How to Identify Taxable and Non-Taxable Income for the BIR

Every peso you receive ends up in one of a few places for BIR purposes: taxable at graduated rates, settled by a final tax, left out of gross income, or covered by a personal exemption. This guide gives you a repeatable four-test method and shows which BIR documents record each classification.

Quick answer

Test each item in order: is it income at all; does your taxpayer class reach it; does a specific provision exclude or exempt it; and if it is taxable, is it taxed by final tax or at graduated rates. Then match it to the document that records it: Form 2316 for pay, Form 2307 for creditable withholding, Form 2306 or bank statements for final tax.

Rule: income is taxable unless a provision takes it out (NIRC Section 32(A)). Exception: the Section 32(B) exclusions and status-based exemptions. Evidence: the taxpayer must prove an exemption applies. Timing: annual returns are due April 15 for the preceding year. First action: list every receipt for the year and run the four tests below.

What do “taxable” and “non-taxable” mean to the BIR?

The Tax Code effectively gives an item one of six labels, and each changes whether and where you report it.

The common mistake is treating “taxed at 0%” as “non-taxable.” Zero-bracket income is still taxable income and adds up with income from other sources; an excluded item never counts toward any bracket.

How do you test a single item of income?

Run these four tests in order. Stop at the first test that removes the item; if none does, the item is taxable.

1. Is it income at all? A loan you received, the return of money you lent, or the principal of a matured deposit is a return of capital, not income. The interest on it is income. Section 32(A) of the NIRC then defines gross income as “all income derived from whatever source,” so being unusual or unnamed does not make an item non-taxable.
2. Does your taxpayer class reach it? A citizen residing in the Philippines is taxed on income from all sources. A nonresident citizen, an overseas contract worker and an alien are taxed only on Philippine-source income (Section 23). If the item is foreign-source and you are in one of those classes, it is outside Philippine income tax. See what income is subject to Philippine income tax for the source rules.
3. Does a specific provision exclude or exempt it? Look for the provision by name: Section 32(B) for exclusions, the minimum wage earner proviso in Section 24(A)(2), or Section 33(C) for fringe benefits that are not taxable, which includes de minimis benefits “as defined in the rules and regulations.” If you cannot point to a provision, assume the item is taxable.
4. If taxable, how is it taxed? Section 24(A)(1) keeps “income subject to tax under Subsections (B), (C) and (D)” of Section 24 out of the graduated schedule. That covers passive income such as interest on bank deposits and dividends, and the separately taxed capital gains. Everything else, including compensation, business and professional income, goes into taxable income under Section 31.

Test 3 is where most errors happen, because exclusions come with conditions. The ₱90,000 ceiling on 13th-month pay and other benefits in Section 32(B)(7)(e), as amended by RA 10963 (TRAIN), is a combined cap: the excess is taxable compensation. For the full list of Section 32(B) exclusions and their conditions, see the companion guide.

Who has to prove that income is non-taxable?

You do. In Intercontinental Broadcasting Corp. v. Amarilla, G.R. No. 162775 (October 27, 2006), retirees argued that their retirement benefits under a collective bargaining agreement were exempt. The Supreme Court held that “the taxpayer is burdened to prove the concurrence of” the elements of the retirement-benefit exclusion: a reasonable private benefit plan maintained by the employer, at least ten years of service with the same employer, age 50 or over at retirement, the benefit availed of only once, and a plan approved by the BIR. Because “there is no evidence on record that the 1993 CBA had been approved or was ever presented to the BIR,” the benefits were held to be part of gross income.

The case was decided under the provision now found in Section 32(B)(6)(a) of the NIRC. A “tax-free” label in a contract or memo does not make income non-taxable; keep the document that proves each condition.

Which BIR documents show how your income was classified?

The payer’s certificate usually records the classification; your job is to check it.

The regulation amending Section 2.83 of RR No. 2-98 (SC E-Library copy) requires Form 2316 to show “the sum of compensation paid including the non-taxable benefits,” and, for minimum wage earners, the “overtime pay, holiday pay, night shift differential pay and hazard pay received by MWEs.”

Worked example: classifying one employee’s year

Hypothetical example for illustration only, using the TRAIN graduated schedule effective January 1, 2023 onward. Ana is a citizen residing in the Philippines with one employer. During the year she receives:

Step 1, gross compensation: ₱480,000 + ₱100,000 = ₱580,000.

Step 2, exclusions from compensation: ₱90,000 of benefits plus ₱28,000 of contributions = ₱118,000.

Step 3, taxable compensation: ₱580,000 − ₱118,000 = ₱462,000.

Step 4, tax: ₱462,000 falls in the bracket over ₱400,000 but not over ₱800,000, so the tax is ₱22,500 + 20% × (₱462,000 − ₱400,000) = ₱22,500 + ₱12,400 = ₱34,900. No rounding is needed.

Step 5, everything else: the ₱6,000 interest is settled by the final tax the bank withholds and is not added to Step 3. The gift and the insurance proceeds never enter gross income.

What could change the answer: if Ana also earned freelance fees, she would have income outside her employer’s withholding and would need to file her own annual return; how to calculate taxable income from gross income walks through that computation.

Your options and what to do next

If you are an employee

• Ask HR or payroll for your Form 2316 and check each non-taxable entry against your payslips.
• Confirm that 13th-month pay and other benefits above ₱90,000 in total were treated as taxable, and that only your own mandatory contributions were excluded. For how 13th-month pay is computed under labor law, see LaborCode.ph’s 13th-month pay guide.
• If you have purely compensation income from one employer and the tax due equals the tax withheld, Section 51-A, added by RA 10963, means you are not required to file an annual return; your employer’s certificate stands in for it.

