutory definition or otherwise exempt from the tax imposed by law. Gross income for the Philippine income taxation, statutory definition Except when otherwise excluded, gross income means all income derived from whatever sources, including (but not limited to) the following items 1. Compensation for services in whatever form paid, including, but not limited to fees, salaries, wages, commission, and other similar items; 2. Gross income derived from the conduct of trade or business or the exercise of a profession; 3. Gains derived from dealings in property; 4. Interests; 5. Royalties; 6. Dividend; 7. Annuities; 8. Prizes and winnings; 9. Pensions; 10.Partners distributive share from the net income of the general professional partnership

Gross income presumed to include all income. The NIRC of gross income is presumed to include all receipt of money or property UNLESS excluded by a specific provision of law or doctrine. REASON: the lifeblood theory The definition of gross income is broad enough to include all passive incomes subject to specific rates or final taxes. However, since these passive incomes are already subject to different rates and taxed finally at source, they are no longer included in the computation of gross income, which determines taxable income Withheld taxes part of gross income unless specifically allowed to be deductible

Withholding taxes on compensation income are not deductible by individuals deriving income solely form compensation because they are not allowed to deduct taxes. The reverse is true with respect to individuals who derive income from business, trade or exercise of a profession or corporation which are allowed to deduct certain taxes. Gross receipt 1

The term includes all income whether actually or constructively received. Thus, the amount withheld is considered as part of gross receipts because the amount is remitted for the benefit of the taxpayer in satisfaction of its tax obligations.

NOTES AND COMMENTS: A. Actual receipt of interest income is not limited to physical receipt. Actual receipt may be physical receipt or constructive receipt. When the depository bank withholds the final tax to pay the tax liability of the lending bank, there is prior to withhold a constructive received by the lending bank of the amount withheld. From the amount constructively received by the lending bank, the depository bank deducts the final withholding tax and remits it to the government for the account of lending bank. Thus, the interest income actually received by the lending bank, both physically and constructively, is the net receipt plus the amount withheld as final tax. The concept of a withholding tax, on income obviously and necessarily implies that the amount of tax withheld comes from the income earned by the taxpayer. Since the amount of tax withheld constitutes forms part of the taxpayers gross receipt. Goodwill The reputation or good name of an establishment Taxable goodwill Goodwill created by an incorporator in the course of the unpaid price of shares subscribed by said incorporator, is profit subject to income taxes Option The right to acquire property at a low price.

Concept of income from whatever source derived All income not expressly excluded or exempted from the class of taxable income, irrespective of the voluntary or involuntary action of the taxpayer in producing the income 1. Examples of income from whatever source derived which are considered as taxable income: a. Gains arising from exportation of property which would be considered as income from dealings in property b. Gains from gambling c. Gains from embezzlement or stealing money.

2. Gains, money or otherwise derived from all other illegal sources fall within the ambit of income derived from whatever sources, subject to income tax. Examples Extortion, illegal gambling, bribery, graft and corruption, kidnapping, racketeering, etc. REASON: these funds are taxable because title is merely voidable. 2

a. Even though the law imposes a legal obligation upon an embezzler or thief to repay the funds, the embezzled or stolen money is gross income. REASON the embezzler or thief has no intention of repaying the money. This is known as the James Doctrine. This has overruled the Wilcox doctrine. b. Proceeds of stolen or embezzled property taxable income. REASON the money or other proceeds of the sale or disposition of stolen property is subject to income tax because the proceeds are received under a claim of right Under the Wilcox doctrine, which is not followed in the Philippines, the proceeds of swindling or embezzlement, theft or robbery, not income subject to tax. Reason: a. A taxable gain is conditioned upon 1. The presence of claim of right to the alleged gain and 2. The presence of a definite unconditional obligation to replay or return that which would otherwise constitute a gain b. The swindler, embezzler, theft or robber has an unqualified duty and obligation to repay the money. The debtor-creditor relationship is defined and unconditional. All right, title and interest in money rested with the victim. c. To collect a tax would give the government an unjustified preference as to the part of the money which rightfully and completely belongs to the victim. The embezzlers title is void The above doctrine, which is not followed in the Philippines, is applicable only in those instances where money or near money like checks are taken. It does not involve the money or other proceeds from embezzled or stolen personal or other property. For the purposes of Philippine income taxation, income taxation is taxable whether the source is legal or illegal. The Wilcox doctrine does not find application in Philippines jurisdiction because gross income means all income derived from whatever source. Money received under solution indebiti is income subject to tax. Income paid or received through mistake may be considered as income from whatever source derived irrespective of the voluntary or involuntary action of the taxpayer in producing the income. Furthermore, under the claim of right doctrine, the recipient, even if he has the obligation to return the same, has a voidable title to the money received through mistake.

