Republic of the Philippines

NUEVA VIZCAYA STATE UNIVERSITY

Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.:IM-TAX 1-2S-2021-2022

College: College of Business Education

Campus : Bayombong Campus

DEGREE BSBA COURSE NO. TAX 1

PROGRAM
SPECIALIZATION Financial COURSE Income Taxation
Management/MM TITLE
YEAR LEVEL 3rd Year TIME FRAME WK NO. 12- IM NO. 06
13

I. UNIT TITLE/CHAPTER TITLE: GROSS INCOME

II. LESSON TITLE:

Lesson 1: Gross Income Definition
Lesson 2: Compensation Income
-Business Income
-Gains derived from dealings in property
-Interest
-Rents
-Royalties
-Dividends
-Annuities
-Prizes and Winnings
-Income from whatever source
Lesson 3: Exclusions from Gross Income

III. LESSON OVERVIEW

This chapter deals with the gross income – its inclusions, exemptions and exclusions.

IV. DESIRED LEARNING OUTCOMES:

1. Define gross income.
2. State the major sources of taxable income.
3. Describe the broad classification of gross compensation income.
4. Describe the concept of income from business and exercise of profession.
5. Compute accurately gross income.
6. List incomes that are exempt or excluded from gross income.

V. LESSON CONTENT

LESSON 1: Gross Income Definition

GROSS INCOME
- Means the pertinent items of income referred to in Sec 32 of the tax code
- It includes all income from whatever source (unless exempt from tax by law) including but
not limited to, the following items:
1. Compensation for services in whatever form paid including fees, salaries, and
wages, commissions, and similar items
2. Gross Income derived from the conduct of trade or business or the exercise of a
profession
3. Gains from dealings in property
4. Interests
5. Rents
6. Royalties
7. Dividends
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8. Annuities
9. Prizes and winnings
10. Pensions
11. Partners’ distributive share from the net income of general professional
partnership

Gross income as discussed in this chapter may appropriately be referred to as gross taxable
income, in the case of a corporation or gross taxable business/professional income, in the case
of an individual taxpayer engaged in trade, business or profession.

Lesson 2: Compensation Income

Gross Compensation Income – means any remuneration for rendering personal services. It
is obtained from an employer-employee relationship between payor and recipient

The basis upon which the remuneration is paid is immaterial in determining whether the
remuneration constitutes compensation. Thus, it may be paid on the basis of piecework, or
percentage of profits and may be paid hourly, daily, weekly, monthly or annually.

There is no determination of compensation until the service is rendered.

Exception: the compensation income including overtime pay, holiday pay, night shift
differential pay, and hazard pay, earned by Minimum Wage Earners (MWE) who has no other
returnable income are non-taxable and not subject to withholding tax on wages

When does an employer-employee relationship exist?

Generally, an employer-employee relationship exists when the person for whom services are
rendered has the right to control and direct the individual who performs the services, not only as
to the result in accomplishing the work but also as to the details and means by which that result is
accomplished

Remuneration for services constitutes compensation even if the relationship of employer and
employee does not exist any longer at the time when payment is made between the person in
whose employ the services had been performed and the individual who performed them.

Compensation income subject to tax is based on gross income less applicable exemptions. No
business and personal expenses are allowed as deductions from gross compensation income

The rule on compensation income applies only to resident citizens, resident aliens and non-resident
citizens and non-resident aliens engaged in business in the Philippines. It does not apply to non-
resident aliens not engaged in business. Neither does it apply to corporations, estate and trusts
because compensation presupposes personal service.

Classification of Gross Compensation Income

1. Basic Salary or Wage

Salary refers to earnings received periodically for a regular work other than manual labor, such as
a monthly salary of an employee

Wages are earnings received usually according to specified intervals of work, as by the hour, day
or week. E.g. carpenter’s daily wage

Backwages are subject to income tax and the withholding tax on wages

2. Honoraria are payments given in recognition for services performed for which established
practice discourages charging a fixed fee. The honorarium of a guest lecturer is an example.

