BM2216
EXCLUSIONS TO GROSS INCOME
Nature of Exemption from Taxation (Tabag, 2022)
Sec. 32(B) of the Tax Code states that exclusions from the gross income refer to the flow of wealth to the
taxpayers which are not considered part of gross income for purposes of computing the taxpayer's taxable
income due to the following:
1. It is exempted by the fundamental law or by statute.
2. It does not come within the definition of income.
Income exclusion should not be confused with reducing gross income by applying allowable deductions.
Exclusions are not considered in determining gross income. However, deductions are subtracted from the
gross income.
Nature of Exemptions from Taxation
Exemptions from taxation is a grant of immunity to persons or corporations of a particular class from a
tax they are obliged to pay. It is an immunity or privilege that the Government may revoke unless the
exemption is founded on a contract protected from impairment. It is freedom from a financial charge or
burden to which others are subjected. Exemptions are not favored and are construed strictly against the
taxpayer and liberally in favor of the Government.
The fundamental theory is that all taxable property should bear its share in the cost and expense of the
Government. Consequently, the person who claims exemption must be able to justify his claim or right by
a grant expressed in terms "too plain to be mistaken and too categorical to be misinterpreted." If not
expressly mentioned in the law, it must be at least within its purview by clear legislative intent.
Grounds for Granting Tax Exemptions (Tabag, 2022)
The following are the grounds for granting tax exemptions:
1. Based on Contract, Law, or Tax Treaty.
Examples:
Based on Law
Based on Treaty
• Tax exemptions are granted to cooperatives registered under the Cooperative
Development Authority.
• Travel tax exemption as provided for by Presidential Decree (PD) 1183.
• Salaries of officials of the United Nations assigned in the Philippines.
• Citizens of the United States working in consular offices in the Philippines are exempt
from payment of all taxes (national or local, salaries, allowances, fees, or wages).
• Salaries of diplomatic officials and agents.
Income of any kind, to the extent required by treaty obligations binding upon the Government of the
Philippines, shall be exempt from income tax. This exclusion is based on the principle of international
comity.
2. Based on some ground of public policy, such as encouraging direct foreign investments,
encouraging new industries, fostering charitable institutions, and the like.
Examples:
• Tax holidays are granted by Investment Promotion Agencies such as the Bureau of
Investments (BOI) as provided under CREATE Act.
• Tax exemptions are granted to companies incurring heavy losses due to legitimate
business reverses, such as an exemption from minimum corporate income tax (MCIT).
3. Based on reciprocity or to lessen the rigors of international double or multiple taxations.
Tax Treaty under Revenue Memorandum Order (RMO) No. 14-2021
In Revenue Memorandum Order (RMO) No. 14-2021, the Bureau of Internal revenue (BIR) required that
"…the availment of a tax treaty provision must be preceded by an application for a tax treaty relief or a
05 Handout 1
 student.feedback@sti.edu
*Property of STI
Page 1 of 4
BM2216
Request for Confirmation with its International Tax Affairs Division (ITAD). It is to prevent any erroneous
interpretation and application of the treaty provisions to which the Philippines is a signatory." The
application must be filed and accompanied by supporting documents justifying the relief. Suppose a ruling
for treaty relief was not secured. In that case of denial, RMO 14-2021 only provides that the taxpayer can
appeal within 30 days to the Department of Finance.
Some countries with tax treaties with the Philippines are as follows:
Korea
Australia
Denmark
Austria
Malaysia
Bahrain
Finland
Brazil
Germany
Canada
Hungary
China
Norway
France
Czech Republic
Netherlands
Spain
Italy
India
Indonesia
United Kingdom
United States
Thailand
Poland
Vietnam
Japan
Belgium
Tax Exemption, Tax Amnesty, and Condonations (Tabag, 2022)
Tax exemption refers to a grant of immunity to persons or corporations of a particular class from a tax
that persons and corporations generally within the same State or taxing district are obliged to pay.
A tax amnesty is a general pardon by the State on persons guilty of evasion or violation of a revenue or
tax law. It is absolute forgiveness or waiver by the Government of its right to collect to tax evaders who
wish to relent and are willing to reform are given a chance to do so and therefore become part of the
society with a clean slate (Republic V. Intermediate Appellate Court, 196 SCRA 335). Like a tax exemption,
a tax amnesty is never favored nor presumed in law and is granted by statute. The terms of the amnesty
must be strictly construed against the taxpayer and liberally in favor of the Government. Unlike a tax
exemption, however, a tax amnesty has limited applicability to cover a particular taxing period or
transaction only.
On the other hand, there is tax condonation or remission when the State desists or refrains from exacting,
inflicting, or enforcing something to restore what has already been taken. The condonation of tax liability
is equivalent to a tax exemption. Thus, it should be sustained only when expressed in the law.
Nature of Power to Grant Tax Exemption (Tabag, 2022)
The nature of power to grant tax exemption:
1. National Government. It is inherent in the exercise of the power to tax that the sovereign State is
free to select the subjects of taxation and to grant exemptions. Unless restricted by the
Constitution, the legislative authority to exempt is as broad as its power to tax.
2. Local Governments. Municipal corporations have no inherent power to tax or grant tax exemptions.
But the moment the power to impose a particular tax is given, they can grant exemption unless
forbidden by some Constitution or law provision. The legislature may delegate its power to give tax
exemptions to the same extent that it may exercise the power to exempt.
