CHAPTER 7:

INTRODUCTION TO RIT
Learning Objectives:
• 1. Identify if an item is treated as income or not.

• 2. Enumerate the items of income not subject to income tax.

• 3. Explain the difference between final withholding tax and

creditable withholding tax.

• 4. Differentiate how tax treatment of income differs from rank

and file employees and supervisory and managerial personnel.

• 5. Enumerate the exempt income of minimum wage earner

Learning Objectives:

• 6. Enumerate and explain how tax due will be computed

on various fringe benefits given to employees.

• 7. Discuss how ordinary assets and capital assets differs

in tax treatment on the gains and losses.

• 8. Prepare for the applicable BIR Form and enumerate

the required attachments relating to compensation income
and fringe benefits.
CHARACTERISTICS OF REGULAR
INCOME TAX
• General in coverage
• Residual tax basin – all items of income as long as they
are:
• not subject to CGT, FIT, and special regimes; and
• not excluded or exempted by law, treaty, or contract from
taxation

• NOTE: income items that are exempted in the coverage of

FIT and CGT are also not taxable to the RIT.
REGULAR INCOME TAX

• 2. A net income tax

• Net Income = Taxable Income

An annual tax –
RIT applies on yearly profits or gains.
• The gross income and expenses of the taxpayer are
measured using the accounting methods employed by the
taxpayer. However, if no such accounting method was
employed or if the method employed does not clearly
reflect the income, the method shall be by the rules of
Commissioner; and

• The gross income and expenses of the taxpayer are

reported to the government over the accounting
period selected by the taxpayer
Creditable withholding tax

• Creditable withholding tax

• advanced taxes deducted from regular tax due to get the

tax shall due to the government

• Regular tax due xx

• LESS: CWT xx
• Tax still due/(refund) xx
Progressive or proportional tax

• Individual – progressive (table)

• Corporations
• – proportional 30% (25% under CREATE Law)
INCOME TAX TABLE
Illustration
• Mr. Tetangco, An accounting specialist has a monthly
salaries of 26,500. Compute the income tax under the
train law.

• 26,500 x 12 months= 318,000 Annual Salaries

• 318,000-250,000=68,000 x20% =P13,600

Illustration
• Mr. Tetangco, An accounting specialist has a monthly
salaries of 30,000. Compute the income tax under the
train law.

• 30,000 x 12 months= 360,000 Annual Salaries

• 360,000-250,000=110,000 x20% = P22,000

THE REGULAR INCOME TAX MODEL
• Gross income – inclusions xx
• LESS: Allowable deductions xx
• Taxable Income xx
Gross Income consists of the major topics:

• [Link] of gross income – exempt from RIT, CGT,

and FIT

• [Link] in gross income – subject to RIT, CGT, or

FIT

• [Link] topics – either exclusion or inclusion such as:

• [Link] benefits
• [Link] in properties
Allowable deductions

• Allowable deductions- Commonly known as business

expenses.

• The exemption of P250,000 annual income of individual

taxpayers from RIT is in lieu of personal expenses.

• Individuals that are not engaged to business

(e.g., pure compensation earners) cannot claim allowable
Individual Taxpayer classified as follows:
• [Link] compensation income earners
• [Link] business or professional income earners
• [Link] income earners
CHAPTER 8:
EXCLUSION TO GROSS
INCOME
What are Exclusions?
• Exclusions are income or receipts which are excluded
from gross income, i.e. these are not included in the
determination of a taxpayer’s gross income.

• Hence, these incomes or receipts are not subject to

income tax. However, despite their non-inclusion from
gross income, such income items may be subject to taxes
other than the income tax.
Exclusions Under the Tax Code
• 1. Proceeds of Life Insurance Upon Death of the
Insured

• The proceeds of life insurance policies paid to the heirs

or beneficiaries upon death of the insured shall be exempt
from income tax. The proceeds of life insurance are
treated more as an indemnity for the life lost instead of
as gain, profit, or income.

• Note: Interest payments made by the insurer constitutes

income to the recipient.
 Exclusions Under the Tax Code
(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.

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

• b) Participating dividends distributed to life insurance policy

holders are actually a return of overpaid premiums. They are
therefore excluded from gross income of the insured.
Exclusions Under the Tax Code
• (3) Gifts, Bequests, and Devices

• The value of property acquired by gift, bequest, devise or

descent are exempt from income taxation.

