What Income Is Excluded Before Philippine Tax Is Computed?

Before the Philippine income tax table is applied, some money you received is taken out of the computation entirely. The Tax Code calls these “exclusions from gross income.” This guide lists each one, explains the condition that makes it apply, and shows what the removal does to your tax, under the National Internal Revenue Code (NIRC) as amended by the TRAIN Law and the 2025 Capital Markets Efficiency Promotion Act (CMEPA).

Quick answer

Section 32(B) of the NIRC lists the income left out before tax is computed: life insurance proceeds, returned premiums, gifts and inheritances, injury and sickness compensation, treaty-exempt income, qualifying retirement and separation benefits, SSS and GSIS benefits, certain prizes, 13th-month pay and other benefits up to ₱90,000, your mandatory contributions, and certain investment gains. Each has conditions.

What does it mean for income to be excluded?

Section 32(A) of the NIRC (RA 8424) defines gross income as “all income derived from whatever source,” unless the Code says otherwise. Section 32(B) is where it says otherwise: the items it lists “shall not be included in gross income and shall be exempt from taxation under this title.” An excluded item is removed at the very start, so it is never added to your taxable income and never reaches the rate table.

Exclusions are easy to confuse with three other things that also shrink your tax. They work differently:

This guide covers only the first row. For the overall order of subtractions, see how to calculate taxable income from gross income; for the two terms themselves, see gross income vs taxable income.

Which income is excluded under Section 32(B)?

Insurance, gifts and compensation for injury

• Life insurance proceeds (32(B)(1)). Amounts paid to heirs or beneficiaries on the death of the insured are excluded. If the insurer holds the proceeds and pays interest on them, “the interest payments shall be included in gross income.”
• Return of premiums (32(B)(2)). Amounts the insured receives back as a return of premiums paid on life insurance, endowment or annuity contracts.
• Gifts, bequests and devises (32(B)(3)). The value of property you receive this way is not your income. Income later earned from that property, such as rent or interest, is taxable. The giver may separately owe donor’s or estate tax, which is not an income tax.
• Compensation for injuries or sickness (32(B)(4)). Amounts received through accident or health insurance or under workmen’s compensation laws, plus damages received by suit or agreement, for personal injuries or sickness.
• Treaty-exempt income (32(B)(5)). Income exempt under a treaty binding on the Philippines, to the extent the treaty requires.

Retirement, separation and social security benefits

• Retirement benefits (32(B)(6)(a)). Benefits under RA 7641, or under an employer’s reasonable private benefit plan, are excluded if you served the same employer for at least ten years, were at least 50 years old on retirement, and the exclusion is “availed of by an official or employee only once.”
• Separation benefits (32(B)(6)(b)). Amounts received by an employee or the heirs because of separation due to death, sickness or other physical disability, or “any cause beyond the control of the said official or employee.” No age or service requirement applies.
• Social security and similar benefits (32(B)(6)). Benefits from the SSS and the GSIS, social security benefits and pensions from foreign government agencies, and United States Veterans Administration benefits received in the Philippines.

Whether a retirement payment qualifies is a frequent dispute. In Intercontinental Broadcasting Corporation v. Amarilla, G.R. No. 162775 (October 27, 2006), the Supreme Court held that “the taxpayer is burdened to prove the concurrence of the following elements” of the exclusion, and found the retirees’ benefits taxable because the collective bargaining agreement that provided them had never been submitted to or approved by the BIR. The employer still bore the tax in that case, because it had agreed to assume the retirees’ tax liability.

Prizes, employee benefits and contributions

• Achievement prizes (32(B)(7)(c)). Prizes and awards mainly for religious, charitable, scientific, educational, artistic, literary or civic achievement, but only if you were “selected without any action on his part to enter the contest or proceeding” and are “not required to render substantial future services.”
• Sports prizes (32(B)(7)(d)). All prizes and awards given to athletes in local and international sports competitions and tournaments, in the Philippines or abroad, “sanctioned by their national sports associations.”
• 13th-month pay and other benefits (32(B)(7)(e)). As amended by Section 9 of RA 10963 (TRAIN Law), the combined total of 13th-month pay and “other benefits such as productivity incentives and Christmas bonus” is excluded up to ₱90,000. The excess is taxable.
• Mandatory contributions and union dues (32(B)(7)(f)). “GSIS, SSS, Medicare and Pag-ibig contributions, and union dues of individuals.” Only your own share deducted from your pay counts; the employer’s share was never your income.