Specific sources of gross income Rules for recognition of gain or loss from the sale or retirement of corporate bonds. a. If bonds are issued by a corporation at their face value 3

If bonds are issued by a corporation at their face value, the corporation realizes no gain or loss If thereafter the corporation purchases and retires any such bonds at a price in excess of the issuing price or face value, the excess of the purchase price over the issuing price of face value is a deductible expense for the taxable year If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price or face value, the excess of the issuing price or face value over the purchase price is gain or income for the taxable year.

b. If bonds are issued by a corporation at a premium If bonds are issued by a corporation at a premium, the net amount of such premium is gain or income which should be prorated or amortized over the life of the bonds. If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price minus any amount of premium already returned as income, the excess of the purchase price over the issuing price minus any amount of premium already returned as income is a deductible expense for the taxable year. If, however, the corporation purchases and retires any such bonds at a price less than the issuing price minus any amount of premium already returned as income, the excess of the issuing price minus any amount of premium already returned as income over the purchase price is gain or income for the taxable year. c. If bonds are issued by a corporation at a discount If the bonds are issued by the corporation at a discount the net amount of such discount is deductible and should be prorated or amortized over the life of he bonds. If thereafter the corporation purchases and retires any of such bonds at a price in excess of the issuing price plus any amount of discount already deducted, the excess of the purchase price over the issuing price plus any amount of discount already deducted is a deductible expense for the taxable year. If, however, the corporation purchases and retires any of such bonds at a price less than the issuing price plus any amount of discount already deducted, the excess of the issuing price plus any amount of discount already deducted over the purchase price is gain or income for the taxable year.

Exclusions from Gross Income

Definition Income received or earned but is not taxable because it is exempted by law or treaty. Rationale for the exclusion Some receipts are excluded from gross income because they are not income. Even if they are by definition income, the exclusions are not subject to tax because of policy considerations such as to avoid the effects of double taxation, or to provide incentives for certain socially desirable activities. Taxpayers who may avail of the exclusions 4

All kinds of taxpayers, individual, estates and trusts and corporate, whether citizens, aliens, whether residents or non-residents may avail of exclusions. Classification of Exclusion Temporary Exclusion- Exclusions from gross income which result from a timing of recognition of income. These are income which are deferred recognition for income tax purposes. Substantive exclusion- Receipts which are not considered as income. They shall not be included in the income tax return and therefore are exempt from income taxation.

Exclusions from Gross income VS Deductions from Gross Income Exclusion Refers to the a flow of wealth to the taxpayer which are not treated as part of gross income for purposes of computing the taxpayers taxable income because it is exempted by the fundamental law by statutes and it does not come within the definition of income. Deduction These are amounts which the law allows to be subtracted from gross income in order to arrive at net income. Exclusions to Gross Income under the National Internal Revenue Code of 1997 (LAGCIRM) 1. L- Life Insurance proceeds 2. A- Amount received by insured as return of premium 3. G- Gifts, bequest and devises 4. C- Compensation for injuries or sickness 5. I- Income exempt under treaty 6. R- Retirement benefits, pensions, gratuities 7. M- Miscellaneous Items a. Income derived by foreign government b. Income derived by the government or its political subdivisions c. Prizes and awards d. Prizes and awards in sports competitions e. 13th month pay and other benefits f. GSIS, SSS, Medicare and other contributions g. Gains from the sale of bonds, debentures or other certificate of indebtedness 5

h. Gains from redemption of shares in mutual fund.

