Final Tax on Passive Income
Updated June 13, 2026
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Definition
Final tax is a definitive income tax imposed on certain types of passive income in the Philippines, where the tax withheld at source serves as full settlement of the income tax due on that income.
Final tax, also called final withholding tax, applies to specific income such as bank interest, royalties, prizes and dividends. For most of these, the payor (a bank, corporation or other withholding agent) withholds the tax at a fixed rate, and that withholding is the full income tax on the income. Unlike creditable withholding tax, final tax is not credited against the payee's tax on other income and is not refunded because the payee's other income is low. Income subject to final tax is not added to taxable income on the annual income tax return. A few final taxes are paid by the taxpayer directly instead of withheld, such as the 15% tax on net capital gains from unlisted shares, which the seller pays with BIR Form 1707 within 30 days after the sale.
Detailed explanation
What is Final Tax?
Final tax is a special income tax regime under the National Internal Revenue Code (NIRC) that applies to specific types of passive income in the Philippines. Unlike regular income tax, which is computed on total taxable income at graduated rates, final tax is a flat-rate tax, usually withheld at source, that is the complete and final settlement of the income tax due on that income. Once it is withheld and remitted to the Bureau of Internal Revenue (BIR), the taxpayer has no further income tax obligation on that income, regardless of total annual income or tax bracket (NIRC §24(B), §57(A)).
Types of Income Subject to Final Tax
For individual citizens and resident aliens, final taxes apply to interest on bank deposits, deposit substitutes and trust funds, royalties, prizes over ₱10,000 and other winnings, cash and property dividends from domestic corporations, and net capital gains from shares not traded on a stock exchange. Capital gains on real property held as a capital asset are subject to a separate 6% final tax. Rental income is not a final-taxed item for individuals; it is taxed with business income (NIRC §24(B), §24(C), §24(D)).
Interest Income
Interest on any currency bank deposit, deposit substitute, trust fund or similar arrangement is subject to a 20% final tax for citizens, resident aliens and nonresident aliens engaged in business. From July 1, 2025, under RA 12214 (CMEPA), the same 20% applies to foreign currency deposits, which were taxed at 15% before, and the exemption for long-term deposits of five years or more was removed for new deposits (NIRC §24(B)(1), as amended).
Dividend Income
Cash and property dividends received from domestic corporations are subject to a 10% final tax for citizens and resident aliens, 20% for nonresident aliens engaged in business, and 25% for nonresident aliens not engaged in business (NIRC §24(B)(2), §25).
Capital Gains from Stock Sales
Net capital gains from the sale of shares not traded through a stock exchange are subject to a 15% final tax, which the seller pays with BIR Form 1707 within 30 days after the sale (NIRC §24(C)). Sales of shares listed and traded through a local stock exchange are instead subject to a stock transaction tax of 0.1% of the gross selling price from July 1, 2025 (NIRC §127(A)).
How Final Tax Works in Practice
When a taxpayer receives passive income subject to final withholding, the payor (bank, corporation, or other withholding agent) withholds the applicable rate and remits it to the BIR. The payor gives the payee BIR Form 2306, the Certificate of Final Tax Withheld at Source. The final tax withheld is not credited against tax on other income, and the income is not added to taxable income on the annual return.
Final Tax vs. Regular Income Tax
Final tax is self-contained and flat. A taxpayer earning ₱500,000 in bank interest subject to a 20% final tax pays exactly ₱100,000 in tax, whatever their other income. Regular income tax, by contrast, is computed on total taxable income using graduated rates of 0%, 15%, 20%, 25%, 30% and 35% (from 2023, under RA 10963). Final tax therefore gives certainty to passive income earners.
Withholding and Compliance
The payor's obligation to withhold final tax is mandatory. A withholding agent that fails to withhold or remit becomes liable for the tax, plus a surcharge and interest. Taxpayers should check the BIR Form 2306 they receive against their own records of income received.
Filing Requirements When Final Tax Applies
A taxpayer whose only income was subjected to final tax is not required to file an annual income tax return for it. A taxpayer who also has compensation, business or professional income files the annual return for that other income, without adding the final-taxed income or claiming the final tax as a credit.
