Gross Income Definition and Scope
Updated June 13, 2026
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Definition
Gross income refers to all income from whatever source derived by a taxpayer during a taxable year, before any deductions or exemptions, as defined under Section 32 of the National Internal Revenue Code (NIRC). It includes compensation, business income, professional income, passive income, and other sources of income subject to Philippine income tax.
Under Section 32 of the NIRC, gross income means all income derived from whatever source, unless excluded by law. It includes compensation, gross income from business or profession, gains from dealings in property, interest, rents, royalties, dividends, annuities, prizes and winnings, pensions, and a partner's distributive share. Resident citizens are taxed on income from within and outside the Philippines, while nonresident citizens (including overseas Filipino workers) and aliens are taxed only on Philippine-source income (Section 23). Some items, such as bank interest and dividends of individuals, are subject to final tax and are not added to the income reported in the annual return. Gross income determination follows the all-inclusive principle, meaning all income is taxable unless specifically excluded or exempted by law.
Detailed explanation
What Is Gross Income?
Gross income is the total of all income from whatever source derived by a taxpayer during a taxable year, before any deductions, exemptions, or allowances are applied. Under Section 32 of the National Internal Revenue Code (NIRC), gross income is the foundation upon which Philippine income tax liability is calculated. It encompasses compensation for services, business and professional income, gains from property transactions, passive income, and all other accretions to wealth not specifically exempted by law.
Sources of Gross Income
Compensation for Services
Compensation includes salaries, wages, bonuses, allowances, benefits, and other remuneration received by employees and professionals for services rendered. This covers both cash and non-cash benefits with taxable value. Under NIRC §32(A)(1), compensation is taxable regardless of the form in which it is received.
Business and Professional Income
Income derived from the operation of a trade or business, including gross receipts from sales of goods or services, is part of gross income. For professionals (doctors, lawyers, accountants, engineers), gross income includes all fees and compensation earned from professional practice. For a business, gross income is gross sales less cost of sales (NIRC §32(A)(2)).
Passive Income
Income from property includes gains from dealings in property, interest, rents, royalties, and dividends (NIRC §32(A)(3) to (7)). For individuals, interest on bank deposits and dividends from domestic corporations are subject to final tax withheld at source (NIRC §24(B)), so they are not added to the income in the annual return.
Other Sources
Gross income also includes annuities, prizes and winnings, pensions, and a partner's distributive share from a general professional partnership (NIRC §32(A)(8) to (11)). The opening words of NIRC §32(A), "all income derived from whatever source", make the list open-ended.
What Is NOT Included in Gross Income
Certain items are excluded from gross income by law. These include life insurance proceeds paid by reason of death (NIRC §32(B)(1)), gifts, bequests and devises (NIRC §32(B)(3)), compensation for injuries or sickness (NIRC §32(B)(4)), retirement benefits and SSS and GSIS benefits (NIRC §32(B)(6)), 13th month pay and other benefits up to ₱90,000, and employee shares of SSS, GSIS, PhilHealth and Pag-IBIG contributions (NIRC §32(B)(7)(e) and (f)).
Gross Income vs. Net Income
Gross income is the starting point; net income is calculated after deducting allowable expenses and deductions. For employees, mandatory contributions and tax-free benefits are taken out of gross compensation to arrive at taxable income, and the first ₱250,000 of that is taxed at 0% (TRAIN Law RA 10963). For self-employed and business taxpayers, ordinary and necessary business expenses are deducted from gross income to compute net income, which is then subject to income tax.
Importance in Tax Compliance
Accurate determination of gross income is critical because it is the base upon which all income tax calculations rest. Underreporting gross income is a common audit finding by the Bureau of Internal Revenue (BIR). Taxpayers must maintain complete records of all income sources and substantiate gross income with supporting documents such as payslips, invoices, bank statements, and financial statements.
Reporting Gross Income
Individual taxpayers report gross income on the Annual Income Tax Return (BIR Form 1700 or 1701). Self-employed and business taxpayers whose gross annual sales, earnings, receipts or output exceed ₱3,000,000 must have their books audited yearly by an independent CPA (NIRC §232(A), as amended by TRAIN). Corporations report gross income on their corporate income tax returns (BIR Form 1702).