Government income and investment gains

• Foreign and Philippine government income (32(B)(7)(a) and (b)). Certain investment income of foreign governments and their financing institutions, and income of the Philippine government and its political subdivisions from public utilities or essential governmental functions. These rarely concern individual taxpayers.
• Project-specific bonds (32(B)(7)(g)). Section 8 of RA 12214 (CMEPA) replaced the old exclusion for gains on bonds with a maturity of more than five years. The exclusion now covers interest income and gains from the sale, transfer or disposition of project-specific bonds “issued by the Republic of the Philippines or any of its instrumentalities” to finance capital expenditures or programs covered by the Philippine Development Plan or its equivalent and other high-level priority programs of the national government, as determined by the Secretary of Finance.
• Mutual fund and UITF redemptions (32(B)(7)(h)). As amended by CMEPA, gains from redeeming shares or units of participation in a mutual fund or unit investment trust fund, provided that “final taxes due on realized gains have been previously withheld.”

Section 28 of RA 12214 keeps the tax exemptions and preferential rates that applied to financial instruments “issued or transacted prior to July 1, 2025” for their remaining maturity. If you hold an older long-term bond, the rule in force when it was issued still governs it.

How do you check whether an item qualifies?

Most exclusions depend on a condition, not just the label on the payment. Use this table to test each item you received:

If a payment does not clearly meet the condition, treat it as taxable until your employer, the payer or your Revenue District Office (RDO) confirms otherwise. The taxpayer carries the burden of proving an exclusion, as the Supreme Court said in IBC v. Amarilla.

Worked example: what exclusions do to your tax

Hypothetical example for illustration only, for a taxable year from January 1, 2023 onward. The contribution figure is assumed, not computed from SSS, PhilHealth or Pag-IBIG tables.

Carlo, an employee, received these amounts in one year: salary of ₱40,000 a month, a 13th-month pay of ₱40,000, a ₱60,000 Christmas bonus, ₱200,000 of separation pay when his employer closed one branch and retrenched him, and ₱500,000 of life insurance proceeds as beneficiary after his father died. His own mandatory contributions are assumed to be ₱24,000.

1. Total received: ₱480,000 salary + ₱40,000 + ₱60,000 + ₱200,000 + ₱500,000 = ₱1,280,000.
2. 13th-month pay and bonus total ₱100,000. Excluded: ₱90,000. Taxable excess: ₱10,000.
3. Contributions excluded: ₱24,000.
4. Separation pay excluded: ₱200,000, because retrenchment is a cause beyond his control.
5. Life insurance proceeds excluded: ₱500,000.
6. Total exclusions: ₱90,000 + ₱24,000 + ₱200,000 + ₱500,000 = ₱814,000.
7. Taxable compensation: ₱1,280,000 − ₱814,000 = ₱466,000.
8. Tax under the 2023-onward schedule: ₱22,500 + 20% × (₱466,000 − ₱400,000) = ₱22,500 + ₱13,200 = ₱35,700.

No rounding is needed. If the separation pay had been wrongly treated as taxable, taxable compensation would be ₱666,000 and the tax ₱22,500 + 20% × ₱266,000 = ₱75,700, or ₱40,000 more. The rate schedule is Section 24(A)(2)(a) as amended by Section 5 of the TRAIN Law. For what counts as income in the first place, see what income is subject to Philippine income tax.

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 (BIR Form 2316). Check that excluded items appear as non-taxable and that only the excess over ₱90,000 of 13th-month pay and benefits appears as taxable.
• If you received separation pay, ask HR for the written reason for separation. That document decides whether Section 32(B)(6)(b) applies.
• If payroll treated an excluded item as taxable, raise it before the year-end adjustment. After the year closes, the correction runs through your employer or your RDO.

If you are retiring

• Ask your employer whether the retirement plan is under RA 7641 or is a private plan, and whether the BIR has approved or qualified it.
• Keep proof of your age, your years of service with that employer, and that you have not claimed the exclusion before.
• If any element is missing, expect the benefit to be taxed and withheld; ask a CPA or your RDO before signing a quitclaim that assumes otherwise.

If you received insurance, a gift, a prize or investment gains

• Keep the insurer’s claim settlement letter, the deed of donation or estate documents, or the award notice showing how you were selected.
• For mutual fund or UITF redemptions, keep the statement showing that final tax on realized gains was withheld.
• Report later income from the property, such as rent or interest, as income. The exclusion covers only the original receipt.

Not sure which taxpayer class you belong to? Read who is required to pay income tax in the Philippines. First action: list every amount you received this year, write the Section 32(B) paragraph beside each one you think is excluded, and check its condition against the table above. Any item without a paragraph stays in gross income.