LIFE INSURANCE PROCEEDS

Life insurance is insurance on human life and insurance appertaining thereto or connected therewith. An insurance upon life may be payable on the death of the person, or on his surviving a specified period, or otherwise contingently on the continuance or cessation of life. Conditions proceeds for exclusion from gross income of life insurance

a. The proceeds of life insurance policies b. paid to the heirs or beneficiaries c. upon the death of the insured, d. whether in a single sum or otherwise Reasons for exclusion a. Proceeds of life insurance are excluded from gross income because they partake more of indemnity or compensation rather than gain to the recipient b. Life insurance inheritance. proceeds serve the same purpose as nontaxable

Interest paid on life insurance proceeds when included as part of the gross income and not an inclusion. Such amounts of life insurance proceeds are held by the insurer under the agreement to pay interest thereon, the interest payments shall be included in the in gross income. Interests do not form part of the indemnity but earnings or income from the use of capital which are taxable. Instances where the life insurance proceeds are not excluded from gross income a. Where the life insurance policy is used to secure a money obligation b. Where the life insurance policy was transferred for a valuable consideration c. The recipient of the insurance proceeds is a business partner of the deceased and the insurance was taken to compensate the partner beneficiary for any loss income that may result as the death of the insured partner d. The recipient of the insurance proceeds is a partnership in which the insured is a partner and the insurance was taken to compensate the partnership for any loss in income that may result from the dissolution of the partnership caused by the death of the insured partner e. The recipient of the life insurance proceeds is a corporation in which the insured was an employee or officer.

AMOUNT RECEIVED BY INSURED AS RETURN OF PREMIUM

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Conditions for amounts received by insured as return of premiums to be excluded from gross income a. The amount received by the insured b. as a return of premiums paid by him c. under life insurance, endowment or annuity contracts d. either 1. during the term 2. at the maturity of the term mentioned in the contract 3. upon surrender of the contract

Reason for the exclusion The amounts returned are not income but return of capital. They represent earnings which were previously taxed Interest or earnings of premiums returned included in gross income The interest or earnings are income, not return of capital

Endowment The insurer agrees to pay a sum certain to the insured if he outlives a designated period. If he dies before that date, the proceeds are to be paid to the designated beneficiary Tax treatment of proceeds received under endowment policies a. if the insured dies, and the beneficiary receives the life insurance proceeds, these are not taxable income because they are excluded from gross income b. if the insured does not die and survives the designated period, the amount pertaining to the premiums he paid are excluded from gross income, but the excess shall be considered part of his gross income.

ANNUITY
The aleatory contract of life annuity binds the debtor to pay an annual pension or income during the life of one or more determinate persons in consideration of a capital consisting of money or other property whose ownership is transferred to him at once with the burden of the income.

GIFTS, BEQUESTS, AND DEVISES

Property received as a gift or received under a will or testament, or through legal succession, is exempt from income tax although the income therefrom or income derived from its investment, sale or otherwise is not. An amount of principal paid under a marriage settlement is a gift. Neither alimony nor an allowance based on separation agreement is taxable income. 7

Reason for exclusion The property is subject to donors or estates taxes as the case may be. Furthermore, there is no income.

Income from property acquired by gift, bequest, devise or descent included in gross income a. Income from such property acquired by gift, bequest, devise or descent b. As well as gift, bequest, devise or descent of income from any property, in case of transfers of divided interest shall be included in gross income

Bequest-a gift of personal property transmitted through will Devise- a gift of real property by will Descent- Strictly speaking the intestate transfer of real property to the heirs of a decedent compared with the term distribution which is used in relation to the intestate transfer or personal property to the heirs. Gift- a gift is any transfer not in the ordinary course of business which is not made for full and adequate consideration in money or moneys worth.

Compensation VS Gift a. If the payment is intended to represent payment, whether designated as compensation or otherwise, for services rendered either in the past, present or future, the amount received will be taxable income to the recipient. b. If the payment are made to show goodwill or a mere kindness towards the recipients and are not intended as a recompense for services rendered, then the payments represent gifts and should be exempt.

