Taxable Income Definition and Computation
Updated June 13, 2026
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Definition
Taxable income is your gross income minus exclusions and allowable deductions. It's the final amount subject to income tax computation under the Philippine tax code. Personal and dependent exemptions no longer apply.
Taxable income represents the portion of your earnings that the Bureau of Internal Revenue (BIR) uses to calculate your income tax. Under the National Internal Revenue Code (NIRC), it is computed by taking gross income, leaving out exclusions such as mandatory contributions and tax-free benefits, and subtracting allowable deductions for business or professional income (itemized deductions or the 40% optional standard deduction). For employees, taxable compensation appears on BIR Form 2316 (Certificate of Compensation Payment/Tax Withheld) and determines the tax withheld for the year. For self-employed individuals, it is computed on BIR Form 1701 or 1701A; corporations use BIR Form 1702. The Tax Reform for Acceleration and Inclusion (TRAIN) Law changed how taxable income is computed from 2018. It repealed the personal and dependent exemptions and replaced them with a 0% rate on the first ₱250,000 of taxable income, raised the tax-free ceiling for 13th month pay and other benefits to ₱90,000, and lowered the rates for most earners from 2023.
Detailed explanation
What Is Taxable Income?
Taxable income is the net amount of income on which a taxpayer owes Philippine income tax. It is calculated by starting with gross income (all income from whatever source derived, per NIRC §32(A)), leaving out exclusions, and subtracting allowable deductions. The result is the base to which the graduated rates are applied.
Legal Foundation
The computation of taxable income is governed by NIRC §32 (Gross Income and Exclusions) and NIRC §34 (Allowable Deductions). The Tax Reform for Acceleration and Inclusion (TRAIN) Law, RA 10963, effective 1 January 2018, set the current rates and removed personal and dependent exemptions.
Components of Taxable Income Calculation
Gross Income
Gross income includes all income from whatever source derived, unless expressly excluded by law. For employees, this includes salaries, wages, bonuses, and allowances. For self-employed individuals and businesses, it includes revenue from trade, profession, or business. Passive income such as bank interest and dividends is usually taxed separately through final withholding (NIRC §24(B)).
Exclusions from Gross Income
Certain receipts are excluded from gross income and therefore do not form part of the taxable base. Common exclusions under NIRC §32(B) include life insurance proceeds, gifts, bequests, and inheritances. Employees also exclude mandatory SSS, PhilHealth and Pag-IBIG contributions, de minimis benefits, and 13th month pay and other benefits up to ₱90,000 per year (NIRC §32(B)(7)(e), as amended by RA 10963).
Allowable Deductions
Deductions apply only to business and professional income. Employees cannot deduct expenses against compensation. Self-employed individuals and businesses may claim itemized deductions for ordinary and necessary business expenses (NIRC §34(A) to (J)), or the optional standard deduction of 40% of gross sales or receipts, with no cap (NIRC §34(L)).
What Happened to Personal Exemptions
Until 2017, individuals could subtract a ₱50,000 personal exemption and ₱25,000 for each dependent, up to four. The TRAIN Law repealed both from 1 January 2018 and introduced a 0% rate on the first ₱250,000 of taxable income instead.
Taxable Income Formula
Taxable Income = Gross Income minus Exclusions minus Deductions
From 2023 onward, taxable income of ₱250,000 or less is taxed at 0%; over ₱250,000 to ₱400,000 at 15% of the excess; over ₱400,000 to ₱800,000 at ₱22,500 plus 20% of the excess; over ₱800,000 to ₱2,000,000 at ₱102,500 plus 25%; over ₱2,000,000 to ₱8,000,000 at ₱402,500 plus 30%; and above ₱8,000,000 at ₱2,202,500 plus 35% of the excess (NIRC §24(A)(2), as amended).
Special Cases and Adjustments
Non-Resident Aliens
Non-resident aliens not engaged in trade or business in the Philippines pay a flat 25% final tax on gross Philippine-source income, with no deductions (NIRC §25(B)).
Capital Gains on Real Property
The sale of real property held as a capital asset is subject to a 6% capital gains tax on the gross selling price or fair market value, whichever is higher, regardless of the holding period (NIRC §24(D)). It is reported separately on BIR Form 1706.
Passive Income
Certain passive income sources (such as interest, dividends, and royalties) are subject to final withholding tax and are not included in the annual income tax return (NIRC §24(B)).
