Passive Income
Updated June 13, 2026
On this page
Definition
Passive income is income such as interest, royalties, prizes and dividends that the Tax Code taxes at final rates instead of the graduated rates. For individuals the main final rates are 20% on deposit interest and most royalties, 10% on dividends from domestic corporations and on royalties from books, literary works and musical compositions, and 25% for nonresident aliens not engaged in trade or business.
In Philippine taxation, passive income refers to the items listed in NIRC §24(B), §25, §27(D) and §28 that are subject to final tax: interest on bank deposits, deposit substitutes and trust funds; royalties; prizes and winnings; and dividends. Under CMEPA (RA 12214), from July 1, 2025 interest on deposits in any currency, including FCDU deposits of residents, is taxed at 20% final, and the exemption for new long-term deposits was removed. The payor withholds the final tax at source, and that tax settles the payee's liability on the income, so it is not reported again on the income tax return. Rental income is not passive income in this sense: it is reported as business income, taxed at graduated rates or the 8% option, with tenants who are withholding agents deducting 5% creditable withholding tax.
Why it matters
Knowing which income is subject to final tax tells you which income goes on your income tax return and which stays off it. Interest, dividends and royalties already taxed at source are excluded from the return, while rent and other business income must be reported and taxed at graduated rates or the 8% option. Mixing the two leads either to double reporting or to unreported income.
How it works
Passive income is taxed through final withholding. The payor, such as a bank or corporation, withholds the final tax before paying you: 20% on deposit interest and 10% on cash dividends from domestic corporations to resident citizens and resident aliens. The payor remits the tax to the BIR, and that settles your tax on the income. Royalties are taxed at 20%, except royalties on books, literary works and musical compositions at 10%. Rent is different: it is part of your business or regular income and is reported on your quarterly and annual returns, with any 5% tax withheld by a corporate tenant claimed as a credit.
Examples
Bank Interest Income
Maria earns ₱50,000 in interest from her savings account in 2026. The bank automatically withholds 20% final tax (₱10,000), leaving her with ₱40,000. She doesn't need to include this in her annual income tax return since it's subject to final withholding tax.
Rental Property Income
Carlos owns a condominium unit and earns ₱30,000 a month in rent (₱360,000 a year). Rent is not subject to a final tax. He reports it as business income; if he elects the 8% rate and has no other income, his tax is (₱360,000 - ₱250,000) × 8% = ₱8,800.
Stock Dividends
Ana receives ₱25,000 in cash dividends from her Philippine stock investments. The company withholds 10% final tax (₱2,500) for resident citizens. This dividend income is not included in her regular income tax return.
Freelance Royalties vs Active Income
Designer Ben earns ₱100,000 from active design work (taxed at graduated rates up to 35%) and ₱50,000 from licensing his existing designs to companies. The license fees are royalties subject to a 20% final tax (₱10,000), which the payor withholds; only royalties on books, literary works and musical compositions get the 10% rate.
Foreign Currency Deposit Interest
Lisa is an OFW who qualifies as a nonresident citizen and keeps her dollars in an FCDU account, earning interest equal to ₱15,000. FCDU income of nonresidents is exempt from income tax, so no tax is withheld. A resident depositor would pay the 20% final tax (₱3,000) on a deposit placed from July 1, 2025.
Common misconceptions
- Myth: All passive income has the same tax rate
- Fact: Different types of passive income have different final rates. Deposit interest is taxed at 20%, dividends from domestic corporations at 10% for resident individuals, and royalties at 20% (10% for books, literary works and musical compositions). Rent is not taxed at a final rate.
- Myth: Passive income is always tax-free
- Fact: Passive income is subject to final taxes and is not tax-free, except in specific cases such as FCDU interest earned by nonresidents and Pag-IBIG MP2 dividends.
- Myth: You never need to report passive income on tax returns
- Fact: Income subject to final tax is not reported again on the annual return, but rent and other business income always are, whatever the amount.
Questions people ask
What is passive income in Philippine taxation?
