INCOME TAX

A “COMPANY”, “SALARIED INDIVIDUAL” AND “NON-SALARIED INDIVIDUAL” OR “AOP” (Association of

Persons) can earn 5 types of income:

1- Salary;
2- Income from Property (i.e. rent);
3- Income from Business (i.e. profits you earn from the business you do);
4- Capital gains (i.e. the profits earned by selling a capital asset); and
5- Income from other resources

TAX RATES
Now suppose a question says that you must treat Capital gains as a separate block of income. Then we
will add all other incomes 1,2,3&5 and apply the tax rate on the total taxable income.

1- For a Company – we will apply the normal 29% tax rate of this year 2020-2021.
Note:- For the years to come, the tax rate may change in the budgets given by the government.
You can Google search: “tax rate applicable on a company's income Pakistan 2021” to get the
FBR’s tax rate of the year.
2- For a Salaried Individual or Non-Salaried Individual/AOP – we will apply the tax rates given in the
following tables (both have same tax rates).
Whereas on the capital gains we will apply the special tax rate given in the question. If no separate block
of income is stated then we will simply add all incomes and apply the tax rate on the total income.

It is very important to remember that income from property is treated as a separate block of income in
the case of individual or AOP. But in the case of a company it is treated as a normal income and thus
added in the total taxable income.

DEDUCTABLE ALLOWANCES
The following allowances are deducted when calculating the total taxable income.

1- Zakat
2- Worker’s welfare fund
3- Worker’s participation fund
SALARY INCOME PERQUISITES

1- Conveyance
If company has given vehicle to its employee:
1- For office use only – No addition to the employee’s salary
2- For personal use only – 10% of the cost of vehicle (or fair market value, FVM of the vehicle)
is added to the employee’s annual income.
3- Part for personal and office use – 5% of the cost of vehicle is added to the employee’s
annual income.
2- Accommodation
If house is not given to the employee – directly add the rent allowance to the employee’s
monthly salary.
If house is given to the employee – add lesser of the following two values:
1- Rent allowance
2- 45% of the minimum time scale (MTS) of the basic salary of the employee (in case of
government employee) or simply 45% of the basic salary of the employee (in case of
private job employee).

What is Minimum Time Scale (MTS) of a government employee’s basic salary?

Suppose for a 17-grade scale we have an MTS  ( 35,000−1,500−55,000 ).

 35,000 is the starting basic salary that employee will get once promoted to the 17-
grade scale. This is the value of which we will take 45% of. But for a private employee,
we will simply take 45% of whatever basic salary is given to us in the question.
 1,500 is the yearly increment of the 17-grade scale.
 55,000 is the maximum salary achievable in 17-grade scale. So to get more salary the
employee will need to be promoted to the next grade scale.

3- Utilities and Services of Domestic Servants.

Domestic or Services allowance is simply added into the employee’s monthly salary.
Note:- This allowance represents that the company provides servants and some specified
utilities (like free education to children) to their employees.

4- Interest Free Loan or Concessional Loan

Where a loan is given to an employee by his/her employer or company, then the amount to be
included in salary income of the employee is added in the following manner:
 If no interest is payable by the employee – the amount of interest computed at the
benchmark rate (10%) is added to the employee’s annual income.
 If interest is payable at less than benchmark rate – then the amount added will be the
interest computed at the benchmark rate (minus) the actual amount of interest paid by
the employee.
 5- Obligations waived/settled
Any obligation waived of which an employee owed to the employer shall be included in the
annual salary income of the employee, equal to the amount waived.

6- Any other Perquisite

For any other perquisite that comes in the question we do the following:

For example if the employer (company) gave its employee a computer for personal use and its
fair market value is 80,000, then we add this Rs.80,000 into the employee’s annual salary
income. But if the employee paid back some amount, like 20,000, then Rs.60,000 will be added
into employee’s annual income.

EXPENSES

If a company provides allowances for various expenses to their employees, e.g. medical allowance, legal
allowance, etc, then they will be added in the employee’s monthly income, unless or until the expenses
are reimbursed, in which case these expense allowances are exempt from tax and will not be added.