• Note: The income from the lease, sale, exchange,

investment, or other disposition of such property shall be
subject to income tax.
 Exclusions Under the Tax Code
• (4) Compensation for Injury or Sickness
• a) Amounts received, through accident or health insurance, or under Workmen’s
Compensation Acts, as compensation for personal injuries or sickness; plus

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

account of such injuries or sickness.

• c) Damages representing compensation for personal injuries arising from libel,

defamation, slander, breach of promise to marry, or alienation of affection.

• - Includes moral damages. Moral damages include physical suffering, mental

anguish, fright, serious anxiety, besmirched reputation, wounded feelings, moral
shock, social humiliation, and similar injury.

• - Includes exemplary or corrective damages. These are imposed by way of

example or correction for the public good.
Exclusions Under the Tax Code
• (5) Income Exempt Under Treaties

• Income of any kind, to the extent required by any treaty

obligation or international agreement to be exempt from
taxation by the Republic of the Philippines.
 Exclusions Under the Tax Code
• (6) Retirement Benefits, Pensions, Gratuities,
Separation Pay Which Are Exempt From Income Tax

• As a general rule, retirement benefits, pensions,

separation pay are all taxable.
•
• As exceptions, the following benefits and payments are
EXEMPT from income tax:
(a) Retirement benefits and/or pensions which
are exempt from income tax:
(b) Separation Pay Due to a Cause
Beyond the Control of the Employee
• Any amount received by an official or employee, or by his heirs, from the
employer as a consequence of separation of such official or employee
from the service of the employer due to:
• (1) Death;
• (2) Sickness;
• (3) Other physical disability; or
• (4) For any cause beyond the control of the said official or employee.

• Retirement pay given due to redundancy/retrenchment is also

excluded from gross income.
• Notes:
• (1) Separation pay due to the abovementioned causes are exempt from
income tax regardless of age or length of service of the employee.

• (2) The exemption does not cover salaries, 13th month pay and other
benefits in excess of ₱90,000, and other payments which are properly
taxable to the employee.
C-E “EXEMPTION”

• (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 in the Philippines, from foreign
agencies and other institutions private or public.
• (d) Payment of benefits due or to become due to any person
residing in the Philippines under the laws of the United States
administered by the United States Veteran Administration.
• (e) Benefits received from or enjoyed under the Social
Security System (SSS) in accordance with the provisions of
R.A. No. 8282.
F-G “EXEMPTION”
• (f) Benefits received from the GSIS under R.A. No. 8291, including
retirement gratuity received by government officials and employees.
• (g) Maternity benefits advanced by the employer to the employee.

• (h) Retirement benefits received from June 5, 2020 to December

31, 2020. Retirement benefits received by officials and employees of
private firms, whether individual or corporate, from June 5, 2020 until
December 31, 2020, shall be excluded from gross income and shall
be exempt from taxation. Provided, any re-employment of such official
or employee in the same firm within the succeeding twelve (12)-
month period shall be considered as proof of non-retirement. In such
case, such benefits received shall be subject to the appropriate
taxes.1
Exclusions Under the Tax Code
• 7) Miscellaneous Items

• (a) Income derived by foreign governments, financing

institutions owned or controlled by foreign
governments, and international or regional financial
institutions established by foreign governments from
investments or deposits in the Philippines.
• - Includes exemption from the stock transaction tax

• (b) Income Derived by the Philippine Government or

its Political Subdivisions from the exercise of any
governmental function.
Exclusions Under the Tax Code
• (c) Prizes and awards 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 granted to athletes in local and

international sports competitions and tournaments
whether held in the Philippines or abroad and sanctioned
by their national sports association.
Exclusions Under the Tax Code

• (e) 13th Month Pay and Other Benefits received by

officials and employees of public and private entities as
“13th month pay and other benefits” which shall include:

• (1) The 13th month pay, and other incentives such as

productivity incentives and Christmas bonus; and

• (2) The excess of the “de minimis” fringe benefits over

their respective ceilings.
• Provided, however, that the total exclusion shall not
exceed Ninety Thousand Pesos (₱90,000).
13th Month Pay and Other Benefits
Exclusions Under the Tax Code

• (F) Compulsory or mandatory contributions of

employees to GSIS, SSS, Medicare (PHIC), and
PAGIBIG, and union dues of individuals.