Filing and Compliance
Taxpayers must compute their taxable income accurately and report it on their annual income tax return (BIR Form 1700 for compensation earners, Form 1701 or 1701A for self-employed and mixed-income individuals). The Bureau of Internal Revenue (BIR) may audit and adjust taxable income if deductions are not properly substantiated or if income is underreported. Errors can lead to a 25% surcharge and 12% interest a year (NIRC §248, §249).
Why it matters
Taxable income determines how much Philippine income tax you owe. Misunderstanding what counts as income, what is excluded and which deductions apply can lead to overpayment or underpayment. Accurate computation keeps you compliant with BIR rules and protects you from penalties and interest charges.
How it works
Identify Gross Income
List all income from all sources (salary, business revenue, rental income) unless it is excluded under NIRC §32(B) or already taxed through final withholding. Include bonuses, commissions, and allowances. Exclude life insurance proceeds, gifts, and the first ₱90,000 of 13th month pay and other benefits.
Apply Exclusions and Deductions
Employees leave out mandatory SSS, PhilHealth and Pag-IBIG contributions and de minimis benefits; they cannot deduct expenses. Self-employed individuals choose itemized deductions or the 40% optional standard deduction on gross sales or receipts. Itemized deductions must be ordinary, necessary, and supported by receipts.
No Personal Exemptions
The ₱50,000 personal exemption and the ₱25,000 exemption per dependent were repealed by the TRAIN Law from 2018. The 0% rate on the first ₱250,000 of taxable income takes their place for every individual.
Apply Tax Rate and Compute Tax
Apply the graduated rates from 2023 onward, 0% on the first ₱250,000 and then 15%, 20%, 25%, 30% and 35% on the higher brackets. Subtract tax credits (withholding tax, quarterly payments) to arrive at the tax still due or a refund.
Examples
Salaried Employee, ₱600,000 Annual Salary
Juan dela Cruz earns ₱600,000 a year. His SSS, PhilHealth and Pag-IBIG contributions total ₱38,400, so his taxable income is ₱561,600. Tax is ₱22,500 + 20% × (₱561,600 minus ₱400,000) = ₱54,820 (NIRC §24(A)(2)).
Self-Employed Professional, ₱1,200,000 Revenue
Maria Santos, a consultant, earns ₱1,200,000 in gross receipts with ₱204,000 of documented expenses (office rent ₱120,000, supplies ₱60,000, utilities ₱24,000). Itemized, her taxable income is ₱996,000 and income tax is ₱102,500 + 25% × ₱196,000 = ₱151,500. With the 40% optional standard deduction, taxable income is ₱720,000 and income tax is ₱86,500 (NIRC §34(L), §24(A)(2)).
Employee with Dependent Children
Anna Reyes earns an ₱800,000 salary and has three children. Her children no longer reduce her tax. After ₱43,400 of contributions, her taxable income is ₱756,600 and tax is ₱22,500 + 20% × (₱756,600 minus ₱400,000) = ₱93,820 (NIRC §24(A)(2)).
Business Owner with Capital Gain
Roberto Cruz's business earns ₱2,000,000 of net taxable income, taxed at ₱102,500 + 25% × ₱1,200,000 = ₱402,500. He also sells a lot he held as a capital asset for ₱3,000,000, above its zonal value. The sale is subject to a separate 6% capital gains tax on the ₱3,000,000 selling price, or ₱180,000, filed on BIR Form 1706. His total is ₱582,500 (NIRC §24(A)(2), §24(D)).
Non-Resident Alien, Interest Income
David Smith, a non-resident alien not engaged in Philippine business, earns ₱200,000 in bank interest. Non-resident aliens not engaged in business pay a 25% final tax on gross Philippine-source income, so his tax is ₱200,000 × 25% = ₱50,000, withheld by the bank. No annual return is required for this income (NIRC §25(B)).
Common misconceptions
- Myth: All income I receive is taxable income.
- Fact: Gross income excludes gifts, inheritances, life insurance proceeds, mandatory contributions and the first ₱90,000 of 13th month pay and other benefits (NIRC §32(B)). Passive income taxed through final withholding is also left out of the annual computation.
- Myth: I can deduct any expense I pay from my salary.
- Fact: Employees cannot deduct expenses against compensation at all. Only ordinary and necessary business expenses are deductible, and only by self-employed individuals and businesses (NIRC §34).