Items Excluded from the Gross Income (Tabag, 2022)
The following are exclusions from the gross income as provided under Section 32(B) of the Tax Code, as
amended by RR 10963 (TRAIN Law; RR 8-2018):
1. Life Insurance
General Rule: Exempt from tax since it is a mere reimbursement for the loss of life.
Exception: The following shall be taxable:
a. The beneficiary was chosen for valuable consideration.
05 Handout 1
 student.feedback@sti.edu
*Property of STI
Page 2 of 4
BM2216
b. The interest earned on the insurance policy.
2. Return of Premium
The amount received by the insured as a return of premiums, endowment, or annuity contracts,
either during the term or at the maturity of the life insurance contract or upon surrender of the
contract.
Return of Premium
Excess
Exempt
Income
3. Gifts, Bequests, and Devises
The value of property acquired by gift, bequest, devise, or descent, provided that income from such
property shall be included in gross income in cases of transfer of divided interest.
Property inherited or received as a gift
Income of the above properties
Exempt
Taxable
4. Compensation for Injuries or Sickness
Amounts received, through accident or health insurance or under the Workmen's Compensation
Act, 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.
5. Income exempt under Tax Treaty
Income of any kind, to the extent required by any treaty obligation binding upon the Government
of the Philippines, shall be exempt. Only the amount received as compensation for lost income is
taxable.
6. Retirement Benefits, Pensions, Gratuities, etc.
a. Retirement benefits received under Republic Act. No. 7641 and those received by officials and
employees of private firms, whether individual or corporate, by a reasonable private benefit
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;
• At least 50 years of age at the time of his retirement; and
• The benefits granted shall be availed by an official or employee only once.
b. Any amount received by an official or employee as a consequence of the separation from the
service because of:
• Death
• Sickness
• Other physical disability or for any cause beyond the control of the said official or employee
c. 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 permanently
in the Philippines from foreign government agencies and other institutions, private or public.
d. Payments 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 Veterans Administration.
e. Benefits received from or enjoyed under the Social Security System under the provisions of
Republic Act No. 8282.
f. Benefits from the GSIS under Republic Act No. 8291, including retirement gratuity received by
government officials and employees.
7. Miscellaneous Items
a. Income derived from investments in the Philippines in loans, stocks, bonds, or other domestic
securities or interest on deposits in banks in the Philippines by:
• Foreign governments
05 Handout 1
 student.feedback@sti.edu
*Property of STI
Page 3 of 4
BM2216
• Financing institutions owned, controlled, or enjoying refinancing from foreign governments
• International or regional financial institutions established by foreign governments
b. Income derived from any public utility or the exercise of any essential governmental function
accruing to the Government of the Philippines or any political subdivision thereof.
c. Prizes and awards made 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.
• The recipient is not required to render substantial future services as a condition for
receiving the prize or award.
d. All prizes and awards are granted to athletes in local and international sports competitions and
tournaments, whether held in the Philippines or abroad, and sanctioned by their national sports
associations.
e. Gross benefits from 13th-month pay and other benefits received by officials and employees of
public and private entities up to the extent of P90,000.
f. GSIS, SSS, Medicare, Pag-Ibig contributions, and union dues of individuals.
g. Gains realized from the sale or exchange, or retirement of bonds, debentures, or other
certificates of indebtedness with a maturity of more than five (5) years.
h. Gains realized by the investor upon redemption of shares of stock in a mutual fund company.
8. Tax Exempt Income under RA 11494, Bayanihan to Recover as One Act, also known as Bayanihan
Act II
a. Retirement benefits received by officials and employees of private firms, individual or
corporate, from June 5, 2020, to December 31, 2020.
b. COVID-19 Special Risk Allowance is given to public and private health workers. It is an allowance
paid to private and public health workers directly catering to or in contact with COVID-19
patients every month they serve during the State of National Emergency Due to COVID-19, as
Declared by the President.
c. Actual Hazard Duty Pay given to Human Resources for Health (HRH). It is compensation given
to HRH serving in the front line during the State of emergency due to COVID-19.
d. Compensation paid to private and public health workers who have contracted COVID-19 in the
line of duty or died while fighting COVID-19, amounting to:
• One (1) million pesos (P1,000,000) in case of death; or
• One (1) hundred thousand pesos (P100,000) in case of severe or critical sickness; or
• Fifteen thousand pesos (P15,000) in case of mild or moderate disease.
Provided that such an amount was given during the State of national emergency due to COVID19, from February 1, 2020. Further, the compensation herein shall be given to the beneficiaries
no later than three (3) months after the date of confinement or death. Finally, the required
supporting documents are submitted.
For compensation in case of death, the said amount shall not be included as part of the
decedent's gross estate subject to estate tax.
References:
Bureau of Internal Revenue (BIR). (2022). Corporate Recovery and Tax Incentives for Enterprises Act (CREATE).
https://www.bir.gov.ph/index.php/create.html
Bureau of Internal Revenue (BIR). (2022). Tax Reform for Acceleration and Inclusion (TRAIN).
https://www.bir.gov.ph/index.php/train.html
Tabag, E. (2022). CPA reviewer in taxation. EDT Books Publishing.
Tabag, E. (2022). Income taxation. EDT Books Publishing.
05 Handout 1
 student.feedback@sti.edu
*Property of STI
Page 4 of 4