3. Fixed or variable allowances

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In general, fixed or variable transportation, representation, COLA and other allowances that are
received by a public officer or employee or officer or employee of a private entity in addition to the
regular compensation fixed for his position or office, are compensation subject to withholding tax

Any amount paid specifically, either as advances or reimbursements for travelling, representation
and other bona fide ordinary and necessary expenses incurred or reasonably expected to be
incurred by the employee in the performance of his duties are not compensation subject to
withholding tax, if the following conditions are satisfied:

a. It is for ordinary and necessary travelling and representation or entertainment

expenses paid or incurred by the employee in the pursuit of the employee in the pursuit of
the employer’s trade business or profession
b. The employee is required to account/liquidate for the foregoing expenses pursuant to
substantiation requirements of Sec. 34 of the tax code

The excess of actual expenses over advance made shall constitute taxable income if such amount
is not returned to the employer

Latest Rulings on Allowances:

a. Transportation and cell phone allowances given to call center employees are not
taxable compensation
1. Fixed monthly transportation allowance of P1500 for rank-and-file employees and
P3000 for supervisory employees precomputed on a daily basis
2. Mobile phone allowance of P1200 for supervisors, managers, and directors who
are expected to be on call 24 hours a day

b. Transportation and Night Shift Allowances granted to night shift employees and Meal
and/or Out-of-Town Allowances granted to employees assigned to conduct field work
are not subject to FBT, income tax and withholding tax.

c. Taxi/transportation allowance of P100 per day given by BPO company servicing global
businesses 24 hours a day to employees who work overtime beyond 10PM or whose
work shift starts at 10 PM onwards is exempt from tax

d. Where taxi/transportation allowance is precomputed on a daily basis and is paid to

employees while they are on assignment or duty, it is not subject to substantiation
requirement or to income and withholding tax

4. Commission is usually a percentage of total sales or on certain quota of sales volume attained
as part of incentive such as sales commission

5. Fees are received by an employee for the services rendered to the employer including a
director’s fee of the company, fees paid to the public officials, such as clerks of court or sheriffs for
service rendered in the performance of their official duty over and above their regular salaries.

Legal fees paid by a union on behalf of its president constitute compensation

Marriage fees, baptismal offerings, sums paid for conducting masses for the dead and other
contributions received by a clergyman, evangelist, or religious worker for services rendered are
considered compensation

6. Tips and gratuities – paid directly to an employee (by a customer of the employer) which are
not accounted for by the employee to the employer are considered taxable income, but not subject
to withholding tax
7. Hazard or Emergency pay – an additional payment received due to workers’ exposure to
danger or harm while working. This is normally night differential pay to arrive at gross salary.
Hazard, overtime, night shift differential and holiday pay of a minimum wage earner is non-taxable
as long as the MWE has no other reportable income
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8. Retirement pay – it refers to a lump sum payment received by an employee who has served
a company for a considerable period of time and has decided to withdraw from work into privacy.

In general, retirement pay is taxable except in the following instances:

I. SSS or GSIS retirement pays
II. Retirement pay due to old age provided that the following requisites are met:
a. The retirement program is approved by the BIR Commissioner
b. It must be a reasonable benefit plan. Its implementation must be fair and equitable
for the benefit of all employees (from president to labour)
c. The retiree should have been employed for 10 years in the said company
d. The retiree should have been 50 years old at the time of retirement
e. It should have been availed of for the first time

9. Separation pay – taxable if voluntarily availed of. It shall not be taxable if involuntary. Examples
of involuntary separation are:
a. Death
b. Sickness
c. Disability
d. Reorganization/merger of company
e. Company at the brink of bankruptcy

When a company is at the brink of bankruptcy, the sequence of satisfying the company’s
indebtedness should be in this order
a. BIR
b. Employee
c. Creditors

As a rule, any amount received by an official or employee or by his heirs from the employer due to
death, sickness or other physical disability or for any cause beyond the control of the said official or
employee (such as retrenchment, redundancy, or cessation of business) are exempted from tax

The phrase for any cause beyond the control of the said official or employee connotes
involuntariness on the part of the official or employee. The separation from the service of the official
or employee must not be asked for or initiated by him.

