The Train Law which was executed in 2018 has amended a lot of the tax rules incorporated in the NIRC. One of the major changes that was made in the TRAIN Law was the complete revamp of Individual Income Taxation which will be discussed in detail in this post.
Types of Individual Income Earners
- Compensation Income Earner – this is an individual who is purely earning compensation income. He has no other income aside from salary and other benefits received by means of employment.
- Self-Employed/Businessman – this individual is not an employee, but rather he or she has his/her own business or is practicing his or her profession.
- Mixed Income Earner – this individual is earning a salary under an employer – employee relationship and at the same time is practicing his/her profession and/or has a business.
- Minimum Wage Earner – this is a compensation income earning individual with earnings that does not exceed the Statutory Minimum Wage in a certain location.
Individual Tax Rates (Tax Regimes) Under the Train Law
Graduated Income Tax Rate for Individual Income Taxation
The table below presents the current and updated graduated tax rates to be used by individual income earners. This table incorporates an exemption of P250,000 on income.
|Tax Schedule Effective January 1, 2018 until December 31, 2022:|
|Not over P250,000||0%|
|Over P250,000 but not over P400,000||20% of the excess over P250,000|
|Over P400,000 but not over P800,000||P30,000 + 25% of the excess over P400,000|
|Over P800,000 but not over P2,000,000||P130,000 + 30% of the excess over P800,000|
|Over P2,000,000 but not over P8,000,000||P490,000 + 32% of the excess over P2,000,000|
|Over P8,000,000||P2,410 + 35% of the excess over P8,000,000|
8% Income Tax Regime
Individuals may also opt to use the 8% income tax regime on Gross Receipts and Other Non Operating Income subject to certain rules and conditions.
Individual Income Taxation Rules
Compensation Income Earners
Pure compensation income earners are allowed to use the graduated income tax rate ONLY. They do not have the option to use the 8% income tax regime as stated in the Train Law.
Self Employed Professionals and Businessmen
Self Employed professionals and those individuals engaged in business have the option to use the graduated income tax rates or the 8% income tax regime.
Mixed Income Earners
Mixed income earners shall be taxed using the graduated rate on their compensation income. While they have the option to use the graduated rate or the 8% income tax rate for their business or professional income.
Minimum Wage Earners
The following income earned by a minimum wage earner is exempt from income tax:
- Basic Wage/Salary
- Overtime Pay
- Holiday Pay
- Night Shift Differential
- Hazard Pay
For a more in-depth discussion of Minimum Wage Earners, click here.
8% Income Tax Regime Rules for Individual Income Taxation
- The taxpayer should be earning business income or income from profession
- The gross sales or receipts of the taxpayer should not exceed P3M for the taxable year
- The intention to avail of the 8% income tax regime should be communicated to the BIR via the first quarter income tax return to be filed on or before May 15 of the current year.
- A deduction of P250,000 from the Gross Receipts or Gross Sales is allowed for those purely earning business income or income from profession.
- Mixed income earners are not allowed to deduct P250,000 from their business income or income from profession.
Difference: Train Law and Old Law for Individual Income Taxation
|Old Law||Train Law|
|Additional Exemption||P25,000 per child or PWD relative||None|
|Highest Rate in Tax Table||32%||35%|
|Exemption in the tax table||None||First P250,000|
|8% optional rate||Not Applicable||Applicable|
Computation of Annual Individual Income Tax