Gross Income vs Taxable Income in the Philippines

“Gross income” and “taxable income” sound interchangeable, but the Tax Code treats them as two separate figures, and mixing them up is how people overstate or understate their tax. This guide explains what each term means under the National Internal Revenue Code (NIRC), what sits between them, and why it changes the tax you pay.

Quick answer

Gross income is everything you earn before anything is taken out; taxable income is what is left after exclusions and allowed deductions. Section 32(A) of the NIRC defines gross income; Section 31 defines taxable income. The graduated rates apply to taxable income, while the 8% option is computed on gross sales or receipts.

What does the Tax Code mean by gross income and taxable income?

Section 32(A) of the NIRC (RA 8424) states that “except when otherwise provided in this Title, gross income means all income derived from whatever source.” It then lists examples, starting with “compensation for services in whatever form paid” and running through business and professional income, gains from dealings in property, interest, rents, royalties, dividends, annuities, prizes and winnings, pensions, and a partner’s distributive share from a general professional partnership.

Section 31 defines taxable income as “the pertinent items of gross income specified in this Code, less the deductions and/or personal and additional exemptions, if any, authorized for such types of income.” Two words carry the weight: pertinent, because only the items of gross income that belong to a given tax are counted, and authorized, because nothing may be subtracted unless the Code or a special law allows it.

So gross income is the starting point, and taxable income is the end point that the rate table is applied to. For which specific items count as income in the first place, see what income is subject to Philippine income tax.

How do the two figures differ side by side?

The table sets out the practical differences.

Note the 8% row: the one regime where your gross figure, not your taxable income, is the tax base. That is why choosing a tax option changes which number matters.

What gets removed between gross income and taxable income?

Two different kinds of reduction sit between the figures, and they work differently.

Exclusions: income the law keeps out of gross income

Section 32(B) opens: “The following items shall not be included in gross income and shall be exempt from taxation under this title.” The headings include life insurance proceeds, return of premium, gifts, bequests and devises, compensation for injuries or sickness, income exempt under a treaty, retirement benefits and similar receipts, and miscellaneous items. Two of the miscellaneous items affect most employees:

• 13th-month pay and other benefits. Section 32(B)(7)(e), as amended by RA 10963 (TRAIN), excludes these benefits, but “the total exclusion under this subparagraph shall not exceed Ninety thousand pesos (₱90,000).” Any excess goes back into taxable compensation.
• Mandatory contributions and union dues. Section 32(B)(7)(f) excludes “GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.” This covers the employee’s own share deducted from pay.

Separately, Section 33(C)(4) lists “de minimis benefits as defined in the rules and regulations” among fringe benefits not subject to the fringe benefit tax. Which benefits qualify, and their limits, are set by BIR regulations and are not restated here.

Deductions: expenses subtracted from business or professional income

Section 34, as amended by Section 11 of RA 10963, opens: “Except for taxpayers earning compensation income arising from personal services rendered under an employer-employee relationship where no deductions shall be allowed under this Section,” and then lists the deductions allowed in computing taxable income. In other words, deductions belong to business and professional income only. The headings include expenses, interest, taxes, losses, bad debts, depreciation, depletion and charitable contributions.

Instead of itemizing, an individual may elect the optional standard deduction (OSD) under Section 34(L), as amended by TRAIN, “in an amount not exceeding forty percent (40%) of his gross sales or gross receipts.”

What no longer sits between them: personal exemptions

Section 12 of RA 10963 provides that “Section 35 of the NIRC, as amended, is hereby repealed,” removing the personal and additional exemptions. The zero bracket in the rate table does that work now: under the schedule effective January 1, 2023 onward, taxable income “not over ₱250,000” is taxed at 0%.

Does the gap work the same way for every taxpayer?

No. What you can subtract depends on what kind of income you earn.

• Employees (purely compensation income): gross compensation minus exclusions equals taxable compensation. No Section 34 deductions are allowed.
• Self-employed individuals and professionals at graduated rates: gross sales or receipts minus itemized deductions or the 40% OSD equals taxable income.
• Self-employed individuals and professionals on the 8% option: Section 24(A)(2)(b) imposes 8% “on gross sales or gross receipts and other non-operating income in excess of Two hundred fifty thousand pesos (₱250,000) in lieu of the graduated income tax rates … and the percentage tax under Section 116.” No deductions are taken. The option is open only where receipts do not exceed the ₱3,000,000 VAT threshold in Section 109(BB).
• Mixed income earners: the compensation part follows the employee rule, and the business part follows the self-employed rule for whichever option applies. How Philippine income tax works for individual taxpayers covers the mixed-income rules in more detail.