Passive income is income such as bank interest, dividends, royalties and prizes that the Tax Code taxes at final rates, mostly 10% or 20% for individuals. Rental income is not in this group; it is taxed as regular income.
What does passive income mean for tax purposes?
For tax purposes, passive income means income subject to final withholding tax instead of the graduated rates. The payor withholds the tax at source, and that settles your tax on that income.
What are examples of passive income in the Philippines?
Common examples: ₱50,000 of bank interest (20% final tax, ₱10,000), ₱25,000 of cash dividends from a domestic corporation (10% final tax, ₱2,500), and ₱30,000 of royalties from a patent license (20% final tax, ₱6,000).
How is passive income tax calculated?
Apply the final tax rate to the gross amount. For example: ₱100,000 of cash dividends × 10% = ₱10,000 tax, or ₱50,000 of bank interest × 20% = ₱10,000 tax.
What's the difference between passive income and active income?
Active income comes from work or business you carry on, such as salaries, professional fees and rent, and is taxed at graduated rates up to 35% (or the 8% option for qualified self-employed individuals). Passive income such as interest, dividends and royalties is taxed at final rates, mostly 10% or 20%.
Why is understanding passive income important?
Understanding passive income helps you: (1) apply the correct final rates, (2) avoid reporting income already taxed at source, (3) report rent and other business income that is not subject to final tax, (4) file the right returns, and (5) keep tax on investments as low as the law allows.
Who needs to know about passive income taxation?
Anyone earning investment income: depositors, investors receiving dividends, OFWs with foreign currency deposits, creators earning royalties, and retirees living off investment income. Property owners should note that rent is taxed as regular income, not as passive income.
When do you encounter passive income in tax filing?
You meet it when you receive a certificate of final tax withheld (BIR Form 2306) from a bank or corporation, when deciding what to leave out of your annual return, and when separating rent and other business income, which must be reported, from income already taxed at source.
What are common mistakes with passive income taxation?
Common mistakes include reporting income already subjected to final tax on the annual return, treating rental income as if it were subject to a final tax, applying the 10% royalty rate to royalties other than on books, literary works and musical compositions, and not keeping withholding certificates.
How do I apply passive income rules in practice?
Apply passive income rules by: (1) identifying which income is subject to final tax, (2) keeping certificates of final tax withheld (Form 2306) and creditable tax withheld (Form 2307), (3) reporting rent and other business income on your quarterly and annual returns, (4) leaving out income already taxed at source, and (5) using tax calculators to compare your options for business income.
In practice
- On BIR Form 1701. Income already subjected to final tax is not included in your annual income tax return. Rent and other business income are reported on Form 1701 or 1701A, and on the quarterly Form 1701Q.
- Certificate of Final Tax Withheld. Banks and corporations issue BIR Form 2306 showing the final tax withheld from your interest, dividends or royalties. Keep these certificates as proof that the tax was withheld.
- Quarterly Filing for Rental Income. Rent is reported on the quarterly return (Form 1701Q) and the annual return. If a corporate tenant withholds 5% creditable tax, claim it using the Form 2307 the tenant gives you.
- Mixed Income Portfolio. If you have both active and passive income, keep separate records. Use TaxCalculator.com.ph's income tax calculator to compare the graduated rates and the 8% option for your business or rental income.
Next steps
Learn more
Income Tax Calculator
Calculate your total tax liability including passive income options
Withholding Tax Calculator
Compute final withholding taxes on different passive income types
BIR Form 1701 Guide
Complete guide to annual income tax returns and passive income reporting
Rental Income Tax Guide
Detailed guide to rental income taxation and filing requirements
Investment Income Tax Guide
Complete guide to taxes on stocks, bonds, and other investments
Related content
Calculators
Tax types
Taxpayer guides
BIR forms
Guides
Glossary
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 §24(B) as amended by RA 10963: final taxes on interest/dividends/royalties/prizes.” lawphil.net. Republic Act No. 10963 (TRAIN), amending NIRC Sec. 24(B). Accessed .