TAX CREDITS

Tax credits basically reduce our tax liability on our income, because tax credits are deducted from tax
liability on the total taxable income. Following are some tax credits:

1- Charitable Donations
We calculate tax credits using the formula:
Tax credit = (A/B)*C
Where,
A = Tax Liability on our total taxable income
B = Total Taxable income
 C = lesser of the following two:
1) Actual donation amount.
2) 30% of the taxable income (for individual or AOP). 20% of the taxable
income (for a company).

2- Tax credit for investment in shares and insurance

Formula is same as above:
Tax credit = (A/B)*C
Where,
A = Tax Liability on our total taxable income
B = Total Taxable income
C = lesser of the following three:
1) Cost (amount) of acquiring (buying) shares or insurance.
2) 20% of the taxable income.
3) Two million rupees.

3- Contribution to an Approved Pension Fund

Formula is same as above:
Tax credit = (A/B)*C
Where,
A = Tax Liability on our total taxable income
B = Total Taxable income
C = lesser of the following two:
1) Total contribution amount.
2) 20% of the taxable income.

EXEMPTIONS

1- Agricultural Income shall be exempt from tax. Therefore, it is not part of income earned.
2- Any scholarship granted to a person to meet the cost of the person’s educational shall be
exempt from tax. Therefore it will not be a part of the person’s income.
CAPITAL GAINS

In simple words, A is the amount received after selling the capital asset and B is the book value
of the capital asset.

1- For Capital gains on the sale of capital assets other than capital securities:
 Where a capital asset (other than securities) has been held by a person for more
than one year, only 3/4th of the capital gain from the sale of the asset shall be
taxable. Meaning 3/4th of the capital gain will be added in the total taxable
income.
 Where a capital asset (other than securities) has been held by a person for less
than a year, it will simply be added to the total taxable income and taxes rates
for individual/AOP given in the above tables or corporate/private limited
company (29%) will be applied.
2- Capital gain on the sale of securities
 Tax rate on capital gain for securities that are held less than 48 months after
acquisition will be 15%.
 Tax rate on capital gain for securities that are held for more than 48 months
after acquisition will be 0%.

INCOME FROM PROPERTY

Income from property is RENT.

 Income from property is chargeable to tax as separate block of income for individuals
and partnerships (AOPs) which means it will be taxed separately and has its own tax
rates (given in the table below).
 Income from property of businesses will be taxed normally at 29% with other incomes
combined.
1- Treatment of non-adjustable amounts
If some non-adjustable or un-adjustable amount is given in the question, simply take 1/10 th
of the un-adjustable amount and add it into the annual income from property.

2- Adjustment of Expenses
No expenses (like repair and maintenance expenses of the property, legal expenses of the
property, etc) can be adjusted (subtracted) from the income from property of
individuals/AOPs. This means that their tax is calculated on the gross amount of income
from property (i.e. rent) at the rates given in the above table.
But in the case of companies, the expenses incurred from the property can be deducted
from the total income from the property given in the question. After deductions, you simply
add the net gross income from property to the total taxable income and apply 29% tax rate
(the deductable expenses are given below).
3- Expenses that can be adjusted/deducted from income from property by Companies

1- Repair expense
Take 1/5th of the gross rent (income from property) and subtract it from the gross rent,
whether the company has spent on the repairs & maintenance or not and regardless of
whatever repair expense amount on property is given in the question.
2- Any premium paid or payable to insure the building
3- Any local tax rate (provincial tax rates) charged on the rent.
4- Any profit/interest paid or payable on any money borrowed in the form of mortgage
or bank loan to acquire, construct, renovate, extend or reconstruct the property.
5- Any expenditure paid or payable for legal services acquired.
6- Any ground rent paid or payable by the company on the property.
7- Any share given to House Building Finance Corporation (HBFC) for the construction or
renovation of the property or anything. Subtract that share from the gross rent.
8- Administration and collection charges not exceeding 6% of rent chargeable to tax.
 If the charges exceed 6% of the gross rent then take maximum 6% of the gross
rent and deduct that from the gross rent.
 If the charges are < 6% (e.g. 4%, 5%,…), then simply deduct that from the
taxable gross rent.

INCOME FROM BUSINESS

The amount of income from business will be directly given in the question; you won’t need to
calculate the amount.