Amounts received by reason of involuntary separation remain exempt from income tax even if the
official or the employee, at the time of separation, had rendered less than 10 years of service and/or
is below 50 years of age.

Any payment made by an employer to an employee on account of dismissal constitutes

compensation regardless of whether the employer is legally bound by contract, statute or otherwise,
to make such payment

10. Pension is a stated allowance paid regularly to a person on his retirement or to his dependents
on his death, in consideration of past services, meritorious work, age, loss or injury.
Pension pay is TAXABLE unless the law states otherwise, or unless the BIR approves the pension
plan of a private company.

11. Vacation and Sick Leave

Taxable or Not:
a. If paid or availed of as salary of an employee who is on vacation or on sick leave
notwithstanding his absence from work, it constitutes taxable compensation income
b. Monetized value of unutilized vacation leave credits of 10 days or less which were paid to
private employees during the year are not subject to tax and to the withholding tax
c. Monetized value of vacation and sick leave credits paid to government officials and
employees are not subject to income tax and to the withholding tax

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for educational purposes only and not for commercial distribution,”
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12. Thirteenth month pay and other benefits

As a general rule, thirteenth month pay and other benefits are not taxable if the total amount
received is P82000or less. Any amount exceeding P82000 is taxable.

13. Fringe benefits and de Minimis

FRINGE BENEFITS - as any good, service, or other benefit furnished or granted by an employer,
in cash or in kind, in addition to basic salaries of an individual employee

De Minimis benefits - privileges of relatively small value as given by the employer to his
employees. They are not considered as compensation subject to income tax and consequently to
withholding tax.

14. Overtime Pay – refers to premium payment received for working beyond regular hours of work
which is included in the computation of gross salary of employee. Back pay and overtime pay
constitute compensation.

15. Profit sharing – proportionate share in the profits of the business received by the employee in
addition to his wages

16. Awards for Special Services – the amount received as an award for special services of
employee, or suggestions to employer resulting in the prevention of theft or robbery. Awards for
past services and the like are also compensations

17. Beneficial payments – such as where an employer pays the income tax owned by an
employee are additional compensation income

18. Other forms of Compensation – received due to service rendered are compensation paid in
kind. It is to be noted that compensation can be paid in kind but taxes are generally paid in money.
For example, an insurance premium paid by employer for insurance coverage where the heirs of
employee are the beneficiaries is the employee’s income

Shares of Stock Received as Compensation

Compensation paid to an employee of a corporation in its stock is to be treated as if the corporation

sold the stock at its market value and paid the employee in cash

Hence, if compensation is received in the form of shares of stock, the fair market value of the shares
of stock at the time the service is rendered is the basis of tax.

Employee stock option

A stock option is a privilege granted to some key employees of a corporation to avail of the said
corporation’s share of stock in the future for a certain price.

The following rules shall be observed when a company issues a stock option to its employees:
1. Compensation income – if the market price is greater than the option price, the
difference is a compensation income at the date of grant.
2. Capital gain – when the stocks are sold, the excess of the market price at the date of
sale over the market price at the date of grant is a capital gain

Cancellation of Debt

The cancellation and forgiveness of indebtedness may amount to a payment of income, gift, or
capital transaction, depending upon the circumstances. The following rules shall then be observed:
1. If a creditor merely desires to benefit a debtor and without any consideration cancels
the debt, the amount of the cancelled debt is a gift, not an income of debtor.

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution,”
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2. If a corporation to which a stockholder is indebted forgives the debt, the transaction

has the effect of the payment of a dividend income to debtor
3. If however a debtor performs services for a creditor, who, in consideration thereof
cancels the debt, the debtor realizes income for his services to the extent of the
amount of debt cancelled

Insurance Premiums as Compensation

These are premiums paid by the employer on life insurance coverage of the employee wherein the
beneficiary is the employee’s family. These constitute taxable income on the basis of the amount
of premium paid.

Income Tax Paid as Compensation

For income tax paid by the employer in favour of the employee, the basis of tax is the amount of
tax paid.