COMPENSATION FOR INJURIES OR SICKNESS

Amounts received, through accident or health insurance or Workmens Compensation Acts as compensation for personal injuries or sickness plus the amounts of any damages received, whetherby suit or by agreement on account of such injuries or sickness Reason for exclusion of damages They are mere compensation for injuries or sickness suffered and not income. The legal theory of personal injury damages is that the amount received is intended to make the plaintiff whole as before the injury. There is need to exclude the compensation so as to restore the injured party whole as before the injury. To include the compensation for injuries or sickness suffered in gross income would be reducing the restoration of the plaintiff whole as before the injury. 8

Two kinds of compensation that maybe excluded from gross income a) amounts received , through Accident or Health Insurance or Workmens Compensation Acts 1) as compensation for personal injuries or sickness b) amounts of any damages received whether 1) by suit 2) agreement 3) on account of or resulting from such injuries or sickness Compensation paid out of Accident or Health Insurance are absolutely excluded from gross income Although the payments are intended to compensate the insured taxpayer for loss of future income, the exclusion is expressly provided by law and should not be subject to any interpretation. The law does not make any distinction whether the Accident or Health Insurance was secured by the taxpayer or his employer. Thus, whatever amounts are received are excluded from gross income.

Compensation paid out of Workmens Compensation Acts are absolutely excluded from gross income There are instances where the employer is required by labor laws to compensate the employer for work-related personal injuries. Although the payments are intended in part to compensate for loss of future income, the exclusion is expressly provided by law and should not be subject to any interpretation. Thus, whatever amounts that are received are excluded from gross income. Kinds of damages arising from personal injuries and sickness, that maybe excluded from gross compensation 1) 2) 3) 4) Actual or compensatory Moral Nominal Temperate or moderate

Damages arising from libel or slander, breach of contracts and others that do not result from personal injuries or sickness are not excluded from gross income and taxable Such kinds of damages are separate from damages received on account of sickness and personal injuries. Actual or compensatory damages This is the adequate compensation for pecuniary loss suffered as may be duly proved during the proceedings. The actual or compensatory damages that may be recovered should be that awarded by the court or by agreement between the parties as a consequence of the sickness or physical injuries suffered by the taxpayer. Extent of actual or compensatory damages that maybe received on account of personal injuries or sickness a. indemnification for damages shall comprehend not only the value of the loss suffered but also that of the profits which the oblige failed to obtain. b. Damages may be recovered: 9

1) For loss or impairment or earning capacity in cases of temporary or permanent personal injury 2) For injury to the plaintiffs business standing or commercial credit c. In instances of personal injuries or sickness , attorneys fees and expenses of litigation other than judicial costs may be recovered, even in the absence of stipulation, in the following cases: 1) When exemplary damage are awarded 2) When the defendants act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest 8) In actions for indemnity under workmens compensation and employers liability laws 9) In a separate civil action to recover civil liability arising from crime 10) When double judicial costs are awarded 11) In any other case where the court deems it just and equitable that attorneys fees and expenses of litigation should be recovered.

INCOME EXEMPT UNDER TREATY

Income exempt under treaty excluded from gross income Income of any kind to the extent required by any treaty obligation binding upon the Government of the Philippines. Although this is income, it is included from gross income by reasons of public policy. Reason for the exclusion Public policy recognizes s the principle of reciprocity and comity among nations as the reasons behind the exclusion. Reciprocity A principle in international law that refers to the practice among sovereign nations of giving concessions on the basis of similar concessions accorded them by other nations. It is premised upon a prior grant of a privilege, in short a quid pro quo. Comity Comity is the respect accorded by sovereign nations because they are equal. Since, the power of taxation is an exercise of sovereignty, and then it is not exercised upon other equal sovereign nations, as well as courtesies of the port exempting their importation of personal and household effects. Retirement Benefits, Gratuities, Pensions Retirement benefits, gratuities, pensions that excluded from gross income a. Retirement benefits received under the Republic Act No. 7641 b. Retirement received from reasonable compliance with certain conditions private benefit plan after

c. Amounts received for beyond control separation d. Foreign social security, retirement gratuities, pensions e. USVA benefits f. SSS benefits g. GSIS benefits 10