Key takeaways

• Section 32(B) items are removed from gross income before any tax is computed and never reach the rate table.
• Most exclusions are conditional: separation must be involuntary, retirement needs ten years, age 50 and first-time use, and prizes need the stated selection rules.
• 13th-month pay and other benefits are excluded only up to ₱90,000 in total.
• CMEPA (RA 12214) replaced the five-year bond exclusion with project-specific bonds and extended the fund exclusion to UITFs, from July 1, 2025.
• The taxpayer must prove an exclusion applies, so keep the documents that show each condition was met.

Related: how to identify taxable and non-taxable income for BIR purposes, including who has to prove an exclusion applies.

Frequently asked questions

What does “excluded from gross income” mean in the Philippines?

It means the item is left out of gross income before any tax is computed. Section 32(B) of the NIRC lists these items and says they “shall not be included in gross income” and are exempt from income tax, so they never reach the graduated rate table.

Is the whole 13th-month pay tax-free?

Only up to a limit. Under Section 32(B)(7)(e), as amended by the TRAIN Law, 13th-month pay and other benefits such as productivity incentives and Christmas bonuses are excluded up to ₱90,000 in total. Any amount above ₱90,000 is taxable compensation.

Is separation pay excluded from taxable income?

It is excluded when the separation is due to death, sickness or other physical disability, or any cause beyond the employee’s control, such as retrenchment or closure, under Section 32(B)(6)(b). Separation the employee chose, such as a voluntary resignation, does not fall under this exclusion.

When are retirement benefits excluded?

Retirement benefits under RA 7641, or under a reasonable private benefit plan, are excluded if the employee served the same employer for at least ten years, was at least 50 years old on retirement, and has not used the exclusion before (Section 32(B)(6)(a)). The Supreme Court in IBC v. Amarilla placed the burden of proving these elements on the taxpayer.

Are life insurance proceeds taxable income?

No. Proceeds of life insurance paid to the heirs or beneficiaries on the death of the insured are excluded under Section 32(B)(1). If the insurer keeps the proceeds and pays interest on them, the interest is included in gross income.

Are SSS, GSIS, PhilHealth and Pag-IBIG contributions excluded?

Yes, your own share. Section 32(B)(7)(f) excludes GSIS, SSS, Medicare and Pag-IBIG contributions and union dues of individuals. Benefits received from the SSS and the GSIS are also excluded under Section 32(B)(6).

Did the CMEPA change any exclusions?

Yes. RA 12214, the Capital Markets Efficiency Promotion Act, rewrote Section 32(B)(7)(g) to cover interest and gains on project-specific bonds issued by the Republic or its instrumentalities, and Section 32(B)(7)(h) to cover gains on redeeming mutual fund and UITF shares or units, provided final taxes on realized gains were already withheld.

Kasama ba sa taxable income ang regalo o mana?

Hindi. Ayon sa Section 32(B)(3), ang property na natanggap bilang regalo, bequest o devise ay hindi isinasama sa gross income ng tumanggap. Pero ang kita mula sa property na iyon, gaya ng renta o interest, ay taxable.

Taxable ba ang bonus ko kung lampas ₱90,000 ang 13th month at bonus?

Oo, pero ang sobra lang. Hanggang ₱90,000 ang kabuuang 13th month pay at ibang benefits na excluded. Ang lampas sa ₱90,000 ay idinadagdag sa taxable compensation mo at dadaan sa graduated tax table.

Exempt ba ang SSS sickness o maternity benefit ko?

Oo. Ang benefits na natanggap mula sa SSS ay kabilang sa exclusions sa Section 32(B)(6) ng NIRC, kaya hindi ito isinasama sa gross income mo.

Sources

• National Internal Revenue Code of 1997 (RA 8424): Sections 32(A) and 32(B)(1) to (7).
• RA 10963 (TRAIN Law): Section 5 (Section 24(A)(2)(a) schedule, January 1, 2023 onward) and Section 9 (Section 32(B)(7)(e), ₱90,000 ceiling).
• RA 12214 (Capital Markets Efficiency Promotion Act): Section 8 (amended Section 32(B)(7)(g) and (h)) and Section 28 (instruments issued or transacted before July 1, 2025).
• Supreme Court, Intercontinental Broadcasting Corporation 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.

Last correction: November 10, 2026. Completed the description of the project-specific bond exclusion to match Section 8 of RA 12214, and added that the employer bore the tax in IBC v. Amarilla. Checked: NIRC Section 32(B) as amended by RA 10963 (Section 9) and RA 12214 (Sections 8 and 28), the Section 24(A)(2)(a) schedule for 2023 onward, G.R. No. 162775, and the worked-example arithmetic. No figures changed.

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