Convenience of the Employer’s Rule

This tax rule provides that allowances in kind furnished to the employee for and as a necessary
incident to the performance of his duties are not taxable. Examples are food and lodging benefit by
a household maid, driver, etc.

Living Quarters
The following rules govern the living quarters and meals:
1. When living quarters are furnished in addition to cash salary, the rental value of
such quarters should be reported as income
2. However, if living quarters or meals are furnished to an employee for the
convenience of the employer, the value thereof need not be included as part of
compensation income
Unless provided for the exclusive benefit of the employer, the rental value of living quarters is
compensation income to the employee to the extent of his reasonable needs, and the excess shall
be considered as expenses of the corporation.

Meals Subsidized by Employer

The value of any board and lodging furnished by an employer is ordinarily taxable to the employee
The exclusion for meals is allowed only when meals are furnished or subsidized to an employee for
the convenience of the employee and incidental to the requirement of his work or position

Remuneration for Casual Labor

1. Remuneration for casual labor not in the course of an employer’s trade or business is
not considered compensation

The term casual labor includes labor which is occasional, incidental or regular. The
expression not in the course of the employer’s trade or business includes labor that does
not promote or advance the trade or business of the employer

2. Any remuneration paid for casual labor( that is, labor which is occasional, accidental or
irregular, but which is rendered in the course of the employer’s trade or business) is
considered compensation

3. Any remuneration paid for casual labor performed for a corporation is considered as
compensation

LESSON 3: BUSINESS INCOME

Business – means any commercial activity engaged in as a means of livelihood or profit of an

individual or group of individuals. Examples are trading, merchandising, manufacturing and other
similar benefits

Gross income from Business

1. Manufacturing
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2. Merchandising
3. Servicing
4. Farming
5. Long-term contract

In case of manufacturing, merchandising or mining business, Gross income shall mean gross
sales less sales returns, discounts and allowances, and cost of goods sold, plus any income
from investment and other incidental or outside operations or sources

In determining gross income, subtractions should not be made for depreciation, depletion,
selling expenses or losses or for items not ordinarily used in computing the cost of goods sold,

The Cost of Sales

Cost of Goods Sold shall include all business expenses directly incurred to produce the
merchandise to bring them to their present location and use. The cost of sale is deducted from the
net sales to calculate gross income from business. Cost of Sales of a business may be classified
as follows:
1. Cost of Goods Manufactured and Sold – it shall include all costs of finished goods that
are sold such as raw materials used, direct labor and manufacturing overhead, freight cost,
insurance premiums and other costs incurred to bring the raw materials to the factory or
warehouse
2. Cost of goods sold of trading or merchandising concern – refers to the invoice cost of
goods sold, plus import duties and freight incurred in transporting the goods to the place
where they are actually sold, including insurance while the goods are in transit
3. Cost of Service of Servicing Concern – for minimum corporate income tax purposes,
gross income from service business is gross receipts less returns, allowances, discounts
and cost of services. The Cost of Services shall include the direct costs and expenses
necessarily incurred to provide the services required by the customers and clients which
include the following items:
a. Salaries
b. Benefits of personnel, consultants and specialists directly rendering the service
c. Cost of facilities directly utilized in providing the service such as depreciation or
rental of equipment used and cost of supplies
d. In the case of banks, costs of services shall include interest expense.

LESSON 4: GAINS DERIVED FROM DEALINGS IN PROPERTY

This refers to the income derived from the sale, and/or exchange of assets, which results in gain
because of the excess of the amount or value received by the taxpayer over the determined value
of the property he has disposed of.
The general rule is that the entire amount of the gain or loss arising there from is a taxable gain or
deductible loss.
LESSON 5: INTERESTS
Gross income derived from interest is only such interest as arising from indebtedness, that is,
compensation for the loan or forbearance of money, goods, or credits. Unless exempted by law,
interest received by a taxpayer is taxable. Interest includes those arising from indebtedness,
whether business or non-business, legal or illegal.
To recapitulate, interests from deposits and yield or any other monetary benefit from deposit
substitutes and from trust funds and similar arrangements are subject to 20% final tax for residents
and non-resident citizens, resident aliens, domestic corporations and resident foreign corporations.