Conditions for excluding retirement benefits from gross income a. Retirement benefits 1. Received under Republic Act No. 7641 and those 2. Received by officials and employees of private firms, whether, individual or corporate, in accordance with a reasonable private benefit plan maintained by the employer. Provided that, b. Retiring official or employee has been 1. In the service of the same employer for at least ten years 2. Not less than 50 years of age at time of retirement 3. The benefits granted under this subparagraph shall be availed of by an official or employee only once

Kinds of Retirement 1. Optional Retirement under Republic Act No. 7641 a. In the absence of a retirement plan or agreement providing for retirement benefits of employees in the establishment, b. an employee upon reaching the age of 60 years or more, c. who has served at least 5 years in the said establishment, d. may retire and shall be entitled to retirement pay equivalent to at least one-half month salary for every year of service, a fraction of at least 6 months being considered as one whole year 2. Mandatory Retirement under Republic Act No. 7641 a. In the absence of a retirement plan or agreement providing retirement benefits of employees in the establishment, fir

b. an employee upon reaching the age of beyond 65 years which is hereby declared the compulsory retirement age, c. who has served at least 5 years in the said establishment, d. may retire and shall be entitled to retirement pay equivalent to at least one-half month salary for every year of service, a fraction of at least 6 months being considered as one whole year. Requisites for the exclusion of retirement benefits under Republic Act No. 7641 a. Retirement benefits received under Republic Act No. 7641 provided that the; b. retiring official or employee has been i. in the service of the same employer for at least 10 years and is ii. not less than 50 years of age at time of retirement iii. the benefits granted under this subparagraph shall be availed of by an official or employee only once.

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Conditions for the availment of the exclusion from gross income of the retirement benefits paid from an employer maintained reasonable private retirement plan a. retirement benefits received by officials and employees of private firms whether individual or corporate b. in accordance with reasonable private benefit plan maintained by the employer, provided that c. retiring employee has been i. in the service of same employer for at least 10 years ii. not less than 50 years of age at time of retirement iii. the benefits granted under this subparagraph shall be availed of by an official or employee only once. Reasonable private retirement benefit plan It means: a. a pension, gratuity, stock bonus, or profit-sharing plan b. maintained by an employer c. for the benefit of some or all of his officials or employees d. where contributions are made by such employer for the officials or employees or both e. for the purpose of distributing to such employees the earnings and principal of the fund is accumulated f. wherein it is provided in said plan that at no time shall any part of the corpus or income of the fund be used for, or be diverted to, any purpose other than for the exclusive benefit of the said officials or employees g. the plan must be approved by and registered with the Bureau of Internal Revenue Amounts received for beyond control separation that are excluded from gross income

Separation pay excluded from gross income a. any amount received by an official, employee or by his heirs b. from the employer c. as a consequence of separation of such official or employee from the service of the employer 1. because of death, sickness or other physical disability 2. for any cause beyond the control of the said official or employee such as a. Retrenchment- it means reduction of personnel b. Redundancy- a position is redundant where it is superfluous, ad is superfluity of a position or 12

positions may be the outcome or a number of factors, such as over hiring of workers c. Cessation or closure of the business- an employer has the right to close entirely totally or partially his business and this would occasion the beyond control separation of his employees Benefits received from foreign government agencies and institutions, public or private that are excluded from gross income Pensions, gratuities from foreign government agencies and institutions, public or private that are excluded from gross income other other

a. The provisions of any existing law to the contrary notwithstanding, social security benefits, retirement gratuities, pensions and other similar benefits i. Received by resident Philippines or aliens or non-resident citizens of the

ii. Who came to reside permanently in the Philippines iii. From foreign government agencies and other institutions, private or public b. Payments of benefits due or to become due to i. Any person residing in the Philippines ii. Under laws of the United States administered by the United States Veterans Administration Gratuity An additional benefit or compensation paid in recompense for previous services rendered or as an inducement to perform additional service. Pension A stated, certain and periodic allowance granted by an employer to an individual, or to his heirs or designees, for previously rendered service.