If you are a freelancer, professional or mixed income earner

• Treat every client payment as taxable business or professional income unless a provision excludes it.
• Collect a Form 2307 from every client that withheld tax, so you can credit it against your annual tax.
• If you are not yet registered, start with registering on ORUS. For which return and tax regime apply, see how Philippine income tax works for individuals.

If you have investment or passive income

• Keep Form 2306 or your bank and broker statements showing the final tax withheld.
• For a sale of real property or unlisted shares, ask your Revenue District Office (RDO) about the separate capital gains return before the deed is registered.

If you still cannot classify an item

Look for a provision that excludes it; if you find none, treat it as taxable. Ask your RDO, a CPA or a tax lawyer about your facts. A BIR ruling applies only to the taxpayer and facts it addresses, so one issued to someone else is a guide, not a guarantee.

Where to file and when

Under Section 51(C)(1) of the NIRC, the annual income tax return of an individual is filed “on or before the fifteenth (15th) day of April of each year covering income for the preceding taxable year.” Section 56(A)(1), as amended by RA 11976 (Ease of Paying Taxes Act), requires the tax to be paid, electronically or manually, at the time the return is filed. As amended by the same law, Section 51(B) allows filing with any authorized agent bank, a Revenue District Office through its Revenue Collection Officer, or an authorized tax software provider, unless the Commissioner permits otherwise.

For returns covering calendar year 2025, RMC No. 20-2026 lists Forms 1700, 1701 and 1701A as available in eFPS and in the Offline eBIRForms Package v7.9.5, with payment through electronic channels and over-the-counter payment at authorized agent banks in limited cases. Which of the three you use depends on whether your income is purely compensation, mixed, or from business or a profession; how Philippine income tax works for individuals explains the difference.

First action: list every amount you received last year, run each through the four tests, and note the document that proves the classification.

Key takeaways

• Income is taxable unless you can point to a provision that excludes or exempts it (NIRC Section 32(A)).
• There are six labels, not two: graduated, 0%, final tax, excluded, exempt by status, and fringe benefit tax.
• Income in the 0% bracket is still taxable income; excluded income never counts toward a bracket.
• The taxpayer must prove every condition of an exemption (IBC v. Amarilla, G.R. No. 162775).
• Form 2316, Form 2307 and final-tax certificates record most classifications; check them rather than starting from scratch.

Related: gross income vs taxable income in the Philippines, and why the difference matters for your bracket.

Frequently asked questions

What is the difference between excluded income and exempt income?

For Section 32(B) items there is none: the NIRC says they “shall not be included in gross income and shall be exempt from taxation.” Other exemptions, such as the minimum wage earner exemption in Section 24(A)(2), depend on who earns the income.

Is income in the zero-percent bracket non-taxable?

No. The first ₱250,000 of taxable income under the 2023-onward TRAIN schedule is taxed at 0%, but it is still taxable income and adds up with income from other sources.

Are allowances on my payslip automatically non-taxable?

No. An allowance is non-taxable only if a provision excludes it, such as de minimis benefits within the limits set by revenue regulations, or benefits within the ₱90,000 ceiling. Otherwise it is taxable compensation.

Where can I see how my employer classified my pay?

On BIR Form 2316, the Certificate of Compensation Payment/Tax Withheld, which must show the compensation paid including the non-taxable benefits.

Is income already subjected to final tax taxable or non-taxable?

It is taxable, but settled at source. Section 24(A)(1) keeps it out of the graduated schedule, so you do not report it again in your annual return.

Who has to prove that an item is exempt?

The taxpayer. In IBC v. Amarilla (G.R. No. 162775, October 27, 2006), the Supreme Court held retirement benefits taxable because there was no evidence the plan was approved by the BIR.

Are fringe benefits of managers part of their taxable compensation?

Benefits given to employees other than rank-and-file are subject to a separate 35% final fringe benefit tax on the grossed-up value, paid by the employer under Section 33(A).

Taxable ba ang regalong pera mula sa magulang ko?

Hindi ito kasama sa gross income ayon sa Section 32(B)(3) ng NIRC. Pero taxable ang kikitain mula rito, gaya ng interest, at maaaring may donor’s tax ang pagbibigay mismo.

Paano ko malalaman kung tama ang non-taxable sa 2316 ko?

Ikumpara ang bawat non-taxable entry sa payslips mo. Tingnan kung ang bonus na lampas sa ₱90,000 ay itinuring na taxable. Kung may hindi tugma, magtanong muna sa HR o payroll.

Kailangan ko pa bang mag-file ng ITR kung non-taxable ang karamihan ng kita ko?

Kung purely compensation ka mula sa iisang employer at tama ang withholding, hindi na dahil sa substituted filing sa Section 51-A. Kung may freelance o business income ka, kailangan mong mag-file.

Sources

• National Internal Revenue Code of 1997 (RA 8424): Sections 23, 24(A)(1), 24(B), 31, 32(A), 32(B)(1), (3), (6)(a), (7)(e) and (7)(f), 33(A)–(C), 51(C)(1).
• RA 10963 (TRAIN Law): amended Section 24(A) (January 1, 2023 onward schedule and minimum wage earner proviso), Section 32(B)(7)(e) (₱90,000 ceiling), Section 33(A) (35% fringe benefit tax) and new Section 51-A (substituted filing).
• RA 11976 (Ease of Paying Taxes Act), approved January 5, 2024: amended Sections 51(B) and 56(A)(1).
• Revenue regulation amending Section 2.83 of RR No. 2-98 on BIR Form 2316 (SC E-Library copy).
• BIR, Revenue Memorandum Circular No. 20-2026 (digest), guidelines for filing annual income tax returns for calendar year 2025.
• Supreme Court, Intercontinental Broadcasting Corp. v. Amarilla, G.R. No. 162775, October 27, 2006.

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 11, 2026.