Income Tax Ordinance, 2001

[Applicable in Pakistan]

SALARY TAXATION
SALARY

AMOUNT CHARGEABLE UNDER THE HEAD “SALARY”

Employee
Employee means any individual engaged in employment.
Any salary, received by an employee in a
tax year, other than salary that is exempt Employer
from tax, shall be chargeable to tax in that Employer means any person who engages and
year under the head “Salary” remunerates an employee.

What is Salary?
Salary means any amount received by an
employee from any employment, (whether
of a revenue or capital nature.)
Employment
Employment includes:
i. a directorship or any other office involved in the
management of a company;
ii. a position entitling the holder to a fixed or
ascertainable remuneration; or
iii. the holding or acting in any public office;

BASIS OF CHARGEBILITY / TAXABILITY UNDER THE HEAD “SALARY”

Salary is charged to tax on “receipt basis” i.e. cash basis.
EXCEPTION
Salary paid in arrears
Where salary is paid to an employee in arrears; and
as a result the employee is chargeable at higher
rates of tax than would have been applicable if the
amount had been paid to the employee in the tax
year in which the services were rendered, the
employee may, by notice in writing to the CIR, elect
for the amount to be taxed at the tax rates that
would have been applicable if the salary had been
paid in the tax year in which the services were
rendered.
Above option shall be exercised by the due date for
furnishing the employee‘s return of income or
employer certificate, as the case may be, for the tax
year in which the amount was received or by such
later date as the Commissioner may allow.
An amount/perquisite shall be treated
as received by an employee from any
employment whether paid or provided:
By
Employee’s employer
Associate of employer,
3rd party under an arrangement with
employer or its associate;
Past or prospective employer; or
To
Employee or
Associate of the employee or
3rd party under an agreement with
employee or its associate.
RECEIPT OF INCOME
A person shall be treated as having
received an amount, benefit, or
perquisite if it is
i. actually received by the person
ii. applied on behalf of the person, at the
instruction of person or under any law
iii. made available to the person

Deferred payment of salary

Where salary is paid by a private company to an employee in any tax year for services rendered by
the employee in an earlier tax year; and
The salary has not been included in the employee‘s salary chargeable to tax in that earlier year,
the Commissioner may, if there are reasonable grounds to believe that payment of salary was
deferred, include the amount in the employee‘s salary income in that earlier year.

Complied by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001
[Applicable in Pakistan]

SALARY TAXATION

ALLOWABLE DEDUCTION
No deduction are allowed in computing income under the head “Salary”
UNDER “SALARY”

Loss can not arise in salary

TREATMENT OF LOSS
Salary shall not be reduced by losses of other heads.

Salary shall be Pakistan Source Income to the extent to which the salary is
GEOGRAPHICAL SOURCE received from any employment exercised in Pakistan, wherever paid; or
OF INCOME paid by or on behalf of Federal, Provincial, or Local Govt in Pakistan,
wherever the employment is exercised.

WITHHOLDING TAX IMPLICATION

Withholding agent Withholding tax

Person responsible for paying salary Average rate of tax x Estimated salary

Person responsible for paying

Directorship fee or 20% of the gross amount payable
Fee for attending board meeting

TAXATION OF ALLOWANCES

Whether the allowance is solely expended in the performance of employee’s duties of employment?

YES NO

Fully taxable except medical allowance

If Allowance is paid in
monthly salary on fixed
basis or as percentage
of salary; or Taxation of Medical Allowance
Taxable
If Allowance is not wholly, Whether any free medical treatment or
exclusively, necessarily or hospitalization or reimbursement of medical or
actually spent on behalf hospitalization charges is provided to employee
of the employer in accordance with the terms of employment?

Otherwise
(Allowance is paid on
YES NO
Not
case to case basis for Taxable
actual expenses)
Medical Allowance is Medical Allowance is
fully taxable exempt up to 10% of
basic salary

Complied by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001
[Applicable in Pakistan]

SALARY

TAXATION OF SPECIAL AMOUNTS

01. EMPLOYEE SHARE SCHEME

Event Taxability Amount Charged to tax

Receipt of right or option Not a taxable

to acquire shares event

Disposal of right or option Under the Consideration received on disposal of option/right as

to acquire shares head “Salary” reduced by employee’s cost of the option/right (if any)

Receipt of shares (Without Under the FMV of the shares on the date of issue as reduced by
restriction on transfer) head “Salary” employee’s cost of shares and option/right (if any)

FMV of the shares on earlier of

Receipt of shares (With
restriction on transfer)
Expiry of restriction / locking period or
Under the
Actual disposal of shares by employee
head “Salary”
as reduced by employee’s cost of shares and option/
right (if any)

Consideration received on disposal of shares as

Under the reduced by employee cost in respect of
Disposal of shares
head “Capital Shares;
gain” Option/right
Amount chargeable under salary under 3 or 4 above.