Benefits under the laws of the United States given to veterans that are excluded from gross income
Excluded from gross income are: Payments due or to become due to any person residing in the Philippines under the laws of the United States administered by the United States Veterans Administration

SSS benefits that are excluded from gross Income

These are benefits derived from or enjoyed under the Social Security System in accordance with the provision of Republic Act No. 8282 such as: a. Monthly pensions The monthly pension is paid by the SSS to a member, for as long as he lives, who has paid at least one hundred twenty (120) monthly contributions prior to the semester of retirement and who: (1) has reached the age of sixty (60) years and is already separated from employment or has ceased to be selfemployed; or (2) has reached the age of sixty-five (65) years. 13

The monthly pension shall be suspended upon the reemployment or resumption of self-employment of a retired member who is less than sixtyfive (65) years old.

b. Dependents pensions Where the SSS monthly pension is payable on account of a members death, permanent total disability or retirement, a dependents pension shall be paid for each dependent child conceived on or before the date of the contingency but not exceeding five (5) beginning with the youngest and without substitution. Where there are legitimate or illegitimate children, the former shall be preferred.

c. Retirement benefits An SSS covered member who is sixty (60) years old at retirement and who does not qualify for pension benefits shall be entitled to a lump sum benefit equal to the total contributions paid by him and on his behalf: Provided, That he is separated from employment and is not continuing payment of contributions to the SSS on his own.

d. Death benefits These are the benefits paid by the SSS, upon the death of a member who has paid at least thirty-six (36) monthly contributions prior to the semester of death, to the secondary beneficiaries in the absence of the primary beneficiaries, or if the member has not paid the required thirty-six (36) monthly contributions, his primary or secondary beneficiaries shall be entitled to a lump sum benefit equivalent to the monthly pension times the number of monthly contributions paid to the SSS or twelve (12) times the monthly pension.

e. Permanent disability benefits Upon the permanent total disability of an SSS member who has paid at least thirty-six (36) monthly contributions prior to the semester of disability, he shall be entitled to the monthly pension: Provided, That if he has not paid the required thirty-six (36) monthly contributions, he shall be entitled to a lump sum benefit equivalent to the monthly pension times the number of monthly contributions paid to the SSS or twelve (12) times the monthly pension, whichever is higher. A member who (1) has received a lump sum benefit; and (2) is reemployed or has resumed self-employment not earlier than one (1) year from the date of his disability shall again be subject to compulsory coverage and shall be considered a new member.

Disabilities deemed as permanent total: 1. 2. 3. 4. 5. Complete loss of sight of both eyes; Loss of two limbs at or above the ankle or wrists; Permanent complete paralysis of two limbs; Brain injury resulting to incurable imbecility or insanity; and Such cases as determined and approved by the SSS 14

f. Funeral benefits A funeral grant equivalent to twelve thousand pesos (P12,000.00) paid, in cash or in kind, to help defray the cost of funeral expenses upon the death of an SSS member, including permanently totally disabled member or retiree.

g. Sickness benefits The SSS benefit given to a member who has paid at least three (3) monthly contributions in the twelve-month period immediately preceding the semester of sickness or injury and is confined therefore for more than three (3) days in a hospital or elsewhere with the approval of the SSS, for each day of compensable confinement or a fraction thereof, be paid by his employer, or the SSS, if such person is unemployed or self-employed, a daily sickness benefit equivalent to ninety percent (90%) of his average daily salary credit after compliance with certain conditions.

h. Maternity leave benefits The entitlement of a female SSS member who has paid at least three (3) monthly contributions in the twelve-month period immediately preceding the semester of her childbirth or miscarriage equivalent to one hundred percent (100%) of her average daily salary credit for sixty (60) days or seventy-eight (78) days in case of caesarian delivery, subject to certain conditions.