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Inter-company Advances
Inter-company advances more properly pertain to transactions between affiliated companies and
between parent and subsidiaries. These are not limited to financially distress situations. Common
financing is resorted to even among corporations that are financially sound.

LESSON 6: RENTS
Rental Income – refers to earnings derived from leasing real estate as well as personal property.
Aside from the regular amount of payment for using the property, rental income also includes all
other obligations assumed to be paid by the lessee to the third party in behalf of the lessor
Rental income is generally determined by the gross receipts for the year, (earned and unearned
under accrual basis) because the nature of business involved is service.
1. Prepaid rental – if the advance payment is a prepaid rental received without
restriction as to its use the entire amount is taxable in the year it is received
whether the lessor uses cash or accrual method of accounting
2. Security Deposit with Restriction – if the advanced payment is a security deposit
which restricts the lessor as to its use, then such amount should be excluded in the
determination of rental income
3. Security Deposit with an Acceleration Clause – if the advanced payment is a loan
deposit, or option money for the property or security deposit for the faithful compliance
of the lessee of the lease contract, such advance payment is not an income to the
lessor. The income to the lessor inures when the lessee violates the terms of the
contract.

Income from Leasehold Improvement – when the lessee erected or built permanent
improvements on the leased property which will become the property of the lessor upon the
expiration of the lease, the value of the improvements should be reported as income of the lessor
using either outright method or spread out method.
a. Outright method – the income from leasehold improvement shall be recognized
when the improvement is completed at its fair market value
b. Spread-out method – the estimated book value of the leasehold improvement
at the end of the lease is spread over the term of the lease and is reported as
income for each year of the lease an aliquot part thereof

LESSON 7: ROYALTIES
Royalty income – is a payment or portion of proceeds paid to the owner of a right, such as an oil
right or a patent for the use of it, or a portion of the proceeds from the work of an author or composer.
a. In general, royalty income includes those which are derived from natural resources
or products such as coal, gas, oil, copper, silver, gold, and other similar products.
These kinds of royalty income are subject to 20% final tax

b. Royalties on books, literary works and musical composition are royalty income subject
to 10% final tax

LESSON 8: DIVIDENDS
Dividend income – is a form of earnings derived from the distribution made by a corporation out
of its earnings or profits and payable to its stockholders, whether in money or in other property.

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Such earnings may be exempt from income tax, or subject to either final tax or on the normal year-
end tax of individuals or corporations

Tax Rules on Dividend Income

1. If received by a domestic or resident corporation from a domestic corporation subject
to tax, such dividend is tax exempt (non-taxable inter-corporate principle)
2. Pure stock dividends, dividends received from cooperative, and pure liquidating
dividends are tax-exempt
3. Cash or property dividend is subject to final tax if received by an individual or non-
resident corporation from a domestic corporation subject to income tax

a. If received by a resident citizen, non-resident citizen and resident alien, the final
tax applicable is 10%
b. If received by a non-resident alien engaged in business in the Philippines, the final
tax is 20%
c. If received by a non-resident alien not doing business within, the final tax is 25%
d. If received by a non-resident foreign corporation from a domestic corporation, the
final withholding tax is 15%

4. Other dividends excluded from rules 1,2, and 3 are included in the computation of the
taxable income and income tax at the end of the year

Forms and Valuations of Dividend Income

For income tax purposes, the form of dividend income shall determine its applicable treatment.
Dividends that are usually received by a stockholder are as follows:
1. Cash dividend – the most common form of dividend. It is valued and taxable to the
extent of amount of money received by the stockholder
2. Property dividend – a dividend payable in property of an issuing corporation is a
property dividend. The property dividend is usually valued and taxable to the extent of
the fair market value of the property received at the time of declaration
a. Merchandise inventory, supplies, etc.
b. Shares of stock of another corporation
c. Treasury stock of issuing corporation if acquired at cost different from its par
value
3. Stock Dividend – pure stock dividends are not subject to tax because they simply
involve a transfer of the retained earnings to the paid-in capital account, except when
the following circumstances exists:
a. There is an option that some stockholders could take cash or property dividends
instead of stock dividends
b. Some stockholders exercised the option to take cash or property dividends
c. The exercise of option resulted in a change of the stockholder’s proportionate share
in the outstanding shares of the corporation