Income already subjected to final tax, such as interest on a Philippine bank deposit, is taxed separately under Section 24(B) and is not carried into taxable income for the graduated rates.

Worked example: the same earners, gross versus taxable

Hypothetical example for illustration only, using the graduated schedule for taxable years from January 1, 2023 onward. The contribution amount is an assumed figure, not a computed SSS, PhilHealth or Pag-IBIG rate.

Carla: an employee

1. Basic pay: ₱40,000 × 12 = ₱480,000. 13th-month pay: ₱40,000. Gross compensation: ₱520,000.
2. Exclusions: 13th-month pay ₱40,000 (within the ₱90,000 ceiling) + assumed employee contributions ₱24,000 = ₱64,000.
3. Taxable compensation: ₱520,000 − ₱64,000 = ₱456,000.
4. Tax: the bracket over ₱400,000 but not over ₱800,000 is “₱22,500 + 20% of the excess over ₱400,000.” ₱22,500 + 20% × ₱56,000 = ₱22,500 + ₱11,200 = ₱33,700.
5. If the rate table were wrongly applied to the gross ₱520,000: ₱22,500 + 20% × ₱120,000 = ₱46,500, an overstatement of ₱12,800.

Dario: a freelancer with ₱900,000 gross receipts

1. Graduated rates with the 40% OSD: deduction ₱360,000; taxable income ₱540,000; tax ₱22,500 + 20% × ₱140,000 = ₱50,500, plus percentage tax under Section 116 (not computed here).
2. Graduated rates with itemized deductions of ₱200,000 (assumed, fully documented): taxable income ₱700,000; tax ₱22,500 + 20% × ₱300,000 = ₱82,500, plus percentage tax.
3. 8% option: 8% × (₱900,000 − ₱250,000) = 8% × ₱650,000 = ₱52,000, with no percentage tax and no deductions.

No rounding is needed in either example. The point is not which option is cheapest in general, but that each option starts from a different base: Dario’s taxable income is ₱540,000 or ₱700,000 under the graduated rates, while the 8% tax ignores taxable income and works from gross receipts.

Which figure should you be looking at?

Find your situation, then use the figure in the middle column as your tax base.

If you are unsure which row fits, start from your BIR Certificate of Registration, which shows the tax types you are registered for.

Your options and what to do next

If you are an employee

• Ask HR or payroll for your year-end certificate of compensation paid and tax withheld, and check that it shows gross compensation, non-taxable amounts and taxable compensation as separate lines.
• Add up your 13th-month pay and other benefits for the year. If the total is over ₱90,000, confirm the excess was treated as taxable.
• Compare the contributions on your payslips with the non-taxable contributions on the certificate.

If you are self-employed or a professional

• Decide your option before you file: the 8% rate on gross receipts, or graduated rates on taxable income with itemized deductions or the OSD.
• If you itemize, keep the papers. Under CIR v. Isabela Cultural Corporation, G.R. No. 172231 (February 12, 2007), a deductible expense must be ordinary and necessary, paid or incurred during the taxable year and in carrying on the business, and “supported by receipts, records or other pertinent papers”; the taxpayer bears the burden of proof, and deductions are strictly construed.
• Reconcile your gross receipts with your invoices, bank deposits and platform payout reports, since every option starts from that figure.
• Not yet registered? Register on ORUS and get your TIN, or go to the Revenue District Office (RDO) for your place of business.

Where to go

File and pay through the channels your RDO assigns, such as eBIRForms, eFPS or an authorized agent bank. For the annual filing date and the rules on who must file, see who is required to pay income tax in the Philippines. This guide does not restate deadlines.

First action: take last year’s gross figure from your certificate or receipts, list each exclusion or deduction you claim beside the section that allows it, and see whether you reach the same taxable income.