- Myth: I can still claim personal and dependent exemptions.
- Fact: Both were repealed by the TRAIN Law from 2018 for all individual taxpayers. The 0% rate on the first ₱250,000 of taxable income replaced them (RA 10963).
- Myth: Taxable income is the same as the tax I owe.
- Fact: Taxable income is multiplied by the applicable tax rate to compute tax liability. You then subtract tax credits (withholding tax, quarterly installments) to find the final tax due or refund (NIRC §24).
- Myth: Gains on real property are taxed like salary.
- Fact: Real property held as a capital asset is taxed separately through a 6% capital gains tax on the gross selling price or fair market value, whichever is higher, not through the graduated rates (NIRC §24(D), as amended by RA 10963).
Questions people ask
How do I calculate my taxable income if I am a salaried employee?
Start with your annual gross compensation. Leave out SSS, PhilHealth and Pag-IBIG contributions, 13th month pay and other benefits up to ₱90,000, and de minimis benefits. The result is your taxable income. Apply the graduated rates from 2023 onward, 0% on the first ₱250,000 and then 15%, 20%, 25%, 30% and 35% (NIRC §24(A)(2)).
What deductions can I claim as a self-employed individual?
You may claim itemized deductions for ordinary and necessary business expenses (rent, utilities, supplies, professional fees, depreciation) supported by receipts, or elect the optional standard deduction of 40% of gross sales or receipts, with no cap. If your gross sales or receipts are ₱3,000,000 or less, you may instead elect the 8% rate. Personal expenses (food, clothing, entertainment) are not deductible (NIRC §34).
Can I claim dependents to reduce my taxable income?
No. The additional exemption of ₱25,000 per dependent was repealed by the TRAIN Law from 2018, along with the personal exemption. Having children or other dependents no longer changes your income tax (NIRC §24(A), as amended by RA 10963).
How is capital gain from selling real property taxed?
The sale of real property held as a capital asset is subject to a 6% capital gains tax on the gross selling price or the fair market value, whichever is higher, regardless of how long it was held. It is filed separately on BIR Form 1706 within 30 days and is not added to taxable income (NIRC §24(D), as amended by RA 10963).
What happens if I underreport my taxable income?
The BIR may assess the additional tax plus a 25% surcharge and 12% interest a year (NIRC §248, §249). If the underreporting is fraudulent, the surcharge rises to 50% and criminal penalties apply. Always maintain complete records and file accurate returns to avoid these consequences.
Do non-resident aliens compute taxable income the same way as residents?
It depends on the type of alien. Non-resident aliens not engaged in Philippine business pay a flat 25% final tax on gross Philippine-source income, with no deductions (NIRC §25(B)). Non-resident aliens engaged in business, including those staying more than 180 days in the year, and resident aliens use the graduated rates; nonresident aliens cannot use the optional standard deduction (NIRC §34(L)).
Can I carry forward unused deductions or exemptions to the next year?
Personal exemptions no longer exist. A net operating loss from business or professional practice can be carried over to the next three years (NOLCO), but other unused deductions cannot be carried forward (NIRC §34(D)(3)).
In practice
- Employees must ensure their employer withholds the correct amount based on their taxable income; under-withholding can result in a tax bill at year-end.
- Self-employed individuals and business owners must maintain detailed records of income and deductions to substantiate their taxable income; the BIR frequently audits these returns.
- Taxpayers with multiple income sources (salary + rental + business income) must add them up, apply exclusions and deductions, then compute tax on the combined taxable income.
- Birth certificates are no longer needed to claim dependents, since dependent exemptions were repealed in 2018.
- Quarterly income tax returns (BIR Form 1701Q) are required for self-employed individuals and business owners; failure to pay can trigger surcharge and interest under NIRC §248 and §249.
Next steps
Learn more
Income Tax Calculator 2026
13th Month Pay Tax Calculator
Tax Bracket Calculator
Tax Refund Calculator
BIR Form 1700 Employee Annual Return
BIR Form 1701 Self Employed Annual Return
BIR Form 2316 Certificate Of Compensation
BIR Form 1701Q Quarterly Return
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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 §31-34 (taxable income, gross income, deductions): full text.” lawphil.net. NIRC of 1997 (RA 8424), Sec. 31-34. Accessed .