Redemption of Stock Dividend

If the corporation cancels or redeems stock issued as a dividend at such time and in such manner
as to make the distribution and cancellation or redemption, in whole or in part, essentially equivalent
to the distribution of a taxable dividend, the amount so distributed in redemption or cancellation of
the stock is considered taxable income to the extent that it represents a distribution of earnings or
profits.
Stock Dividends Different from Shares Previously Acquired
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When stock dividends received are of a different class from shares previously acquired, the
stock dividends are not income, and therefore, not taxable. The original cost of the
investment is allocated between the original shares and the stock dividends on the basis of
their respective market value at the date of receipt
4. Scrip Dividend – is issued in the form of promissory note and is taxable to the extent of
its fair market value. It is taxable in the year when the warrant was issued.
5. Indirect Dividends – are those other dividends representing payments or rights
received by the taxpayer, which are really dividends
6. Liquidating Dividend – are return of stockholders investment. It arises from the
distribution of assets by a corporation to its stockholders upon corporate dissolution

As a rule, the excess amount of liquidating dividends over cost of shares surrendered is taxable.
Such excess is a gain realized which is taxable.
Distribution of liquidating dividends is to be treated as a sale of stock. The difference between the
cost or other basis of the stock and the amount received in liquidation of the stock is a capital gain
or a capital loss. The gain realized or loss sustained by the stockholder is a taxable income or
deductible loss, as the case may be. Consequently, the capital gain on liquidating dividend is not
subject to final tax.

LESSON 9: ANNUITIES
This refer to the annuity policies sold by insurance companies, which provide installment payments
for life, or for guaranteed fixed period of time whichever is longer or for life and guaranteed fixed
period. The portion of each annuity payment that represents return of premium is not taxable while
that portion that represents interest is taxable.

LESSON 10: PRIZES AND WINNINGS

Prize – is a reward for a contest or a competition. It represents remuneration for an effort
reflecting one’s superiority, like prize money of a boxing contest
Winnings – is a reward for an event that depends on chance such as winnings from
gambling, lottery or raffle ticket
In general, prizes are subject to final tax of 20% except if the amount of the prize is ten thousand
(P10,000) or less which shall be subjected to normal tax. Winnings are subject to final tax final tax
of 20% regardless of amount
Prize and winnings are generally taxable except when the law provides for their exemption,

LESSON 11: INCOME FROM WHATEVER SOURCE

These include all other incomes not expressly exempt under the laws.
Examples:
1. Income derived from illegal sources, such as gambling, extortion, theft, bribes,
embezzlement, and smuggling are taxable.
2. Compensation from damages if it represents payment for loss of expected profits.
Compensatory damages constituting returns of capital are not taxable.
3. The amount of the debt of a stockholder to a corporation when forgiven.
4. Bad debts previously charged off but later recovered.
5. Taxes paid and subsequently refunded.
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for educational purposes only and not for commercial distribution,”
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6. Tax informer’s reward to persons instrumental to discovery of violations of the

National Internal Revenue Code and the discovery and seizure of smuggled goods.
LESSON 12: EXCLUSIONS FROM GROSS INCOME
The following items shall not be included in the computation of gross income and shall be exempt
from income taxation:
1. Life Insurance. The proceeds of life insurance policies paid to the heirs or 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.
2. Gifts, Bequests and Devises. Provided, however, that income from such property, as
well as gift, bequest, devise or descent of income from any property, in cases of transfers
of divided interest, shall be included in gross income.
3. Compensation for Injuries or Sickness
4. Income Exempt from Treaty
5. Retirement Benefits, Pensions, Gratuities, etc.
a. Retirement benefits received under Republic Act 7641 and those received by
officials and employees of private firms, whether individual or corporate, in
accordance with a reasonable private benefit plan maintained by the employer.
b. 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 because of death, sickness or other physical disability r for any cause
beyond the control of the said official or employee.
c. The provision of any existing law to the contrary notwithstanding, 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 or enjoyed under the Social Security System in accordance with
the provisions of Republic Act 8282.
f. Benefits received from the GSIS under Republic Act 8291, including retirement
gratuity received by government officials and employees.
g. Investment income of the contributor consisting of all income earned from the
investment and reinvestment of personal equity ad retirement account (PERA)
assets in the maximum amount is exempt under R.A. 9505 and Revenue
Regulations 17-2011.
6. Miscellaneous Items
a. Income derived by foreign government
b. Income derived by the government or its political subdivisions
c. Prizes and Awards made primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but only if:
1. The recipient was selected without any action on his part to enter the contest or
proceeding; and
2. The 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
e. 13th month pay and other benefits
f. GSIS, SSS, Medicare, Pag-Ibig and Other Contributions
g. Gains from the Sale of Bonds
h. Gains from Redemption of Shares in Mutual Fund