• - These are actually deductions, but are labelled as

exclusions in the Tax Code.
• Note: Contributions in excess of the mandatory
contributions are not deductible from gross income.
• Moreover, GSIS Educational Plan, GSIS Optional
Insurance, GSIS Unlimited Optional Insurance, and GSIS
Memorial Plan premiums shall not be deductible.
Exclusions Under the Tax Code

• (g) Gains from the sale, exchange or retirement of

bonds, debentures, or other certificate of
indebtedness with a maturity of more than 5 years.

• (h) Gains from Redemption of Shares in a Mutual

Fund

• (i) Income of non-residents from transactions with

Domestic Depository Banks and OBUs Under the
Expanded Foreign Currency Deposit System
Exclusions Under the Tax Code

• (j) Personal Equity and Retirement Account (“PERA”)

• PERA refers to the voluntary retirement account of an
individual (called a “Contributor”) established from his own
Qualified PERA Contributions and/or Qualified Employer
Contributions, for the purpose of being invested solely in
qualified or eligible PERA investment products.
Exclusions Under the Tax Code
• (k) Representation and transportation allowances
(“RATA”) granted under Section 34 of the General
Appropriation Act to certain officials and employees of
the government from the rank of Department Secretaries
to Division Chiefs are not subject to income tax and to the
withholding tax.

• (l) Personnel Economic Relief Allowance (“PERA”)

granted to all employees of the National Government,
Local Government Units, including government owned or
controlled corporations, is considered
remuneration/compensation for services performed by the
employees in the performance of official duties, hence,
not taxable income.
Exclusions Under the Tax Code
• (m) Capital contributions to corporations/partnerships
are not income of the corporation/partnership, and hence
not subject to income tax.

• (n) Project-related income from the development of

socialized housing sites. The private sector (ex.
contractors) shall be exempt from payment of project-
related income taxes (including CGT) on a per project
basis on income realized from the development of
socialized housing sites.
• Yield or income from any low-cost or socialized
housing-related asset-backed security.
Exclusions Under the Tax Code
• (o) Income from the commercialization of
technologies developed by local inventors or
researchers under R.A. No. 7459 during the first ten
(10) years from the date of the first sale.

• (p) Homeowners’ Association (HOA) dues or

contributions but only when the LGU having
jurisdiction over the HOA certifies the lack of
resources of the HOA to render its services.

• (q) Proceeds which constitute a fund held in trust by

the taxpayer, and which do not redound to the benefit
of the taxpayer
Exclusions Under the Tax Code
• (r) Income from the sale of gold pursuant to R.A. No.
7076 (the People’s Small-Scale Mining Act of 1991)4
• (1) Income from the sale of gold to the Bangko Sentral ng
Pilipinas by registered small-scale miners5 and accredited
traders; and
• (2) Income from the sale of gold by registered small-scale
miners to accredited traders for eventual sale to the
Bangko Sentral ng Pilipinas
 Exclusions Under the Tax Code

• (S) The wage subsidy given to employees under the

Small Business Wage Subsidy Measure (“SBWS”)
shall not be considered as part of gross income, and
therefore not subject to income tax, pursuant to Section
4(z) of R.A. No. 11469 (Bayanihan to Heal as One Act)

• (t) Compensatory interest

• The right to recover interest arises either by virtue of a
contract (monetary interest), or as damages for the delay
or failure to pay the principal loan on which the interest is
demanded (compensatory interest).
 Exclusions Under the Tax Code
(U) COVID-19 Special Risk Allowance of Health Workers

(V) Compensation to Health Workers Contracting COVID-19 in

the Line of Duty

(1) In case of death of the health worker, One Million Pesos

(₱1,000,000) shall be provided to the heirs;
(2) In case of sickness, for a severe or critical case, One
Hundred Thousand Pesos (₱100,000) shall be provided to the
health worker;
(3) In case of sickness, for a mild or moderate case, Fifteen
Thousand Pesos (₱15,000) shall be provided to the health
worker
Exclusions Under the Tax Code
• (W) Active hard duty pay received by temporary
Human Resources for Health (HRH) medical and allied
staff serving at the front lines during the State of
National Emergency declared by the President
CHAPTER 9:
INCLUSION TO GROSS
INCOME
INCLUSION
• Gross income means the total income of a taxpayer
subject to tax. It includes the gains, profits, and income
derived from whatever source, whether legal or illegal.