Why it matters
Final tax gives Filipino taxpayers certainty about the tax cost of interest, dividends, prizes and gains on unlisted shares, because the rate does not depend on their income bracket. Knowing which income is under final tax and which is under the regular graduated rates prevents two common errors: adding final-taxed income to taxable income on the annual return, and claiming final tax as a credit. For many Filipinos with savings accounts, final tax withheld by the bank is the only income tax they pay on their interest.
How it works
Income Source Withholds Final Tax
When a taxpayer receives passive income subject to final withholding, such as bank interest, royalties, prizes or cash dividends, the payor withholds the applicable rate and remits it to the BIR. For individual citizens and residents, the rates are 20% on bank interest, royalties and prizes over ₱10,000, and 10% on dividends from domestic corporations (NIRC §24(B)).
Taxpayer Receives Tax Certificate
The payor issues BIR Form 2306 (Certificate of Final Tax Withheld at Source), which shows the income payment and the final tax withheld. It is proof that the tax on that income has been paid. BIR Form 2307 is a different certificate, used for creditable withholding tax.
Final Tax Settles Liability
The withheld final tax is the complete and final settlement of income tax on that specific income. The taxpayer has no further income tax obligation on that income, even if their overall tax bracket is higher.
Annual Return Treatment
If the taxpayer has other income, such as compensation or business income, the annual income tax return covers that other income only. Income already subjected to final tax is not added to taxable income, and the final tax withheld is not credited against the tax on the other income. A taxpayer whose only income is final-taxed income does not need to file an annual income tax return for that income.
Examples
Maria's Bank Interest at ₱100,000/year
Maria deposits ₱500,000 in a time deposit earning ₱100,000 in interest for the year. Her bank withholds 20% final tax, remitting ₱20,000 to the BIR, and issues her a BIR Form 2306 for ₱20,000. This ₱20,000 is her complete income tax on that interest; she owes no additional tax on it and does not report it as taxable income (NIRC §24(B)(1)).
Juan's Dividend Income from Family Corporation
Juan receives ₱150,000 in cash dividends from a domestic corporation in which he owns shares. The corporation withholds 10% final tax, remitting ₱15,000 to the BIR and issuing Juan a BIR Form 2306. Juan's income tax on this dividend is settled; he does not include the ₱150,000 in taxable income on any annual return, and the ₱15,000 is not credited against other taxes (NIRC §24(B)(2)).
Anna Sells Non-PSE Shares for ₱50,000 Gain
Anna sells shares in a private company that are not traded on a stock exchange, realizing a net capital gain of ₱50,000. No broker withholds the tax. Anna files BIR Form 1707 and pays the 15% capital gains tax of ₱7,500 within 30 days after the sale. This ₱7,500 fully settles her income tax on this gain (NIRC §24(C)).
Ramon Earns ₱200,000 Interest Plus ₱300,000 Salary
Ramon earns ₱200,000 in bank interest (final tax withheld: ₱40,000 at 20%) and ₱300,000 in compensation income. The interest is already fully taxed. His income tax on compensation is computed on the ₱300,000 alone: 15% of the ₱50,000 above ₱250,000, or ₱7,500, which his employer withholds. The ₱40,000 final tax is not added to or credited against this amount (NIRC §24(A)(2), §24(B)(1)).
Common misconceptions
- Myth: Final tax is an additional tax on top of regular income tax.
- Fact: Final tax is the complete and final settlement of income tax on that specific income. It is not additional; it replaces the regular income tax for that income (NIRC §24(B), §57(A)).
- Myth: If I have final-tax income, I must add it to my annual income tax return.
- Fact: Income subject to final tax is not added to taxable income on the annual return. If all your income was subjected to final tax, you are not required to file an annual return for it; if you have other income, you file for that other income only.
- Myth: Final tax rates are the same for all types of passive income.
- Fact: Final tax rates vary by income type. For individual citizens and residents: 20% on bank interest (peso or foreign currency, from July 1, 2025), royalties and prizes over ₱10,000; 10% on dividends from domestic corporations; and 15% on net capital gains from shares not traded on a stock exchange. Nonresident aliens face different rates on dividends (NIRC §24(B), §24(C), §25).
