EXCLUSIONS IN GROSS INCOME PROPERTY INSURANCE CONTRACTS.

PROCEEDS OF LIFE INSURANCE POLICY  The proceeds of property insurance

contracts in excess of the tax basis of
 Life is regarded as a capital item with
the property lost or destroyed is a
infinite value. Hence, the proceeds of
taxable return on capital and, hence,
life insurance is a return of capital.
included in gross income.
 The proceeds of life insurance policy
paid to the heirs or beneficiaries upon GIFTS, BEQUESTS, AND DEVICES OR DESCENT.
the death of the insured, whether in a
 The value of property acquired by gift,
single sum or otherwise are excluded in
bequest, device or descent are not
gross income; however, if such
included in gross income of the done.
amounts are held by the insurer under
 However, income from such property
an agreement to pay the interest
as well as gift, bequest, device or
thereon, the interest payments shall be
descent of income from any property
included in gross income.
in cases of transfers of undivided
RETURN OF PREMIUM. interest shall be included in gross
income.
 Return of premium is the amount
received by the insured under life GIFTS VS EXCHANGE
insurance, endowment, or annuity
 The transferor’s intention or motive
contracts, either during the term or
must be evaluated in determining
at the maturity of the term
whether a transfer is a gift or an
mentioned in the contract or upon
exchange. Gifts are characterized by
surrender of the contract.
pure liberality or disinterested
 The amount received by the
generosity and are given without
insured as a return of premiums on
consideration. An exchange always
any insurance contract is a return
involves a consideration.
of capital; hence, it is excluded
from gross income. EMPLOYMENT GRATUITIES
Scenario:  Gratuities given under an employer-
employee relationship are normally
 Alberto is insured in a P1,000,000.00
treated in exchange for services
life insurance policy with annual
rendered by employees. Hence, they
premium payments of P20,000.00 for
are subject to income tax.
10 years. If Alberto outlives the policy
 The transfer of properties by the
after the 10th year, he will be paid a
employer to managerial or supervisory
P500,000.00 maturity value.
employees is generally subject to fringe
 If he outlives the policy and collected
benefits tax.
the P500,000.00, P200,000.00 will not
 Christmas or major anniversary gifts
be included in gross income because it
granted by the employer to employees
is a return of premium while
are deminimis benefits subject to
P300,000.00 will be included in gross
income tax.
income.
COMPENSATION FOR INJURIES AND SICKNESS • The retiring official or employee has
been in the services of the same
 Amounts received through accident or
employer for at least ten (10) years;
health insurance or under Workmen’s
• The retiring employee is at least fifty
Compensation Act as compensation for
(50) years of age at the time of
personal injuries or sickness, plus
retirement;
amounts of any damages received,
• The employer maintains a reasonable
whether by suit or agreement, on
private benefit plan.
account of such injuries or sickness are
not included in gross income. Requisites for exemption under the Labor
Code:
• Note: Reimbursement of loss of salary due
to sickness or injury is included in gross • The retiring employee is at least sixty
income. (60) years of age;
• He must have served the employer for
INCOME EXEMPT UNDER TREATY
at least five (5) years
 Income items that are excluded by SEPARATION OR TERMINATION.
international agreement to which the
Philippine government is a signatory • In certain cases, employees receive
are excluded from income tax. It must “separation pay” when their
be recalled that treaty agreements employment with the employer is
override provisions of our revenue tax terminated. This amount is excluded
laws in case of conflict under the from gross income if the termination
exemption doctrine of international was due to specific grounds.
comity. • Backwages and illegal deductions
recovered by the employee after
RETIREMENT BENEFITS AND PENSIONS. termination forms part of the gross
 This includes retirement benefits under compensation income since they
R.A. No. 7641 (Labor Code) and those actually form part of employee
received by officials and employees of compensation were they not
private firms in accordance with a erroneously or intentionally withheld
reasonable private benefit plan from the employee.
maintained by the employer. Requisites for exemption of separation pay:
 To be exempt, the retirement benefit
plan must be a “trusteed” plan where • The separation or termination must be
the fund is held under management of due to job-threatening sickness, deaths
a trustee free from both employer and or other physical disability; OR
employee control. • The same must be due to any cause
beyond the control of the employee or
Requisites for exemption under private benefit official such as redundancy,
plan: retrenchment, business closure,
• First time availment of retirement employee layoff, downsizing, or
benefit exemption; sickness or death of the employee.
SOCIAL SECURITY BENEFITS AND OTHERS. • Gains from sale on bonds,
debentures, or other certificate of
• Social security benefits from the SSS
indebtedness with a maturity of
and GSIS are not included in gross
more than 5 years. This does not
income.
include interest derived from
• Social security benefits from foreign
certificate of indebtedness.
government agencies and
• Gains realized from redemption of
retirement benefits from private
shares in a mutual fund company by
foreign pension plans are likewise
the investor (since they are already
not included in gross income.
subject to final tax);
MISCELLANEOUS ITEMS. • Income derived from the sale of
gold pursuant to RA7076;
• Income derived on domestic
securities or from interest on OTHER EXCLUDED INCOME.
deposits in Philippine banks by
• Minimum wage and certain benefits
foreign governments, foreign
of minimum wage earners;
financial GOCCs, international or
• Covid19 benefits under Bayanihan
regional financial institutions
to Heal as One Act (R.A. No. 11469);
established by foreign
• Limited retirement exemption
governments;
under Bayanihan to Recover as One
• Income derived by the government
Act (R.A. No. 11494);
and its political subdivisions from
• Income of barangay micro-business
any public utility or exercise of
enterprises;
essential government functions;
• Income of cooperatives;
• Prizes and awards made primarily in
• Income of non-stock, non-profit
recognition of religious, charitable,
entities;
scientific, educational, artistic,
• Income of qualified employee trust
literary or civic achievements (See
funds;
discussion on Final Income
• Business or professional income of
Taxation).
self-employed and or professionals
• Prizes and awards in sports
who opted to the 8% income tax.
competitions granted to athletes
(See discussion on Final Income
Taxation).
• Contributions for GSIS, SSS,
PhilHealth, PagIbig and union dues
of individuals;
• Contributions to Personal Equity
Retirement Account (PERA);
• PERA investment income and PERA
distributions;
• 13th month pay and other benefits
received by officials and employees
of public or private entities not
exceeding P90,000.00;