Why it matters
Gross income is the foundation of your tax liability in the Philippines. Understanding what counts as gross income ensures you report all required sources and claim only legitimate deductions, reducing audit risk and ensuring compliance with BIR requirements. Underreporting gross income is a common violation found in BIR audits.
How it works
Identify All Income Sources
List every source of income you received during the taxable year, such as salary, business receipts, rental income, interest, dividends, and any other accretion to wealth. Include both cash and non-cash benefits with taxable value. Check NIRC §32(B) for the items excluded from gross income, such as gifts, life insurance proceeds and 13th month pay up to ₱90,000.
Gather Supporting Documentation
Collect payslips, invoices, bank statements, financial statements, and other proof of income. The BIR requires substantiation of all gross income reported on your tax return. Keep books and records for five years from the day after the return deadline (NIRC §235, as amended by RA 11976).
Calculate Gross Income Total
Sum all taxable income sources to arrive at your total gross income. Do not deduct expenses or personal deductions at this stage. Gross income is the raw total before any reductions.
Apply Deductions and Exemptions
Subtract what the law allows (mandatory contributions and tax-free benefits for employees; itemized deductions or the 40% optional standard deduction for the self-employed) to compute taxable income. Gross income minus deductions equals the amount subject to income tax under NIRC §24.
Examples
Salaried Employee with Multiple Income Sources
Juan dela Cruz earns a ₱600,000 annual salary, ₱50,000 in bank interest and ₱30,000 in cash dividends. The interest (20%) and dividends (10%) are already taxed through final withholding, so only his salary goes into the graduated computation. After ₱38,400 of SSS, PhilHealth and Pag-IBIG contributions, his taxable compensation is ₱561,600 and his income tax is ₱22,500 + 20% × ₱161,600 = ₱54,820 (NIRC §24(A) and §24(B)).
Self-Employed Professional
Maria Santos, a freelance accountant, earned ₱800,000 in professional fees during the year. Her gross income is ₱800,000. She deducts ₱150,000 in ordinary business expenses (office rent, supplies, professional development). Her net income is ₱650,000, which is her taxable income subject to the graduated rates (NIRC §32(A)(2), §34).
Business Owner with Rental Income
Anna Reyes operates a retail store with gross sales of ₱2,000,000 and cost of goods sold of ₱800,000, and also earns ₱120,000 a year in rent. For a business, gross income is sales less cost of goods sold, so her gross income is ₱1,200,000 + ₱120,000 = ₱1,320,000. After deducting ₱200,000 in operating expenses, her net income is ₱1,120,000 (NIRC §32(A)(2) and (A)(5)).
Non-Resident Foreign National
Robert Chen, a nonresident alien not engaged in trade or business in the Philippines, earned ₱500,000 of Philippine-source income. He is taxed only on Philippine-source income, at a 25% final tax on the gross amount (₱125,000), withheld by the payor (NIRC §25(B)).
Recipient of Exempt Income
Pedro Gonzales received ₱100,000 in life insurance proceeds from his deceased father's policy and ₱50,000 in SSS benefits. Neither amount is included in gross income, because life insurance proceeds paid by reason of death and SSS benefits are excluded under NIRC §32(B)(1) and §32(B)(6)(f).
Common misconceptions
- Myth: Gross income is the same as take-home pay or net salary.
- Fact: Gross income is total income before any deductions. Take-home pay is what remains after taxes and other withholdings. For a ₱600,000 salary, gross income is ₱600,000; take-home is less after income tax and other deductions (NIRC §32).
- Myth: Gifts and inheritances are always part of gross income.
- Fact: Gifts, bequests and devises are excluded from the recipient's gross income under NIRC §32(B)(3). However, the donor may owe donor's tax at a 6% flat rate on total gifts exceeding ₱250,000 per calendar year (NIRC §99).
- Myth: Business expenses can be deducted from gross income to reduce it before reporting.
- Fact: Gross income is reported as the total of all income sources. Business expenses are deducted separately to compute net income. Gross income must be reported in full; deductions are itemized separately on the tax return (NIRC §32 and §34).
- Myth: Income from informal or cash-based work does not count as gross income.