- Myth: I can claim a refund of final tax withheld if my income is low.
- Fact: Final tax is not refunded because your other income is low or below the taxable level. It is the full tax on that income. A refund is possible only for tax withheld in error, for example on income that is exempt (NIRC §57(A)).
Questions people ask
Is final tax the same as withholding tax?
No. Withholding tax is the general mechanism for collecting tax at source. It is either creditable, where the tax withheld is credited against the payee's tax due on the return, or final, where the tax withheld is the full tax on that income and the income is not reported for regular income tax. Not all withholding taxes are final taxes (NIRC §57(A) and (B)).
Can I request my bank not to withhold final tax on my interest income?
No. Banks are required by law to withhold final tax on interest income. Because the tax is final, it is not refunded or credited even if your other income is below the taxable level; a refund is possible only for tax withheld in error, such as on an exempt payee (NIRC §24(B)(1), §57(A)).
What happens if my employer withholds income tax but I also have final-tax income?
They are handled separately. The tax your employer withholds is credited against your income tax on compensation. Final tax withheld on interest or dividends is not credited against that tax, and the final-taxed income is not added to your compensation income (NIRC §24(A), §24(B)).
Are capital gains from PSE-listed shares subject to final tax?
No. Gains on shares listed and traded through a local stock exchange are not subject to the capital gains tax; the sale is subject instead to a stock transaction tax of 0.1% of the gross selling price from July 1, 2025 (0.6% before that). Net capital gains on shares not traded through a stock exchange are subject to a 15% final tax (NIRC §24(C), §127(A)).
Do I need to report final-tax income on my annual income tax return?
Income subject to final tax is not included in taxable income on your annual income tax return. If you also have compensation or business income, you file the return for that income. If all your income was subjected to final tax, you are not required to file an annual income tax return for it.
What is BIR Form 2306 and why do I need it?
BIR Form 2306 is the Certificate of Final Tax Withheld at Source, issued by the payor (bank or corporation) to show the income payment and the final tax withheld. Keep it as proof that the tax on that income was paid. Do not confuse it with BIR Form 2307, which is for creditable withholding tax that you claim against your tax due (RR 2-98, as amended by RR 11-2018).
In practice
- Banks and financial institutions are the main withholding agents for final tax on interest income; they issue BIR Form 2306 to depositors.
- Corporations paying dividends must withhold final tax and remit it to the BIR; failure to do so exposes the corporation to penalties and interest.
- Sellers of shares not traded through a stock exchange compute and pay the 15% capital gains tax themselves, using BIR Form 1707 within 30 days after the sale; no broker withholds it.
- Taxpayers with compensation or business income file their annual return for that income only, leaving out income already subjected to final tax and the final tax withheld on it.
- Final tax simplifies compliance for retirees and investors living on passive income; if final tax is properly withheld, they may have minimal or no additional filing obligations.
Next steps
Learn more
Bank Interest Tax Calculator
Dividend Tax Calculator
Investment Return Calculator
BIR Form 1601FQ Monthly/Quarterly Remittance Return Of Final Tax Withheld
BIR Form 1701 Annual Income Tax Return For Individuals
Certificate Of Final Tax Withheld
Complete Guide To Withholding Taxes In The Philippines
Investment Income Taxation Guide
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Sources & References (3)
Primary sources and the laws, regulations, and official issuances this page relies on. Each citation links directly to the issuing authority’s document.
- LawPhil Project (Arellano Law Foundation). “NIRC §24(B) as amended by RA 10963: passive income final taxes (interest 20%, dividends 10%, unlisted-share gains 15%).” lawphil.net. Republic Act No. 10963 (TRAIN), amending NIRC Sec. 24(B). Accessed .
- Bureau of Internal Revenue. “BIR: Final Withholding Tax (rates and BIR Form 2306 certificate).” bir.gov.ph. Bureau of Internal Revenue, Withholding Tax (Final). Accessed .