Key takeaways

• Gross income is all income from whatever source (Section 32(A)); taxable income is gross income less authorized deductions (Section 31).
• Exclusions keep items out of gross income; deductions are subtracted from it. Employees get exclusions only.
• 13th-month pay and other benefits are excluded up to ₱90,000, and the employee’s own SSS, PhilHealth, Pag-IBIG and union dues are excluded.
• Self-employed individuals at graduated rates itemize or take the 40% OSD; on the 8% option, the base is gross receipts over ₱250,000.
• Personal exemptions were repealed by TRAIN; the 0% band on the first ₱250,000 of taxable income replaces them.

Related: How to calculate taxable income from gross income, step by step.

Related: the full list of income excluded before Philippine tax is computed, from life insurance to the ₱90,000 benefits ceiling.

Frequently asked questions

What is the difference between gross income and taxable income in the Philippines?

Gross income is all income from whatever source, before anything is taken out (NIRC Section 32(A)). Taxable income is what remains after removing exclusions and subtracting the deductions the law allows for that type of income (Section 31). Graduated rates apply to taxable income, not gross income.

Is my gross salary my taxable income?

No. From gross compensation you remove exclusions such as 13th-month pay and other benefits up to ₱90,000, and your own SSS, PhilHealth and Pag-IBIG contributions and union dues (Section 32(B)(7)(e) and (f)). What is left is your taxable compensation.

Can employees deduct expenses from their salary for income tax?

No. Section 34, as amended by the TRAIN Law, allows no deductions to taxpayers earning compensation income under an employer-employee relationship. Employees reduce their taxable income only through exclusions, not business deductions.

What deductions can a freelancer or professional claim?

A self-employed individual taxed at graduated rates may claim itemized deductions under Section 34, such as ordinary and necessary business expenses, or elect the optional standard deduction of up to 40% of gross sales or gross receipts under Section 34(L).

Is there still a personal exemption in the Philippines?

No. The TRAIN Law repealed Section 35 of the NIRC, which held the personal and additional exemptions. Instead, the first ₱250,000 of taxable income is taxed at 0% under the schedule effective January 1, 2023 onward.

Under the 8% option, is the tax based on gross or taxable income?

On gross sales or gross receipts and other non-operating income in excess of ₱250,000, under Section 24(A)(2)(b). No itemized or optional standard deductions are taken, and the 8% replaces both the graduated rates and the percentage tax.

Who has to prove a deduction if the BIR questions it?

The taxpayer. In CIR v. Isabela Cultural Corporation (G.R. No. 172231, February 12, 2007), the Supreme Court held that deductions are strictly construed and that a business expense must be ordinary and necessary, paid or incurred in the taxable year and in the business, and supported by receipts, records or other pertinent papers.

Ano ang pinagkaiba ng gross income at taxable income?

Ang gross income ay lahat ng kita mo bago bawasan ng kahit ano. Ang taxable income ay ang matitira matapos alisin ang mga exclusion at ibawas ang mga deduction na pinapayagan ng batas. Sa taxable income kinukuwenta ang income tax sa graduated rates.

Kasama ba ang 13th month pay sa taxable income ko?

Hindi, hanggang ₱90,000 kasama ang iba pang benepisyo, ayon sa Section 32(B)(7)(e) ng NIRC na inamyendahan ng TRAIN Law. Ang sobra sa ₱90,000 ay isasama sa taxable compensation mo.

Pwede bang ibawas ng freelancer ang gastos niya sa negosyo?

Oo, kung graduated rates ang gamit mo. Pwede kang mag-itemize ng gastos na may resibo o invoice, o pumili ng optional standard deduction na hanggang 40% ng gross receipts. Kung 8% option ang pinili mo, walang deduction na ibabawas.

Sources

• National Internal Revenue Code of 1997 (RA 8424): Sections 31, 32(A), 32(B), 33(C)(4) and 34.
• RA 10963 (TRAIN Law): Section 24(A)(2)(a) schedule effective January 1, 2023 onward; Section 24(A)(2)(b); Section 32(B)(7)(e) (₱90,000 ceiling, amended by Section 9); Section 34 opening and 34(L) (amended by Section 11); Section 109(BB); repeal of Section 35 (Section 12).
• Supreme Court, Commissioner of Internal Revenue v. Isabela Cultural Corporation, G.R. No. 172231, February 12, 2007.

This guide is general information about Philippine tax law, not tax or legal advice for your situation. For your specific facts, consult a CPA, a tax lawyer or your BIR Revenue District Office.

By the TaxCode.ph Editorial Team. Sources checked as of: November 10, 2026.