Income Tax (2026 Guide)

Income tax is the primary direct tax imposed by the Philippine government on the worldwide income of individuals and corporations. Governed by the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Act of 2017 and the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act of 2021, income tax applies to all persons, whether natural or juridical, who derive income from sources within and outside the Philippines. The tax is levied on gross income less allowable deductions, with rates varying by taxpayer classification and income bracket. For individuals, the tax is progressive, ranging from 0% to 35% depending on taxable income. For corporations, the standard rate is 25% under CREATE, with special rates for certain entities such as cooperatives (10%) and non-resident foreign corporations (30%). The legal basis is found in NIRC §§ 21–24 (individuals), §§ 27–29 (corporations), and §§ 32–34 (special cases).

Who Pays This Tax

All individuals who are Philippine residents or who derive income from Philippine sources are subject to income tax. This includes employees earning salaries, self-employed professionals, business owners, investors, and retirees receiving pensions. Non-resident aliens are taxed only on Philippine-source income. Corporations, partnerships, and other juridical entities organized or doing business in the Philippines must also pay income tax on their net income. Special rules apply to non-resident foreign corporations (taxed at 30% on Philippine-source income), resident foreign corporations (taxed at 25% on worldwide income), and tax-exempt entities such as non-stock, non-profit organizations and government agencies (NIRC § 30). Employees are subject to withholding tax on compensation, while business owners and professionals file annual returns based on their net income after allowable deductions.

How It's Calculated

For individuals, income tax is calculated using a progressive tax table. Under the 2023 TRAIN schedule (effective January 1, 2023 and still current), the tax brackets for resident individual citizens are: 0% on the first ₱250,000 of taxable income (exempt); 15% of the excess over ₱250,000 for income of ₱250,001–₱400,000; ₱22,500 + 20% of the excess over ₱400,000 for ₱400,001–₱800,000; ₱102,500 + 25% of the excess over ₱800,000 for ₱800,001–₱2,000,000; ₱402,500 + 30% of the excess over ₱2,000,000 for ₱2,000,001–₱8,000,000; and ₱2,202,500 + 35% of the excess over ₱8,000,000 for income above ₱8,000,000 (NIRC § 24(A), as amended by RA 10963). The formula is: Taxable Income = Gross Income − Allowable Deductions. Allowable deductions for individuals include the standard deduction (₱250,000 for 2024, per TRAIN) or itemized deductions (medical expenses, charitable contributions, business expenses, interest on loans), whichever is greater. For corporations, the calculation is: Corporate Income Tax = Net Income × Tax Rate. Net income is computed as Gross Income − Cost of Goods Sold − Operating Expenses − Depreciation − Interest Expense − Other Deductible Expenses. Under CREATE (RA 11534), the corporate income tax rate is 25% for domestic corporations and resident foreign corporations, down from the previous 30%. Non-resident foreign corporations pay 30% on Philippine-source income. Cooperatives pay 10% on net income (NIRC § 27(D)). Withholding taxes on compensation are calculated monthly: Withholding Tax = Gross Compensation × Applicable Withholding Tax Rate, with rates ranging from 0% to 35% depending on the employee's estimated annual income (BIR Withholding Tax Tables, updated annually).

Filing Requirements

Individual taxpayers must file an Annual Income Tax Return (Form 1701 for resident citizens, Form 1701-C for self-employed and mixed-income earners, or Form 1701-E for non-residents) on or before April 15 of the following year (NIRC § 51). The return must be filed with the taxpayer's assigned Revenue District Office (RDO) or through the Bureau of Internal Revenue's electronic filing system (eBIR or eFPS). Employees with only compensation income and no other income may be exempt from filing if their total income does not exceed the personal exemption limit (₱250,000 standard deduction for 2024). However, those with business income, investment income, or multiple sources of income must file. Corporations must file Form 1702 (Annual Corporate Income Tax Return) or Form 1702-RT (for corporations with reduced capital stock) on or before the 15th day of the fourth month following the close of their taxable year (typically April 15 for calendar-year corporations, per NIRC § 51). Quarterly estimated income tax declarations (Form 1702-Q for corporations, Form 1701-Q for individuals with business income) are due on the 15th day of the fourth, sixth, ninth, and twelfth months of the taxable year (NIRC § 57). All returns must include supporting documents such as financial statements, schedules of income and deductions, and proof of withholding taxes paid. Filing can be done electronically via eBIR (https://ebir.bir.gov.ph) or through authorized eFPS providers, or manually at the RDO with original and duplicate copies.

Exemptions & Special Cases

Certain income is exempt from income tax under NIRC § 32. These include: (1) income derived by the Government of the Republic of the Philippines and its political subdivisions; (2) income of non-stock, non-profit educational, charitable, religious, scientific, and cultural organizations and institutions, provided they comply with registration and reporting requirements; (3) income of the Social Security System, Government Service Insurance System, and similar social security institutions; (4) prizes and awards from legitimate lotteries, sweepstakes, and contests, up to ₱10,000 (amounts exceeding ₱10,000 are taxable); (5) retirement benefits received under the Social Security System, Government Service Insurance System, or private pension plans, subject to certain conditions; (6) life insurance proceeds received by the beneficiary; (7) income from the sale of a personal residence, subject to conditions (NIRC § 39(C)); and (8) certain agricultural income in specific cases. Additionally, individuals may claim a personal exemption (standard deduction of ₱250,000 for 2024) or itemized deductions, whichever is greater. Corporations may deduct ordinary and necessary business expenses, depreciation, interest on business loans, and losses from casualty or theft. Special rates apply to certain entities: cooperatives pay 10% (NIRC § 27(D)), non-resident foreign corporations pay 30% on Philippine-source income (NIRC § 28(A)(1)), and resident foreign corporations pay 25% on worldwide income (NIRC § 28(B)). Tax-exempt entities must maintain their status by complying with registration, reporting, and operational requirements set by the BIR.

Penalties for Non-Compliance

Failure to file an income tax return or pay taxes on time incurs substantial penalties under NIRC §§ 248–249. The standard penalty for late payment or underpayment is a 25% surcharge on the unpaid tax (NIRC § 248(A)). Additionally, interest accrues at 12% per annum on the unpaid tax, compounded monthly, from the due date until full payment (NIRC § 249, as amended by TRAIN Act RA 10963). For example, if a taxpayer owes ₱100,000 in income tax due on April 15 but pays on July 15 (3 months late), the penalty is ₱25,000 (25% surcharge) plus ₱3,000 in interest (12% annual rate × 3 months ÷ 12), totaling ₱128,000. Failure to file a return altogether may result in criminal prosecution, a fine of ₱10,000 to ₱50,000, and/or imprisonment of 1 to 4 years (NIRC § 272). Fraudulent underpayment or evasion carries even harsher penalties: a fine of ₱50,000 to ₱500,000 and/or imprisonment of 2 to 10 years (NIRC § 271). The BIR may also assess additional taxes through a formal audit, and taxpayers have the right to appeal assessments through the BIR's administrative review process and, if necessary, the Court of Tax Appeals (CTA). Withholding agents who fail to remit withheld taxes face a 25% surcharge plus 12% annual interest on the withheld amount, plus potential criminal liability.