GSIS benefits that are excluded from gross income

Benefits received from the GSIS under Republic Act No. 8291, including retirement gratuity received by the government officials and employees such as: a. Basic monthly pension The benefit that is given to a GSIS member who has rendered at least fifteen (15) years of service b. Separation benefits This is the GSIS benefit that is given to the member who resigns or is separated from the service after he has rendered at least three (3) years of service but less than fifteen (15) years. It is a cash payment equivalent to one hundred percent (100%) of a GSIS members average monthly compensation for each year of service he paid contributions, payable upon reaching sixty (60) years of age or upon separation, whichever comes later c. Unemployment or involuntary separation benefits These are the unemployment benefits in the form of monthly cash payments equivalent to fifty percent (50%) of the average monthly compensation that paid to a permanent employee who is involuntarily separated from the service due to the abolition of his office or position usually resulting from reorganization: Provided, That he has been paying integrated contributions for at least one (1) year prior to separation.

GSIS retirement benefits that are excluded from gross income. 15

This is the lump sum payment as payable at the time of retirement of a GSIS member plus an old-age pension benefit equal to the basic monthly pension payable monthly for life, starting upon expiration of the five-year (5) guaranteed period covered by the lump sum; or cash payment equivalent to eighteen (18) months of his basic monthly pension plus monthly pension for life payable immediately with no five-year (5) guarantee. Compulsory retirement age for GSIS members Unless the service is extended by appropriate authorities, retirement shall be compulsory for an employee at sixty-five (65) years of age with at least fifteen (15) years of service: Provided, That if he has less than fifteen (15) years of service, he may be allowed to continue in the service in accordance with existing civil service rules and regulations. General conditions of retirement A GSIS member who retires from the service shall be entitled to the retirement benefits if: a. he has rendered at least fifteen (15) years of service; b. he is not below 60 years of age at the time of resignation or separation; c. he is not receiving a monthly benefit from permanent total disability. d. Permanent disability benefits 1. Permanent disability benefits 2. Permanent partial disability benefits such as complete and partial loss of: a. Any finger b. Any toe c. One arm d. One hand e. One foot f. One leg g. One or both ears h. Hearing of one or both ears i. j. Sight of one eye Such as other cases as may be determined by the GSIS

e. Temporary total disability benefits f. Survivorship benefits g. Funeral benefits h. Dividends

MISCELLANEOUS ITEMS EXCLUDED FROM GROSS INCOME

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Income Derived by foreign governments that are excluded from gross income Income derived from investments in the Philippines in loans, stocks, bonds or other domestic securities, or from interest on their deposits in the Philippines by a. Foreign government b. Financing institutions owned, controlled or enjoying refinancing from foreign government c. International or regional financing institutions established by foreign government

Income derived by the Government or its political subdivision that are excluded from gross income 1. These are income derived a. From any public utility b. From the exercise of any essential governmental function accruing to the government of the Philippines or to any political subdivision thereof. 2. Income derived from public utility Public Utility It is a business or service engaged in supplying the public with some commodity or service of the public consequence

Prizes and awards excluded from gross income Requisites to be met before prizes and awards are excluded from gross income. Prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achievement but only if: a. The recipient was selected without any action on his part to enter the contest or proceeding; and b. The recipient is not required to render substantial future services as a condition to receiving the prize or award. Payments or benefits received by a student of an educational institution. Students of educational institutions are sometimes the recipient of certain benefits from the educational institution which are usually referred to as scholarships. For tax purposes, these benefits may be classified as: a. Compensation for services; b. A gift; c. A scholarship; d. A prize or award.

