Understanding Your Options Under the TRAIN Law
Under the TRAIN Law, you can choose between:
1. Graduated Income Tax
(with Optional Standard Deduction or Itemized Deductions)
2. 8% Flat Income Tax
(in lieu of income tax and percentage tax)
Your choice applies for the entire year, so it’s important to compute properly before deciding.
When You Must Choose Your Tax Regime (Confirmed for 2025)
You elect your tax option at the start of every taxable year through:
Option A – January (Annual Registration)
File BIR Form 1905 – Update of Registration
OR
Option B – First Quarter Filing (1701Q Q1)
Deadline: on or before May 15
If you do not choose by Q1, the BIR automatically classifies you under graduated income tax.
Option 1: Graduated Income Tax (Progressive Rates)
How It Works
You pay tax based on net taxable income:
Net Income = Gross Income – (OSD or Itemized Deductions)
Non-VAT taxpayers below ₱3M must also pay 3% percentage tax.
2025 Graduated Tax Rates
| Taxable Income | Tax Due |
| ₱0 – ₱250,000 | 0% |
| ₱250,001 – ₱400,000 | 15% of excess over ₱250,000 |
| ₱400,001 – ₱800,000 | ₱22,500 + 20% of excess over ₱400,000 |
| ₱800,001 – ₱2,000,000 | ₱102,500 + 25% of excess over ₱800,000 |
| ₱2,000,001 – ₱8,000,000 | ₱402,500 + 30% of excess over ₱2,000,000 |
| Over ₱8,000,000 | ₱2,202,500 + 35% of excess over ₱8,000,000 |
Best For
- Businesses with high operating expenses
- Professionals claiming OSD or itemized deductions
- Businesses with variable income
Option 2: 8% Flat Income Tax
How It Works
A simple 8% tax on gross income, replacing:
- Income Tax
- Percentage Tax (3%)
Who Can Avail It
- Non-VAT taxpayers earning ₱3M or below
- Freelancers, consultants, online sellers, and small service businesses
Best For
- Low-expense operations
- Professionals who want easier filing
- Businesses that do not track expenses in detail
Watch Out
- No deductions allowed
- If you exceed the ₱3M VAT threshold, you must shift to:
Graduated Income Tax + 12% VAT (from the month you exceed it)
People Also Ask
Which option saves more?
- If expenses are low, 8% often results in lower tax.
- If expenses are high, graduated income tax often results in savings.
Can I switch midyear?
No. The election is final for the full taxable year.
How do I choose the 8% rate?
Through BIR Form 1905 or Q1 filing of Form 1701Q.
What if I don’t choose?
You default to the graduated income tax system.
Graduated vs. 8%: Side-by-Side Comparison
| Category | Graduated Income Tax | 8% Flat Rate |
| Tax Basis | Net Income (Gross – Expenses) | Gross Income |
| Tax Rate | 0% to 35% | 8% |
| Percentage Tax? | Yes (3% for non-VAT) | None |
| Allows Deductions? | Yes | No |
| Best For | High-expense operations | Low-expense professionals |
Examples (2025)
Below are improved and corrected examples showing when each option wins.
Example 1: Low Expenses (Winner: 8% Flat Rate)
Gross Income: ₱600,000
Actual Expenses: ₱60,000
8% Flat Rate
₱600,000 – ₱250,000 = ₱350,000 × 8% = ₱28,000
Graduated Income Tax (OSD)
OSD (40%): ₱240,000
Net Income = ₱360,000
Income Tax = 15% of ₱110,000 = ₱16,500
3% Percentage Tax = ₱18,000
Total = ₱34,500
Winner:
8% Flat Rate — Lower total tax (₱28,000)
Example 2: High Expenses (Winner: Graduated Income Tax)
Gross Income: ₱1,200,000
Actual Expenses: ₱700,000 (58%)
8% Flat Rate
₱1,200,000 – ₱250,000 = ₱950,000 × 8% = ₱76,000
Graduated Income Tax (Itemized)
Net Income = ₱500,000
Income Tax = 15% of ₱250,000 = ₱37,500
3% Percentage Tax = ₱36,000
Total = ₱73,500
Winner:
Graduated Income Tax — Lower total tax (₱73,500 vs ₱76,000)
How UNA Helps You Choose the Right Option
| Service | What We Do | Result |
| Tax Advisory & Planning | Compute 8% vs graduated for your actual figures | Pay the least legal tax |
| Annual & Quarterly Filing | Prepare and file 1701 / 1701Q | Accurate, on-time filings |
| Bookkeeping | Organize income and expenses | BIR-ready records |
| Compliance Review | Check past filings for risks | Avoid audits and penalties |
Final Note
Choosing between 8% flat rate and graduated income tax affects your cash flow, compliance requirements, and overall tax burden.
If you’re unsure which option truly gives you better savings for 2025, it’s best to compare both before filing your first quarter return.
Book Your FREE 20-Minute Tax Assessment
Let UNA compute your taxes and guide you to the best option for 2025.
Email us at sales@una-acctg.com
