Updated Final Tax Rates on Passive Income – Train Law

Updated Final Tax Rates
Updated Final Tax Rates

Final Tax is the tax on Passive Income earned within the Philippines. The train law made some changes regarding certain rates. The differences between the old law and the TRAIN law will be discussed in detail in this post.

What is Passive Income?

Passive income is income that is earned with very minimal to no effort. Examples of passive income include prizes from competitions, winnings from raffle draws, dividend income, interest income, royalties and the like. It is different from active income wherein there is material participation by the person involved in earning such income. Examples of active income include compensation income,business income, and income from practice of profession.

Updated Final Tax Rates on Passive Income

Changes Made by the Train Law

  • PCSO Lotto Winnings

Before the train law was implemented, all PCSO Lotto winnings were exempt from tax. When the Train Law presented the updated final tax rates, it has limited the exemption of the winnings to the first P10,000. A final tax of 20% is now imposed on the PCSO lotto winnings of Citizens and Resident Aliens on the excess of P10,000.

  • Interest Income from a Depository Bank under a Foreign Currency Deposit System

The previous final tax rate for Citizens and Residents on interest received under a FCDS was 7.5%. The Train Law doubled the said rate and made it 15% except for nonresident aliens and foreign corporations.

  • Capital Gains Tax

Capital Gains Tax on the sale of Unlisted Domestic Stocks was also amended under the Train Law. For a complete discussion of Capital Gains Tax, click here.

*For board exam purposes, all final tax rates should be memorized by the examinee.

Sample CPA Board Exam Questions on Final Tax

FINAL TAX EXERCISE 1
Mr. Agcipet, a resident citizen, joined a singing contest held in Magic the Super Mall, Philippines where there were 3 contestants. He won third place in the said contest and received cash net of tax amounting to P12,000. How much is the final tax that was withheld?

Click to show the Answer
Final Tax on Passive Income is withheld at source. To compute for the amount of final tax withheld, simply divide P12,000 by 80% then multiply the tax rate for prizes which is 20%.
FINAL TAX EXERCISE 2

Mr. Edami, a Resident Citizen, earned the following interest income gross of taxes:

  • Interest from savings deposit in Landbank of the Philippines P10,000
  • Interest income earned from lending business P80,000
  • Interest income earned from a bank outside the Philippines P20,000

How much is the final tax on passive income to be paid?

Click to show the Answer

The computation should be P10,000 x 20% = P2,000

Interest income earned from lending business and from bank outside the Philippines is subject to regular tax here in the Philippines.