Graduated Tax Rates and Income Brackets

What Are Graduated Tax Rates?

Graduated tax rates, also called progressive taxation, are a cornerstone of the Philippine income tax system. Under this system, a taxpayer's income is divided into brackets, and each bracket is taxed at a different rate. As income increases, the marginal rate (the rate applied to the next peso earned) increases, but only the income within that bracket is taxed at that rate. This differs from a flat tax, where all income is taxed at a single rate regardless of amount.

The Philippines adopted its current graduated tax rate structure under the Tax Reform for Acceleration and Inclusion (TRAIN) Law, Republic Act No. 10963, effective January 1, 2018. The system was further refined by the Corporate Income Tax and Minimum Corporate Income Tax Amendments (CMEPA) in 2024, which adjusted rates for corporations but maintained the individual income tax brackets established under TRAIN.

Current Individual Income Tax Brackets (2024)

As of 2024, the Philippine individual income tax brackets for residents are:

• ₱0 to ₱250,000: 0% (exempt)
• ₱250,001 to ₱400,000: 15%
• ₱400,001 to ₱800,000: 20%
• ₱800,001 to ₱2,000,000: 25%
• ₱2,000,001 to ₱5,000,000: 30%
• ₱5,000,001 and above: 35%

These brackets apply to individual taxpayers who are residents of the Philippines and derive income from all sources (NIRC §24(A), as amended by RA 10963).

How Graduated Rates Work in Practice

The key principle is that you do not pay the highest marginal rate on your entire income. Instead, only the portion of income that falls within each bracket is taxed at that bracket's rate. For example, if Juan dela Cruz earns ₱600,000 annually:

• ₱0 to ₱250,000 at 0% = ₱0
• ₱250,001 to ₱400,000 (₱150,000) at 15% = ₱22,500
• ₱400,001 to ₱600,000 (₱200,000) at 20% = ₱40,000
• Total tax: ₱62,500

Juan's effective tax rate is ₱62,500 ÷ ₱600,000 = 10.42%, not 20% (the marginal rate on his last peso).

Non-Resident Aliens and Special Rates

Non-resident aliens (NRAs) who are not engaged in trade or business in the Philippines are taxed only on Philippine-source income at a flat rate of 25% (NIRC §25(A)). NRAs engaged in business are taxed on worldwide income at the same graduated rates as residents. OFWs (overseas Filipino workers) who are residents are taxed on worldwide income at graduated rates; those who are non-residents are taxed only on Philippine-source income.

Corporate Income Tax Rates

Corporations have a different rate structure. Under CMEPA 2024, the regular corporate income tax rate is 25% (down from 30% under TRAIN). Certain small and medium enterprises (SMEs) with gross receipts not exceeding ₱5,000,000 in the preceding taxable year may be subject to an 8% corporate income tax rate on net taxable income (NIRC §27(A), as amended by RA 11534 and further adjusted by CMEPA).

Purpose and Rationale

Graduated tax rates embody the principle of ability to pay: those with higher incomes contribute a larger share of their income to government revenue. This progressive structure aims to reduce income inequality and fund public services while minimizing the tax burden on lower-income earners. The TRAIN Law specifically raised the personal exemption threshold to ₱250,000 to reduce the tax burden on workers earning below that level (RA 10963, Section 2).

Interaction with Deductions and Credits

Graduated rates apply to taxable income after allowable deductions (such as personal and additional exemptions, itemized deductions, and business expenses) and before tax credits. Tax credits (such as the Expanded Simplified Withholding Tax for certain professionals) directly reduce the tax liability calculated using graduated rates.