What are Deductions and Exemptions to

Income Tax (Philippines)

What are the deductions and exemptions you can claim against your taxable income
in computing income tax and preparing your annual tax return? The computation for income tax
expense and payable for individuals and corporations (including taxable partnerships) differs.
Individual taxpayers can claim personal and additional exemptions that reduce their total taxable
income while corporations, which are not natural persons, obviously cannot. Furthermore,
income tax rate on individuals are graduated (progressive), while the corporation income taxes
(regular corporate income tax and minimum corporate income tax) are computed at fixed rates. If
you are on your way now to computing your income to be filed and remitted with the BIR, the
following deductions and exemptions may reduce your taxable income, and thereby also
reducing your income tax.

What are allowable deductions from gross

income?
1. Optional Standard Deductions. Both individual taxpayers and corporations have the option
to claim optional standard deductions (OSD in lieu of itemized deductions. The following are
OSD for individuals and corporations:

a. OSD for individual

For individual taxpayers, a maximum of 40% of their gross sales or gross receipts shall be
allowed as deduction instead of the itemized deduction. This type of deduction shall not be
allowed for non-resident aliens engaged in trade or business.

b. OSD for corporations

RA 9504, which was approved effective July 2008, gives corporate taxpayers an option to claim
optional standard deduction (OSD) instead of itemized deductions. OSD is equivalent to 40% of
gross income. Once the option to use OSD is made, it shall be irrevocable for the taxable year for
which the option was made. A corporation who availed and claimed this deduction is still
required to submit its financial statements when it files its annual tax return and to keep such
records pertaining to its gross income.
2. Itemized deductions. These deductions from gross income include all ordinary and necessary
trade and business expenses paid or incurred during the taxable year in carrying on or which are
directly attributable to the development, management, operation and/or conduct of the trade and
business. Itemized deductions include the following:

a) Expenses
b) Salaries
c) Interest *
d) Travel
e) Rental expenses
f) Entertainment expenses *
g) Taxes *
h) Losses
i) Bad Debts *
j) Depreciation
k) Depletion of Oil and Gas Wells and Mines
l) Charitable Contributions and Other Contributions *
m) Research and Development
n) Pension Trusts
o) Premium payments on health/ or hospitalization insurance *
p) and other expenses that may be allowed as itemized deductions by the NIRC

Important Note: Certain expenses, such as interest, bad debts, taxes, entertainment and other
expenses have been set with limitations and exemptions in claiming as deductions against the
taxable income. To learn more on the limitations, tax arbitrage and exemptions on those
expenses, please read our article allowable deductions in the Philippines. Premium payment
on health and/or hospitalization insurance of an individual taxpayer, including his family, in the
amount of P= 2,400 per year, per family, may be deducted from his gross income: Provided, that
said taxpayer, including his family, has a yearly gross income of not more than P= 250,000. In
case of married taxpayers, only the spouse claiming the additional exemption for dependents
shall be entitled to this deduction.

Personal and Additional Exemptions

As discussed earlier, individual taxpayers may claim personal and addition exemptions as
follows:

1. Personal exemption
For single individual or married individual judicially decreed as legally separated with no
qualified dependentsP 50,000.00
For head of familyP 50,000.00
For each married individual *P 50,000.00

Note: In case of married individuals where only one of the spouses is deriving gross income,
only such spouse will be allowed to claim the personal exemption.

2. Additional exemption.

For each qualified dependent, a P25,000 additional exemption can be claimed but only up to 4
qualified dependents. The additional exemption can be claimed by the following:

The husband who is deemed the head of the family unless he explicitly waives his right in
favor of his wife
The spouse who has custody of the child or children in case of legally separated spouses.
Provided, that the total amount of additional exemptions that may be claimed by both shall
not exceed the maximum additional exemptions allowed by the Tax Code.
The individuals considered as Head of the Family supporting a qualified dependent

Note: Dependent Child means a legitimate, illegitimate or legally adopted child chiefly
dependent upon and living with the taxpayer if such dependent is not more than twenty-one (21)
years of age, unmarried and not gainfully employed or if such dependent, regardless of age, is
incapable of self-support because of mental or physical defect.

Disclaimer: This article was published for informational use only. New laws, BIR issuances,
regulations and rulings may render this post obsolete or incorrect in part or in full. For more
information, please visit the BIR website or office for more information.