02. TAX FREE SALARY (TAX ON TAX)

If employer agrees to pay the tax on employee‘s salary, then the tax paid by the employer shall be
treated as an additional benefit to the employee.
Salary income of the employee shall be grossed up by the amount of tax payable by the employer.

03. AMOUNT RECEIVED ON TERMINATION OF EMPLOYMENT

Amount received on termination of employment (paid voluntarily or under an agreement) including

compensation for redundancy or loss of employment and golden handshake payments can be taxed
at following rate:
Total tax paid or payable for three preceding tax years x 100

Total taxable income for three preceding tax years

Above option shall be exercised (by notice in writing to CIR)

by due date for furnishing the employee‘s return of income or employer certificate; or
by such later date as CIR may allow.

Complied by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001
[Applicable in Pakistan]

SALARY

TAXATION OF BENEFITS AND PERQUISITES

01. ACCOMODATION / HOUSING 02. MOTOR VEHICLE

Motor vehicle provided by an employer to an

Accommodation / housing provided employee is taxable as follow:
by an employer to an employee is
Situation Taxable
taxable at higher of:
Fair market rent / alternate amount; or 5% of:
cost of motor vehicle to the
45% of minimum of time scale (MTS) Partly for
employer; or
of the basic salary or basic salary if personal &
FMV of the motor vehicle at the
there is no time scale partly for
commencement of the lease,
official use
if the motor vehicle is taken on
Where House Rent Allowance is lease by the employer.
admissible @ 30%, amount taxable
would be higher of 10% of:
Fair market rent / alternate amount; or cost of motor vehicle to the
employer; or
30% of minimum of time scale (MTS) For personal
FMV of the motor vehicle at the
of the basic salary or basic salary if use only
commencement of the lease, if
there is no time scale the motor vehicle is taken on
lease by the employer.

03. TAXATION OF MEDICAL ALLOWANCE & MEDICAL FACILITY

Medical allowance along with medical Medical treatment /

Medical allowance is
treatment / hospitalization / hospitalization / reimbursement
provided only
reimbursement thereof are provided thereof is provided only

Medical allowance is Whether such medical treatment / Medical facility / hospitalization

exempt upto 10% of hospitalization / reimbursement thereof / reimbursement thereof is
basic salary is provided in accordance with terms fully exempt**
of employment?

Yes No
Medical allowance is exempt up to
Medical allowance is fully taxable; &
10% of basic salary; and
Medical facility / hospitalization / its
Medical facility / hospitalization /
reimbursement is fully exempt**
reimbursement thereof is fully taxable

**Subject to the condition that:

National Tax Number of the hospital or clinic is given; and
employer also certifies and attests the medical/hospital bills
Complied by: Murtaza Quaid, ACA
 Income Tax Ordinance, 2001
[Applicable in Pakistan]

SALARY

TAXATION OF BENEFITS AND PERQUISITES

INTEREST FREE / CONCESSIONAL LOAN

Interest free / concessional loan provided by the employer to an employee is taxable as follow:

Interest Free Loan Profit on loan @ 10%

Interest rate is less than 10% Profit on loan @ (10% - Interest Charged)
Concessional
Loan Interest rate is more than 10% No Taxability

No Taxability if: Point to remember: Where above loan is used wholly or

partly for acquisition of any asset or property producing
Loan amount ≤ Rs. 1,000,000; or
income chargeable to tax, the employee shall be treated as
Employee has waived interest on
having paid an interest equal to benchmark rate on loan or
his account with the employer
part of loan used to acquire asset or property.

OTHER PERQUISITES PROVIDED BY EMPLOYER TO EMPLOYEE

Provision of services of a housekeeper, driver, gardener, or other domestic assistance

Total salary paid to the domestic assistant for service rendered to employee xxxx
Payment made by employee for such services (xxxx)
Amount chargeable to tax xxxx

Transfer of property by employer to employee Waiver or payment of obligation of

employee by employer
FMV of property at the time it is transferred xxxx
Payment made by employee for the property (xxxx) Amount waived or paid by the employer
Amount chargeable to tax xxxx
EXEMPTION FOR FOOD, EDUCATION,
Provision of services by employer to employee MEDICAL TREATMENT ETC.