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution,”
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i. Holiday pay, overtime pay, night shift differential pay and hazard pay received by
minimum wage earners (R.A. 9504, Section 2, June 17, 2008).
j. Campaign contributions
k. Under R.A. No. 11210 or The 105-Day Expanded Maternity Leave Law, the maternity
benefit of the female worker gas been expanded from the previous 100% of the
average daily salary credit to a full pay or salary which now includes the salary
differential as its component, aside from the added duration of the maternity leave.
Accordingly, the salary differential is considered as a benefit exempt from the Income
and Withholding Taxes. (RMC 105-2019).

VI. LEARNING ACTIVITIES

Answer the following briefly:

1. What Are the major sources of taxable income?

2. What the classifications of Gross Compensation Income?
3. Explain the concept of income from business and exercise of profession.
3. List down the items that are exempt or excluded from gross income.

VII. ASSIGNMENT
True or False

1. In accounting for gross income of farmers under the accrual basis in contrast to cash basis,
beginning and ending inventories of livestock and farm products raised and purchase are
considered.

2. Income derived from illegal sources, such as gambling, extortion, theft, bribes, embezzlement,
and smuggling are not taxable.

3. The portion of each annuity payment that represents return of premium is not taxable while that
portion that represents interest is taxable.

4. In general, the situs of the income whether within or without the Philippines, is determined by the
place where the service is rendered.

5. Source of income is either within the Philippines, without the Philippines or partly within or partly
without the Philippines.

6. Amounts received, through accident or health insurance or under Workmen’s Compensation Acts,
as compensation for personal injuries or sickness, plus the amount of any damages received
are exempt from income tax.

7. Pensions are taxable to the extent of the amount received except if there is an approved pension
plan by the Bureau of Internal Revenue.

8. Payroll period means the period of services for which a payment of compensation is ordinarily
made to an employee by his employer.

9. The proceeds of life insurance policies paid to the heirs or beneficiaries upon the death of the
insured are exempt from income tax and if such amount are held by the insurer under an
agreement to pay interest thereon, the interest payments shall be excluded from gross income.

10. Gross income derived from interest is only such interest as arising from indebtedness, that is,
compensation, for the loan or forbearance of money, goods, or credits.

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 12 of 13
 Republic of the Philippines
NUEVA VIZCAYA STATE UNIVERSITY
Bayombong, Nueva Vizcaya
INSTRUCTIONAL MODULE
IM No.:IM-TAX 1-2S-2021-2022

VIII. EVALUATION

IX. REFERENCES

Ballada, W. (2021). Income Taxation Made Easy. Sampaloc, Manila: Domdane Publishers

Banggawan, R. (2019). Income Taxation: Laws, Principles and Applications. Manila,

Philippines: Rex Bookstore

Tabag, E. and Garcia, E. (2020 Edition). Income Taxation with Special Topics in Taxation.
2044 CM Recto Ave., Quiapo, Manila: EDT Book Shop

e-RESOURCES

“In accordance with Section 185, Fair Use of Copyrighted Work of Republic Act 8293, the copyrighted works included in this material may be reproduced
for educational purposes only and not for commercial distribution,”
NVSU-FR-ICD-05-00 (081220) Page 13 of 13