Inclusion and Exclusion of

Gross Income
Presented by:
Sam H Calites
Inclusion of Gross Income
 Section 32 (A) – Inclusion, meaning they are part of the
gross income and are hence taxable.

 Section 32 (A), Except when otherwise provided in this

Title, gross income means all income derived from
WHATEVER SOURCE, including, but not limited to the
following items:
 (1) Compensation for services in whatever form paid,
including, but not limited to fees, salaries, wages,
commissions, and 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) Rents;
(6) Royalties;
Inclusion and Exclusion of Gross
Income
 (7) Dividends;
(8) Annuities;
(9) Prizes and winnings;
(10) Pensions; and
(11) Partner's distributive share from the net income of the
general professional partnership.

 Thus, the pertinent items of gross income when earned

by an RC (within and without), NRC (within), RA
(within), NRAETB (within) shall be reported and shall
form part of their income. Please take note that Tax
Code did not distinguish the source of the income. The
definition did simply provide for WHATEVER
SOURCE. So this means that the income even
proceeding from illegal sources like illegal gambling,
bribes, kickbacks is still taxable and needs to be
reported in the Income Tax Return.
Important points to remember:

Item 1 - Compensation - the designation of the income is

immaterial, the employer and employee may call the
salary/wage as anything but LOVE is not significant. The
same being considered as compensation.

Item 2 - Gross income under this item means Gross Sales

less Cost of Sales (for seller of goods) or Gross Receipts
less Cost of Service (for seller of service). Of course, after
considering the discounts, allowances or returns.

Item 3 - The gains that forms part of the gross income are
those earned from the sale or disposition of ordinary
assets. The gains from the sale of capital assets are
therefore not included because the same are subjected to
final tax. Please see Section 39 and Revenue Regulations
7-2003 for reference. My Take shall on Ordinary vs. Capital
Assets is somewhere buried elsewhere.
Important points to remember:

Item 4 - Those interests that were NOT subjected to final

tax are part of the gross income. (The interest earned on
the "pautang" of the Bumbay from the madalang people is
taxable. On the other hand, the interest earned by the
Bumbay on his bank deposits are NOT part of the gross
income - already subjected to final tax)

Item 5 - Of course, the rents form part of the gross

income. In this case, it should be gross rentals less cost,
e.g. depreciation, salaries, maintenance, etc.
Important points to remember:
Item 6-10 - Those income that were not subjected to final tax
forms part of the gross income. This is tricky though and you
should be analytical and very careful. The status of the
taxpayer should be taken into consideration. Example: If AA is
a RC (income within and without) receives royalty from abroad,
earns interest income from his loan extended to non-residents,
and the other income whether or not subjected to final tax if
the same is from abroad forms part of the gross income. On
the other hand, if such were earned by the NRC, RA, NRAETB,
the income therefore are not taxable (since they are taxable
only on the income earned within. So in essence, the source
should always be considered and who is the taxpayer.

Item 11 - Since the general professional partnership (GPP) as a

rule is exempt, the income of the GPP distributed to the
partners will be reported by such partners in their separate and
distinct capacity. The share therefore of the partners is the
Item 11 to be reported in the gross income of each partner.
Exclusion of Gross Income

 SECTION 32 (B) - EXCLUSIONS FROM GROSS INCOME

(exempt from 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) Amount Received by Insured as Return of Premium. -
The amount received by the insured, as a return of
premiums paid by him under life insurance, endowment, or
annuity contracts, either during the term or at the maturity
of the term mentioned in the contract or upon surrender of
the contract.
Exclusion of Gross Income
 (3) Gifts, Bequests, and Devises. _ The value of property
acquired by gift, bequest, devise, or descent: 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.

(4) Compensation for Injuries or Sickness. - amounts

received, through Accident or Health Insurance or under
Workmen's Compensation Acts, as compensation for
personal injuries or sickness, plus the amounts of any
damages received, whether by suit or agreement, on
account of such injuries or sickness.