•
• It does not include income excluded by law, or which are
exempt from income tax.
Gross Income Defined
• Gross income means all income derived from whatever source, including
(but not limited to) the following items:

• (1) Compensation for services;

• - Including pensions and retiring allowances (except those exempt by
law)
• (2) Gross income derived from the conduct of trade or business or the
exercise of a profession;
• (3) Partner’s distributive share from the net income of a general
professional partnership;
• (4) Rents;
• (5) Annuities (excess over premium paid);
• (6) Gains derived from dealings in property;
• (7) Interest income;
• (8) Royalties;
• (9) Dividends;
• (10) Prizes and winnings;
Items of Gross Income
• 1. Compensation For Services
• Compensation for services, of whatever kind and in
whatever form paid, forms part of gross income.
A) Compensation Income which may be
in the following forms:
• a) Cash
• b) Allowances
• c) Property – the FMV of the thing taken in payment is the amount of

• Compensation Income which may be in the following forms:

• compensation.
• d) Employer’s stock – the FMV of the shares at the time the services were
• rendered.
• e) Promissory notes – the fair discounted value of the note as of the time of
• receipt. The employee shall also record additional income upon the recovery of the discount.
• f) Forgiveness of debt for services rendered to a creditor

• Note: Where the debtor is a stockholder of the corporation condoning the debt, the
condonation of the debt amounts to an indirect payment of dividend.
• g) Income tax of the employee assumed or paid by the employer, in consideration of the
latter’s services.
• h) Pensions and retiring allowances – except those exempt by law

• i) Stock options – the FMV of the stock option at the time the services
• were rendered by the employee
B) Stock Options
• 1) The amount of compensation shall be the FMV of the stock options
at the time the services were rendered.
• 2) When the employee exercises the option by paying the exercise
price (equity-settlement option), it results in additional income. Such
additional income shall equal the higher of the book value or FMV of
the shares, less the exercise price.
• (a) If the employee is a rank-and-file employee, the additional income
shall be recognized by the employee as taxable compensation and
shall be subject to the CWT on compensation.
• (b) If the employee is a supervisory or managerial employee, the
additional income shall be treated as a fringe benefit subject to the
final FBT.
• 3) When the grantor (the corporation) simply pays the difference
between the FMV of the shares and the exercise price (cash-
settlement option), the same rules in (2) above apply.
C) Fringe Benefits
• C) Fringe Benefits which may be in the form of (1) meals
furnished or subsidized by the employer; (2) living quarters; (3) life
insurance premiums paid by the employer where the insured
employee is the beneficiary; (4) facilities or privileges provided by
the employer; or (5) allowances.
• Fringe benefits are classified under the following categories,
namely:
• Those subject to the fringe benefits tax (“FBT”)

• - Fringe benefits given to employees holding managerial or supervisory positions, and which
are listed in RR No. 3-98, as amended.
• Those included in gross income in the ITR
• - Fringe benefits given to rank and file employees
• - Fringe benefits given to employees holding managerial or supervisory employees and
which are not listed in RR No. 3-98, as amended
• Those which are not taxable
• - Fringe benefits given to employees for the convenience of the employer, or if incurred by
the employee in the pursuit of the trade, business, or profession of the employer and is
liquidated and accounted for by the employee.
• - “De minimis” fringe benefits
D-E SALARIES AND SEPARATION PAY
• D) Salaries and Allowances During Leaves of Absence

• E) Separation Pay NOT Due to a Cause Beyond the

Control of the Employee
• General Rule: Separation pay is included in gross income
of separated employee.
• Exception: If separation is caused by something not of the
employee’s making. For example, if separation is due to
cessation of the business, or as a consequence of death,
sickness, other physical disability, or for any cause
beyond his control, the separation pay shall be exempt
from tax.
F) Fees

• Fees received by an employee for the performance of a

service for the employer, including director’s fees
(including per diems and allowances), are regarded as
compensation income.
• Marriage fees, baptismal offerings, sums paid for saying
masses for the dead, and other contributions received by
a clergyman, evangelist, or religious worker for services
rendered are considered compensation.