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Payments or benefits received by as student of an educational institution that may be considered as compensation for services hence included as part of compensation income. Where the payments or benefits are received as compensation for services (past or present) rendered by the student, the payments or benefits are considered as income subject to tax. Among such benefits are reduction or full exemption from school fees. Scholarship A scholarship is an amount paid or allowed to, or for the benefit of an individual to aid such individual in the pursuit of study or research. It includes tuition and other school fees, books, supplies, and equipment, as well any stipends, free board and lodging, transportation, and other expenses that are directly related to finishing an academic degree in an educational institution. Scholarship is considered as compensation the value where it is in payment of past or future services. Where a scholar is required to render future services to the grantor for a certain period after completion of the degree, in exchange for the scholarship, then the value of the same is considered as compensation income on the part of the recipient. If there is a penalty clause that requires the recipient to reimburse certain amounts if he does not render any service or where he is not able to render the full service, then the reimbursement does not form part of the gross income of the grantor because it is considered as merely a payment of a loan. Scholarship considered as a prize or award excluded from gross income In order for the scholarship to be considered as a prize or award mad primarily in recognition of religious, scientific, educational, artistic, or literary achievement. a. The scholar must have been selected without any action on his part to enter the contest or proceeding; and b. The scholar is not required to render substantial future services as a condition to receiving the prize or award. Non-compliance with the above conditions would bar exclusion of the value of the scholarship given as a prize or award from gross income. It would therefore be taxable as compensation income. Prizes and awards in sports competition exclude from gross income Requisites for the exclusion from gross income of prizes and awards in sports competition: a. All prizes and awards b. Granted to athletes c. In local and international sports tournaments and competitions d. Whether held in the Philippines or abroad, and e. Sanctioned by their national sports associations Tax exemptions to athletes covered by special law. All prizes and awards granted to athletes in local and international sports tournaments and competitions held in the Philippines or abroad and sanctioned by their respective national sports associations shall be exempt 18

from income tax: Provided, That such prizes and awards given to said athletes shall be deductible in full from the gross income of the donor: Provided, further, That the donors of such prizes and awards shall be exempt from the payment of donors tax.

National sports association. Those sports associations duly accredited by the Philippine Olympic Committee.

13th month pay and other benefits are excluded from gross income
Requisites for the 13th month pay and other benefits excluded from gross income Gross benefits a. Received by officials and employees of 1. Public and private entities: Provided, however, That the total exclusion under this subparagraph b. Shall not exceed Thirty thousand pesos (P30,000) c. Which shall cover: 1. Benefits received by officials and employees of the national and local government pursuant to R.A. 6686; 2. Benefits received by employees pursuant to P.D. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; 3. Benefits received by officials and employees not covered by P.D. 851, as amended by Memorandum Order No. 28, dated August 13, 1986; 4. Other benefits such as productivity incentives and Christmas bonus. Benefits received by officials and employees of the national government pursuant to R.A. 6686 that are excluded from gross income. R.A. 6686 as amended by Rep. Act No. 8441,g grants to all officials and employees of the national government who have rendered at least four months of service from January 1 to October 31 of each year and who are employed in the government service as of October 30 of the same year a Christmas bonus equivalent to one month basic salary and additional cash gift of five thousand pesos (P5,000). Officials and employees of the local government units shall be entitled to the same bonus and cash gift. However, barangay chairmen shall be entitled only to the P5,000 cash gift. Benefits received by employees pursuant to P.D.851 as amended by Memorandum Order no.28, dated August 13, 1986 are excluded gross income Memorandum Order No. 28, dated August 13,1986 has removed the salary ceiling. Thus, all rank and file employees are now entitled to a 13th month pay regardless of the amount of basic salary that they receive in a month if their employers are not otherwise exempted from the application of P.D. No. 851. 19

Benefits received by officials and employees not covered by PD No. 851 are excluded from gross income. Productivity incentives that are excluded from gross income. Productivity incentive bonuses that are given to employees for the purpose of encouraging them to become more efficient are excluded fro gross income

Christmas bonus that are excluded from gross income This refers to Christmas bonuses that are not covered by the exclusions of being received ubder PD 851. Secretary of Finance may increase the ceiling of P30000. The ceiling of P30000 a. May be increased b. Through rules and regulations c. Issued by the Secretary of Finance. 1. Upon recommendation of the Commissioner of Internal Revenue d. After considering among others the effect on the same of the inflation rate at the end of the taxable year. GSIS, SSS Medicare and Other Contributions that are excluded from gross income. Gains from the Sale of bonds, debentures, or other certificates of indebtedness that are excluded from gross income Bonds Bonds are usually very long term notes often maturing in 30-40 years Debentures Any instrument which either creates or agrees to create a debt in favor of one person or corporation.

Gains from redemption of shares in mutual fund are excluded from gross income Gains realized by the investor upon redemption of shares in mutual fund company is excluded from gross income

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