(5) Income Exempt under Treaty. - Income of any kind,

to the extent required by any treaty obligation binding
upon the Government of the Philippines.
Exclusion of Gross Income
 (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, in accordance with 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 ten (10) years and is not less than fifty (50)
years of age at the time of his retirement: Provided, further, That
the benefits granted under this subparagraph shall be availed of by
an official or employee only once. For purposes of this Subsection,
the term 'reasonable private benefit plan' means a pension,
gratuity, stock bonus or profit-sharing plan maintained by an
employer for the benefit of some or all of his officials or
employees, wherein contributions are made by such employer for
the officials or employees, or both, for the purpose of distributing
to such officials and employees the earnings and principal of the
fund thus accumulated, and wherein its 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 and employees.
Exclusion of Gross Income

 (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 or for any cause beyond the control of
the said official or employee.

(c) The provisions of any existing law to the contrary

notwithstanding, social security benefits, retirement
gratuities, pensions and other similar benefits received
by resident or nonresident citizens of the Philippines or
aliens who come to reside permanently in the Philippines
from foreign government agencies and other institutions,
private or public.
Exclusion of Gross Income

 (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 in accordance with the provisions of
Republic Act No. 8282.

(f) Benefits received from the GSIS under Republic Act

No. 8291, including retirement gratuity received by
government officials and employees.
Exclusion of Gross Income
 (7)Miscellaneous Items. -

(a) Income Derived by Foreign Government. - Income

derived from investments in the Philippines in loans,
stocks, bonds or other domestic securities, or from
interest on deposits in banks in the Philippines by (i)
foreign governments, (ii) financing institutions owned,
controlled, or enjoying refinancing from foreign
governments, and (iii) international or regional financial
institutions established by foreign governments.

(b) Income Derived by the Government or its Political

Subdivisions. - Income derived from any public utility or
from the exercise of any essential governmental function
accruing to the Government of the Philippines or to any
political subdivision thereof.
Exclusion of Gross Income
 (c) Prizes and Awards. - Prizes and awards made
primarily in recognition of religious, charitable, scientific,
educational, artistic, literary, or civic achievement but
only if:

(i) The recipient was selected without any action on his

part to enter the contest or proceeding; and
(ii) 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. - All prizes

and awards granted to athletes in local and international
sports competitions and tournaments whether held in
the Philippines or abroad and sanctioned by their
national sports associations.
Exclusion of Gross Income
 e) 13th Month Pay and Other Benefits. - Gross benefits
received by officials and employees of public and private
entities: Provided, however, That the total exclusion under
this subparagraph shall not exceed Thirty thousand pesos
(P30,000) which shall cover:
(i) Benefits received by officials and employees of the
national and local government pursuant to Republic Act No.
6686;
(ii) Benefits received by employees pursuant to Presidential
Decree No. 851, as amended by Memorandum Order No.
28, dated August 13, 1986;
(iii) Benefits received by officials and employees not
covered by Presidential decree No. 851, as amended by
Memorandum Order No. 28, dated August 13, 1986; and
(iv) Other benefits such as productivity incentives and
Christmas bonus: Provided, further, That the ceiling of
Thirty thousand pesos (P30,000) may be increased through
rules and regulations issued by the Secretary of Finance,
upon recommendation of the Commissioner, after
considering among others, the effect on the same of the
inflation rate at the end of the taxable year.
Exclusion of Gross Income

 (f) GSIS, SSS, Medicare and Other Contributions. -

GSIS, SSS, Medicare and Pag-ibig contributions, and
union dues of individuals.

(g) Gains from the Sale of Bonds, Debentures or other

Certificate of Indebtedness. - Gains realized from the
same or exchange or retirement of bonds, debentures or
other certificate of indebtedness with a maturity of more
than five (5) years.

(h) Gains from Redemption of Shares in Mutual Fund. -

Gains realized by the investor upon redemption of
shares of stock in a mutual fund company as defined in
Section 22 (BB) of this Code.