Taxation Law

Mr. DANISH BASHIR MANGI

Head of Income section 11
• A person may earn and receive income from different
sources during the tax year (1st July to 30 June). For the
purpose of charge of income tax and calculation of tax
payable, the income is classified under five heads. These
heads of income have been specified in section of the
income tax ordinance, 2001 and are as follows:
• Salary
• Income from house property
• Income from business or profession
• Capital gains and
• Income from other sources
• Each and every income earned by the person can be classified
in one of these heads. The presence of the 5th head that is
“income from other sources” makes it sure that any income
which cannot be included in any of the first four heads must be
taxed under this general head.
• Classification of income of the person under 5 different heads
does not mean that a person will have to pay five different
taxes. Classification is only necessary because the procedure for
computation of income under each head is different. It is
necessary on humanitarian, logical, and justice grounds to
evolve different principles and bases for computing the taxation
income under each head. Once the income has been calculated
separately according to the procedure specified for each head,
it is clubbed together and the assessment of the whole income is
made at the same time and tax is computed on the taxable
income and not on income under each head separately.
SALARY section 12
• Features of Salary Income
• The amount must be received an employee from his present or past
employer. It is necessary that relationship of the employer and the
employee should exist. If such a relationship is not present, the
amount received cannot be taxed under this head.
• Income is paid by government, local authority, company, public
body, association or private employer in Pakistan. Income received
from foreign government is not taxed under section 12.
• Income is due to employee during or after service. It means that
pension ( paid by past employer to employee after service) is
included in salary.
• Employee in case of company includes the director, managing
director, or an agent of the company.
Scope of Salary Income
• the word “salary” has been used in a broader sense in the
Income Tax Ordinance, 2001, as compared to its use in our
daily conversation. The following groups of receipts are
included in the term salary under section 12:
• Salary and wages
• Annuity, Pension or Gratuity
• Fees, commission or allowances
• Perquisites and
• Profits in lieu of or in addition to salary or wages
Salary and wages
• Salary means fixed weekly or monthly remuneration
• Wages means amounts earned by laborers and normally
payable on hourly, daily or piece work basis.
Annuity, Pension or Gratuity
• Annuities are amounts paid by the employer annually.

• Pension means the amount received from past employer

after retirement.

• Gratuity is lump-sum amount give by employer normally

at the time of retirement.
Fees, Commission or Allowances
• Fees are the amounts received from employer on the basis
of work performed.

• Commission implies the work done on a remuneration

agreed on the basis of percentage of the income of
employer.
Perquisites
• Perquisites means facilities or benefits provided by the
employer to his employee. For example:
• Value of rent free accommodation provided by the employer;
• Value of an accommodation provided by employer at concessional
rate;
• Insurance premium paid by employer to effect life insurance for the
benefit of employee;
• A debt of employee paid by employer; and
• Value of conveyance facility provided by the employer are all
perquisites provided by the employer
Profits in lieu of or in addition to salary
or wages
• Compensation received from employer on
termination of employment
• Compensation on modification of terms of
employment
• Overtime payments
• Bonus received from employer
• Amount received from provident fund or any other
fund which is contributed by employer
• Directorship fee or fee for attending meetings of
board of directors is part and parcel of taxable
salary
• Mr. Danish is employed in an office
in the salary 65,000/- per month,
Bonus 1,30,000 for the year,
Dearness Allowance 6,000/- per
month, house allowance 29000 per
month and accommodation has
provided to him.
Find out his Tax,
• 65000 * 12 = 7,80,000
• 1,30,000 * 1 = 1,30,000
• 6000 * 12 = 72,000
• A) 29000 * 12 = 3,48,000
• B) 65000 * 12 * 45%= 3, 51,000

1,333,000
• Grand total =

• Tax = 72,800
Key to Remember
• Allowance taxable
• Facility 45% of MTS will be taxable
• If facility 45% of MTS with rental values then comparison;
whichever is higher will be taxable
• If MTS is not available then basic salary
• Small city then 30%
Conveyance
• Sometimes, an employer provides the employee either a
conveyance for his use or conveyance allowance is provided.
How to determine the value of this facility allowance for the
purpose of calculating taxable income? The important
situations and their treatment are being discussed here:
• A) conveyance allowance
• If the employer provides conveyance allowance to his employee, the
whole allowance will be fully taxable.
• Basic salary = 80,000 p.m
• Dearness allowance = 25,000 p.m
• Medical allowance = 15,000 p.m
• Conveyance allowance = 20,000 p.m
• Calculate taxable income.
• Solution
• 80,000 * 12 = 9,60,000
• Dearness allowance 25k * 12 = 300,000
• Medical allowance 15,000 * 12 = 1,80,000
• Conveyance allowance 20k * 12 = 2,40,000
Facility of conveyance
• 1. for Personal Use
• 10%
• 2. For office use
• 0%
• 3. partially personal use and partially office use
• 5%

• 4. employer acquires the conveyance on Lease

• COST
FAIR MARKET VALUE
LEASE EXEMPTED
• Salary 4,20,000 annual
• Conveyance for his partially personal and partially office use
use = 11,80,000 * 5% =
/-
• 4,20,000 + 118,000 = 5,38,000
• Tax = 3,900 /-
22,000 * 12 = 264,000
33,000 * 1 = 33,000
8,50,000 * 5% = 42,500

total income = 339,500

tax = 0% because it is not fall in the taxable slab rates.
Medical Allowance
• 1. Exempt up to 10% of Basic Salary

•
Example of 1. Medical allowance
• Medical allowance has given Rs. 12,000 a year
• Salary Rs. 100,000 yearly

• 10% of 100,000 = 10,000

• 12,000 – 10,000 = 2,000 taxable amount

• 100,000 + 2,000= 102,000

• 2. Medical treatment and facility all free and exempt from
taxable.
• 3. Bills reimbursement of medical fully exempt.
• Hospital NTN if not then taxable
• 4. Medical allowance + Facility then
• Medical allowance taxable and facility is exempted.
• Salary 22,000 * 12 = 264,000
Bonus 33,000 * 1 = 33,000
Conveyance allowance for private use; cost of car is 20,50,000
• Medical Allowance 19,000 per month

• 679,800 taxable income

• 10,989 tax
Class test
• basic salary 83000 pm
• house allowance 16000 pm accommodation has given
at rural area.
• medical Allowance 9000 pm
• he has received bills reimbursement from employee
Rs. 95,000 hospital has not NTN.
• conveyance has given to him for private use and FMV
of car Rs. 22,50,000
• bonus 55,000 every 4th month
• mobile allowance 10000 every 2nd month
• find his taxable income
Entertainment
• Entertainment allowance will be taxable
• Free Tea, Coffee etc. exempted
• Entertainment with reimbursement exempted
• Free/subsidized food facility (Lunch/Dinner) provided by hotel
or restaurant exempted

• Free/subsidized food facility (Lunch/Dinner) provided by

hotel or restaurant OTHER THAN EMPLOYEETAXABLE

• NOTE: transport always taxable.

• Hotel bills paid by employer if official tour exempted , for
personal use it is taxable.

• Special Allowance
• Special allowance received by employee, granted to meet expenses
which are incurred in the performance of official duties are completely
exempt from tax.
• Examples:
• Uniform allowance
• Travelling allowance
• Daily allowance EXEMPTED
• Re-Location allowance