FMV of service at the time it is provided xxxx Following perquisites are exempt:
Payment made by employee for the services (xxxx) i. Free / subsidized food provided by
Amount chargeable to tax xxxx hotels and restaurants to its employees
during duty hours;
Provision of utilities by employer to employee ii. Free / subsidized education provided
by an educational institution to the
FMV of utilities provided xxxx children of its employees;
Payment made by employee for the utilities (xxxx) iii. Free / subsidized medical treatment
Amount chargeable to tax xxxx provided by a hospital or a clinic to
its employees; and
iv. Any other perquisite or benefit for
Residual perquisites
which the employer does not have to
FMV of perquisite at the time it is provided xxxx bear any marginal cost, as notified by
Payment made by employee for the perquisite (xxxx) FBR.
Amount chargeable to tax xxxx
Complied by: Murtaza Quaid, ACA
 Income Tax Ordinance, 2001
[Applicable in Pakistan]

SALARY – TAXATION OF RETIREMENT BENEFITS

TAXATION OF RETIREMENT BENEFITS

PROVIDENT FUND

PF Act, 1925 Recognized Provident Fund Unrecognized

Event
(Govt. PF) (Part I of 6th Sch.) Provident Fund

Employee’s Taxable Taxable

contribution (in the year of Taxable (in the year of deduction) (in the year of
deduction) deduction)

Amount in excess of lower of:

Rs. 150,000; or
Employer’s No taxability – No taxability –
1/10th of (Basis salary + dearness
contribution not yet received not yet received
allowance)is treated received, hence
taxable

Amount in excess of higher of:

Interest 16% interest rate on accumulated
No taxability – balance; or No taxability –
credited
not yet received 1/3rd of (Basis salary + dearness not yet received
during the year
allowance)is treated received, hence
taxable

Payment of Employer’s
Exempt u/c 22, Exempt under clause 23, Part 1,
accumulated contribution &
P-1, 2nd Sch. 2nd Schedule
balances interest is taxable

COMMUTATION OF PENSION PENSION

COMMUTATION OF PENSION Taxability Pension received by citizen

of Pakistan is exempt except
Received by an employee of where the person continues
Federal Government, to work for the same
Provincial Government, employer or associate of the
Local Government, Fully exempt
employer.
Statutory body or corporation established
by any law for the time being in force. Where more than one
pension is received,
Received from Government or under any exemption shall apply to
pension scheme approved by the FBR under higher of such pensions.
Fully exempt
Clause 12, P-1 of 2th Schedule
Pension received by a
Received from pension scheme person over 60 years of age,
approved by FBR under clause 13(iii), Exempt up to is exempt
P-1 of 2nd Schedule and Rs. 300,000
applicable to all employees of the employer

Received from unapproved pension

Exempt up to
scheme/fund except
lower of
i. Any payment not received in Pakistan
- Rs. 75,000 or
ii. Any payment received by a director of a
- 50% of the
company who is not a regular employee
amount
of such company.
receivable
iii. Any payment received by a non-resident.

Complied by: Murtaza Quaid, ACA

 Income Tax Ordinance, 2001
[Applicable in Pakistan]

SALARY – TAXATION OF RETIREMENT BENEFITS

TAXATION OF RETIREMENT BENEFITS

GRATUITY

GRATUITY Taxability

Received by an employee of
Federal Government,
Provincial Government,
Fully exempt
Local Government,
Statutory body or corporation established by any law for the time
being in force.

Gratuity fund approved by the Commissioner under P-3 of 6th Schedule Fully exempt

Received from gratuity scheme

approved by FBR under clause 13(iii), P-1 of 2nd Schedule and Exempt up to
applicable to all employees of the employer Rs. 300,000

Received from unapproved scheme scheme/fund except

Exempt up to lower
i. Any payment not received in Pakistan
of;
ii. Any payment received by a director of a company who is not a
- 75,000 or
regular employee of such company.
- 50% of
iii. Any payment received by a non-resident.
amount
iv. Any gratuity received by an employee who has already received any
receivable
gratuity from the same or other employer.

BENEVOLENT FUND

Benevolent grant paid from a Benevolent Fund to employees or members of their families
in accordance with the provisions of the Central Employee Benevolent Fund and Group
Insurance Act, 1969 is exempt from tax.

SUPERANNUATION FUND

Approved Superannuation Fund Unapproved

Event
[Under P-II, 6nd Sch.] Superannuation Fund

Employee’s contribution in the

Taxable (in year of deduction) Taxable (in year of deduction)
Fund

Employer’s contribution in the

No taxability – not yet received No taxability – not yet received
Fund

Interest earned by the fund No taxability – not yet received No taxability – not yet received

Payment from superannuation fund (Annuity, commutation of any annuity or refund of contribution)

Employer’s contribution and

- On death of beneficiary Exempt
interest is taxable

Employer’s contribution and Employer’s contribution and

- During the lifetime of beneficiary
interest is taxable interest is taxable

Complied by: Murtaza Quaid, ACA