Income subject to final tax in the Philippines is taxed once at the source, and that single withholding settles the entire obligation. The recipient receives the payment net of tax and does not report the amount again on the annual income tax return. Most passive income falls into this category, along with certain capital gains and windfalls like prizes and gambling winnings. The legal duty to deduct and remit sits with the withholding agent, not with the person receiving the money.
Interest on Bank Deposits and Similar Placements
Interest earned on peso-denominated bank deposits, deposit substitutes, trust funds, and similar investment arrangements is subject to a 20 percent final tax. It applies whether the account is a savings deposit, a time deposit, or a money market placement. The bank withholds before crediting interest to the account, so the balance you see posted is already net of the government’s share.
Interest on foreign currency deposits held under the expanded foreign currency deposit system is taxed at 15 percent. This lower rate applies to resident citizens and resident aliens. Nonresident individuals’ foreign currency deposit interest is generally exempt.
These rates are fixed regardless of the depositor’s income level. A person earning millions in salary and one earning minimum wage pay the same 20 percent on their peso deposit interest. Because the tax is final, the interest never enters the graduated brackets on the annual return.
Long-Term Deposits and Early Pre-Termination
Long-term deposits and investment certificates get a full exemption. If you hold a qualifying deposit or trust fund certificate issued by a bank for at least five years, the interest is exempt from final tax entirely. The deposit must be in an individual name (not corporate), denominated in at least P10,000, and evidenced by a certificate in the form prescribed by the Bangko Sentral ng Pilipinas.
Pulling the money out early undoes the benefit. Pre-terminating before the five-year mark triggers a final tax on the entire interest earned, graduated by holding period:
- Four years to less than five years: 5 percent
- Three years to less than four years: 12 percent
- Less than three years: 20 percent
The depository bank deducts the tax from the proceeds before releasing the funds. Depositors who park money for the tax break but withdraw at year four often do not realize the 5 percent still bites the full interest amount.
Dividends from Domestic Corporations
Cash or property dividends received by an individual from a domestic corporation are subject to a 10 percent final tax. The same rate applies to your share in the distributable net income of a partnership (other than a general professional partnership), a joint venture taxable as a corporation, or a similar entity. The payor withholds the 10 percent before releasing the distribution.
Dividend income stays off the annual return entirely. There is no line for it on BIR Form 1700 or 1701. The BIR Certificate of Final Tax Withheld (Form 2306) serves as proof that the obligation was settled.
Royalties
Royalty income is generally subject to a 20 percent final tax. This covers payments for the use of patents, trademarks, trade names, formulas, and similar intellectual property rights.
A preferential 10 percent rate applies to royalties from books, other literary works, and musical compositions. A novelist collecting royalties from a publisher has 10 percent withheld rather than 20 percent.
Prizes, PCSO Winnings, and Other Gambling
Prizes above P10,000 are subject to a 20 percent final tax withheld by the payor. Prizes of P10,000 or less are not subject to final tax; instead, you include them in gross income on your annual return and pay at your regular rate.
PCSO and lotto winnings follow a slightly different rule. Amounts of P10,000 or below are fully exempt from income tax. Anything above that threshold is subject to the same 20 percent final tax. Before the TRAIN law took effect in 2018, all PCSO and lotto winnings were tax-free regardless of size, so this change caught some winners by surprise.
Other gambling winnings are taxed at the same 20 percent final rate, withheld by the gaming operator or distributing entity. The recipient takes the net and has no further reporting obligation for that win.
Capital Gains on Real Property
Selling real property classified as a capital asset triggers a 6 percent final tax. The base is whichever is higher: the gross selling price or the current fair market value at the time of sale. The seller pays, and the tax must be settled before title can transfer to the buyer.
The return is BIR Form 1706, filed and paid within 30 days after the sale, exchange, or disposition. File it with the authorized agent bank or revenue collection officer in the district where the property is located. Missing the 30-day window exposes you to surcharges and interest on top of the tax due, and the Registry of Deeds will not process the transfer without a Certificate Authorizing Registration.
Capital Gains on Unlisted Shares
Selling shares of stock in a domestic corporation through a private transaction (not through the Philippine Stock Exchange) results in a 15 percent final tax on the net capital gain. The TRAIN law replaced the older two-tier system with this flat rate on the entire net gain.
Shares traded through the stock exchange follow a different regime: a stock transaction tax of 0.6 percent on the gross selling price. It is also final in nature but works as a percentage-of-sale tax rather than a tax on net gain. Private sales require you to compute actual gain (selling price minus cost basis); exchange-traded sales tax the gross proceeds.
Forms and Deadlines for Withholding Agents
The withholding agent handles most of the paperwork. Three main forms govern final tax compliance:
- BIR Form 0619-F, the monthly remittance, is due on the 10th day of the month following the month the tax was withheld.
- BIR Form 1601-FQ is the quarterly return that reconciles monthly remittances with total final taxes withheld for the quarter.
- BIR Form 1604-F is the annual information return, due on or before January 31 of the following year, listing all payees and amounts.
Real property sales follow their own timeline through Form 1706: 30 days from the date of the transaction. Withholding agents file through the BIR’s Electronic Filing and Payment System (eFPS) or the eBIRForms package, depending on taxpayer classification, with payments through Authorized Agent Banks.
Penalties for Late or Missed Withholding
Failing to withhold or remit on time carries real cost. The BIR imposes a 25 percent surcharge on the unpaid amount, plus interest at 12 percent per year (reduced from 20 percent by the TRAIN law) running from the due date until full payment. On large transactions like real property sales or substantial dividend distributions, these add up quickly.
Willful failure to withhold or remit is also a criminal offense under the NIRC, punishable by a fine of at least P10,000 and imprisonment of one to ten years. The BIR often offers compromise penalties as an alternative to full litigation, but a compromise still requires payment of the underlying tax plus the agreed amount.
The risk sits with the withholding agent, not the recipient. If a bank fails to withhold 20 percent on deposit interest, the BIR pursues the bank. But if you are the payor in a private share sale or a business distributing dividends, the duty to deduct, report, and remit falls on you.