Tax on Passive Income


IMPORTANT NOTE: The TRAIN law has introduced changes in tax rates. Please keep this in mind while reading the text below.

A final tax at the rate of twenty percent (20%) is hereby imposed upon the amount of interest from any currency bank deposit and yield or any other monetary benefit from deposit substitutes and from trust funds and similar arrangements; royalties, except on books, as well as other literary works and musical compositions, which shall be imposed a final tax of ten percent (10%); prizes (except prizes amounting to Ten thousand pesos (P10,000) or less which shall be subject to tax under Subsection (A) of Section 24; and other winnings (except Philippine Charity Sweepstakes and Lotto winnings), derived from sources within the Philippines: Provided, however, That interest income received by an individual taxpayer (except a nonresident individual) from a depository bank under the expanded foreign currency deposit system shall be subject to a final income tax at the rate of seven and one-half percent (7 1/2%) of such interest income: Provided, further, That interest income from long-term deposit or investment in the form of savings, common or individual trust funds, deposit substitutes, investment management accounts and other investments evidenced by certificates in such form prescribed by the Bangko Sentral ng Pilipinas (BSP) shall be exempt from the tax imposed under this Subsection: Provided, finally, That should the holder of the certificate pre-terminate the deposit or investment before the fifth (5th) year, a final tax shall be imposed on the entire income and shall be deducted and withheld by the depository bank from the proceeds of the long-term deposit or investment certificate based on the remaining maturity thereof:
Four (4) years to less than five (5) years - 5%;
Three (3) years to less than (4) years - 12%;
and Less than three (3) years - 20% (Section 24 of the Tax Reform Act of 1997; R.A. 8424)
TAXABLE UNDER THIS SECTION:
[1] Interest from any currency bank deposit
[2] Interest from yield or any other monetary benefit from deposit substitute
[3] Interest from trust funds and similar arrangements
[4] Royalties
[5] Prizes
[6] Interest income from pre-terminated long-term deposit or investment

NOT TAXABLE UNDER THIS SECTION:
[1] Royalties on books
[2] Royalties on literary works
[3] Royalties on musical compositions
[4] Prizes of P10,000 or less
[5] Philippine Charity Sweepstakes and Lotto winnings
[6] Interest income from long-term deposit or investment

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