- Fact: All income from whatever source derived is part of gross income under NIRC §32(A), regardless of whether it is formal, informal, or cash-based. The BIR expects taxpayers to report all income, and willful failure to do so can be prosecuted as tax evasion (NIRC §254).
Questions people ask
What is the difference between gross income and taxable income?
Gross income is the total of all income from all sources before any deductions. Taxable income is gross income minus allowable deductions and exemptions. For employees, taxable income equals gross compensation minus mandatory contributions, 13th month pay and other benefits up to ₱90,000, and de minimis benefits; the first ₱250,000 of it is taxed at 0% (TRAIN Law RA 10963). For self-employed, taxable income equals gross income minus business expenses (NIRC §32 and §24).
Do I have to report income from informal work or side hustles?
Yes. Gross income covers all income from whatever source derived under NIRC §32(A), including informal work, freelance projects, and side hustles. The BIR expects complete reporting of all income. Unreported income is assessed with a surcharge of 25% plus 12% annual interest (NIRC §248 and §249), and willful attempts to evade tax are criminal (NIRC §254).
Are gifts and inheritances included in gross income?
No. Gifts, bequests and devises are excluded from the recipient's gross income under NIRC §32(B)(3), although income from the property received is taxable. The donor may owe donor's tax at a flat 6% on total gifts exceeding ₱250,000 per calendar year (NIRC §99). Inheritances are not subject to income tax on the heir; the estate may owe estate tax at a 6% flat rate (NIRC §84).
How do I report gross income if I have multiple employers or income sources?
List all employers and income sources on your annual income tax return (BIR Form 1700 or 1701). Include gross compensation from each employer, plus all other income (interest, dividends, rental, business, professional). The total is your gross income. Each employer withholds tax based on your gross salary; you reconcile all withholdings when you file your annual return (NIRC §32 and BIR Form 1700).
What happens if I underreport gross income?
The BIR may assess additional income tax, surcharge of 25%, and interest of 12% per annum on the unpaid tax (NIRC §248 and §249). If the underreporting is willful, criminal prosecution for tax evasion is possible under NIRC §254. Under-declaring taxable sales or receipts by more than 30% is prima facie evidence of a false or fraudulent return, which carries a 50% surcharge (NIRC §248(B)).
Are government benefits like SSS and GSIS pensions included in gross income?
No. SSS and GSIS benefits are excluded from gross income (NIRC §32(B)(6)). Retirement benefits from a private employer are also excluded if paid under RA 7641 or a reasonable private benefit plan to an employee at least 50 years old with at least 10 years of service with the same employer, availed only once (NIRC §32(B)(6)(a)). Annuities and other pensions are included in gross income (NIRC §32(A)(8), (10)).
How do I report gross income if I am self-employed or operate a business?
Report gross sales or receipts, then cost of sales and operating expenses, to arrive at net income. File an income tax return (BIR Form 1701 or 1702) with the supporting financial statements. If gross annual sales, earnings, receipts or output exceed ₱3,000,000, the books must be audited yearly by an independent CPA and the return accompanied by an Account Information Form (NIRC §232(A), as amended by TRAIN).
In practice
- Employers withhold tax on compensation using the RR 11-2018 withholding tables; employees with one employer and correct withholding are covered by substituted filing, while others report gross compensation on BIR Form 1700 or 1701.
- Self-employed and business taxpayers must maintain detailed records of all gross income sources and substantiate them with invoices, receipts, and bank statements during BIR audits.
- Rental income must be reported as gross income even if the property is mortgaged; repayments of loan principal are not deductible, though interest on the loan may be deductible as a business expense (NIRC §32(A)(5), §34(B)).
- Non-resident aliens not engaged in trade or business in the Philippines pay a 25% final tax on gross Philippine-source income, withheld by the payor, with no deductions allowed (NIRC §25(B)).
- The BIR cross-references gross income reported on tax returns with third-party information, such as withholding agents' alphalists and Forms 2307, to detect underreporting and initiate assessments.
Next steps
Learn more
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BIR Form 1700 (Annual ITR)
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Employee Tax Guide 2026
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Section 32 NIRC Explained
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Sources & References (2)
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 §32 (gross income: inclusions/exclusions): full text.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 32. Accessed .