• Exception: Authorized fees paid to public officials, such as

notaries public, clerks of court, sheriffs, etc., for services
rendered in the performance of their official duties, are not
considered wages.
G-H Dismissal, Tips and Gratuities
• G) Dismissal Payment
• Any payment made by an employer to an employee on
account of dismissal, that is, involuntary separation from
the service of the employer, constitutes wages,
regardless of whether the employer is legally bound by
contract, statute, or otherwise to make such payment.
• H) Tips and Gratuities
• Tips or 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.
2. Gross Income From Business
• In general, “gross income” means total sales less COGS,
plus any income from investments and from any incidental
or outside operations or sources
INCLUSION OF GROSS INCOME
• 3. Payments Made by a GPP to a Partner, and the
Distributive Share of Partners in the Net Income of a
GPP

• 4. Rent or Lease Income

• Reporting of Income by a Lessor
• Rent paid by the lessee for the use or lease of property is
taxable income to the lessor.
5. Annuities and Life Insurance
Policies
• (a) Annuities - Annuities paid under an annuity contract
in excess of the consideration paid are includible in gross
income.
• (b) Life Insurance Policies – Where insured outlives the
term of the policy, amounts received by an insured in
excess of the premiums paid are included in gross
income.

• Note: Distributions on paid-up policies, which are made

out of earnings of the insurance company subject to tax,
are in the nature of corporate dividends and should be
taxed accordingly.
6. Gains Derived From Dealings in
Property
• Sale of 3 types of property which may give rise to taxable
events:

• Ordinary asset – 100% of the gain or loss shall be

recognized in the ITR.
• Capital asset – subject to final taxes (capital gains tax)
• Other capital asset – holding period of the asset shall be
taken into
• consideration if the seller is an individual, and only the
• net capital gain shall be included in the ITR.
7. Interest Income
• Interest income, as a rule, is taxable income included in the
ITR.

• EXC: (1) Interest income from bank deposits or deposit

substitutes in the
• Philippines subject to FT (passive income);
• (2) Interest income which are exempt from tax:
• (i) Interest income from long-term deposit or investment in the
• form of savings, trust funds, deposit substitutes, investment
management accounts;
• (ii) Interest income earned from passive investments of foreign
• governments, financing institutions owned by foreign
governments, and international financial institutions established
by foreign governments.
8. Royalties

• Royalties derived from sources within the Philippines are

subject to a final tax of 20%, except royalties on books,
other literary works, and musical compositions which shall
be subject to a final tax of 10%.

• Royalties received by resident citizens and domestic

corporations from sources without the Philippines
shall be included in the ITR.
9. Dividends

• Dividends subject to FT: Cash or property dividends

received by individuals and NRFCs from domestic
corporations.
• Dividends included in gross income in the ITR:
• 1) Generally, cash and/or property dividends received by
a resident citizen or domestic corporation from a foreign
corporation.

• 2) Liquidating Dividend

• Liquidating dividends represent distribution of all the

property or assets of a corporation in complete liquidation
or dissolution.
Dividends not subject to income tax

• 1) Intercorporate dividends from a domestic corporation to

another domestic corporation or an RFC.

• 2) Generally, stock dividends.

10. Prizes and Winnings

• Subject to FT: (a) Prizes over ₱10,000 and winnings15

derived within the
• Philippines.
• (b) Prizes received by a NRANETB and by a NRFC within the
• Philippines.

• Included in the ITR:

• 1) Prizes amounting to ₱10,000 or less received by a citizen,
resident alien, or NRAETB.
• 2) Prizes received by domestic corporations.
• 3) Prizes received by RFCs within the Philippines.
• 4) Prizes and winnings received by resident citizens from
sources without the Philippines.
11. Income From Other Sources

1. Recovery of damages representing compensation for loss of profits

or income are includible in gross income.
2. Recovery of Bad Debt Previously Deducted
3. Refund of Deductible Tax
4. Tournament Prizes
5. Forgiveness of Indebtedness
6. Income from Illegal Sources
7. Unutilized/Excess Campaign Funds
8. Early Withdrawals from a Personal Equity and Retirement Account
(“PERA”) which do not qualify for exclusion from taxable gross income
9. Gain in the Sale or Retirement by a Corporation of Its Own Bonds
10. If bonds are issued by a corporation at a premium, the net amount
of such premium is gain or income which is prorated or amortized over
the life of the bond.
11. Stock options granted to a supplier of goods or services
• End of Presentation