SALARY: Taxation,

Exemptions & Rebates

Presented By: Asif Zafar
22 August 2016
Objective
Thank you all for this invitation.

Todays session has been planned with the objective to discuss

and understand the income tax laws in relation to taxability of
salary, rebates available against salary income and the tax credits
available against the tax payable.

Page 2 SALARY: Taxation, Exemptions & Rebates

Contents
Page #
Salary meaning of 04
Pakistan Source Salary 06
Basis of taxation 07
Deduction of not allowed General rule 08
Allowances and Perquisites 09
Valuation of accommodation and conveyance 10
Treatment of medical benefits 11
Payment on termination of services 12
Concessional loans 13
Tax on Tax 14
Provident Fund Deemed salary 15
Perquisites not taxable 16
Rebates / Deductible allowances 17
Income Tax Rates 19
Withholding tax by employer 21
Adjustments from withholding 22
Other adjustments 23
Page 3 SALARY: Taxation, Exemptions & Rebates
Salary Meaning of
Salary means:

Any amount received by an employee from any employment

(whether of revenue or capital nature).

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Salary Meaning of
Salary includes any amount received:

By the employees employer, an associate of the employer, or by

a third party under an arrangement with the employer or an
associate of the employer;

By a past employer or a prospective employer; or

To the employee or to an associate of the employee or to a third

party under an agreement with the employee or an associate of
the employee.
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Pakistan Source Salary
Salary shall be Pakistan source if it is received from exercise of
employment in Pakistan.

It is immaterial where salary is paid or the employer is Pakistan

resident or not.

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Basis of taxation
Salary is taxable on receipt basis

A person is considered to receive salary, if the amount is:

Actually received by the person

Applied on behalf of the person on his instruction

Made available to the person.

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Deductions not allowed General Rule
No deduction is allowed for any expenditure incurred by an
employee in deriving salary income.

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Allowances and Perquisites
All allowances received by an employee in relation to his
employment are fully taxable.

All perquisites (benefits in kind) provided to an employee in relation

to his employment are taxable at fair market value (FMV).

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Value of accommodation and Conveyance
The value of accommodation provided by an employer shall not be
less than 45% of his basic salary.

The value of conveyance provided by an employer shall be:

10% of cost of vehicle to the employer (if only for personal use)

5% of cost of vehicle to the employer (if partly for official and

partly for personal use).

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Treatment of medical benefits
If the terms of employment provides for medical treatment /
reimbursement of medical expense, the entire benefit is exempt if:

NTN of the hospital is mentioned on the bill

Bills are duly verified by the employer

If terms of employment do not provide for any medical benefit but

the employer provides such benefit / reimbursement, the exemption
is upto 10% of basic salary.

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Payment on termination of services
Payment on termination of services may be taxed:

At the applicable tax rate for the tax year in which payment is
received; or

At an average rate of tax of the employee for 3 preceding tax

years, at the option of the employee.

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Concessional loan
If the employer provides interest free loan or loan at a concessional
rate, the amount to be included in salary will be -

Profit on loan at the benchmark rate; or

The difference between the profit paid by the employee and the
profit computed at the benchmark rate (currently 10%)

No addition will be made in respect of the above, if the loan amount

does not exceed Rs.500,000

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Tax on Tax
Tax borne by the employer is a perquisite in the hands of the
employee and is therefore taxable.

Salary is therefore required to be grossed up to determine correct

taxable income.

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Provident Fund Deemed salary
Following are taxable as salary income in the hands of the employee on
account of provident fund

Any contribution to a recognized provident fund by an employer if it exceeds

the lower of the following
1/10th of the salary; or

Rs.150,000

Any interest on account of provident fund credited to an employees account

in excess of
1/3rd of the employees salary

at a rate exceeding the rate prescribed by the Federal Government

(currently 16%)
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Perquisites not taxable
Following perquisites are not taxable as salary in the hands of the employee:

Free or subsidized food provided by hotels and restaurants to its employees during
duty hours;

Free or Subsidized education provided by an educational institution to the children

of its employees;

Free or subsidized medical treatment provided by a hospital or a clinic to its

employees;

Any other perquisite for which the employer does not have to bear any marginal
cost as notified by CBR.

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Rebates / Deductible allowances
Profit on debt
A deductible allowance against salary income is allowed to the lower of 50%
of taxable income or Rs.1 million in respect of any profit or share in rent /
share in appreciation for value of house paid on a loan obtained from a
scheduled bank or an NBFC, or a Government, or a listed company where
the loan is utilized for construction or acquisition of a house.

Zakat
Deductible allowance in respect of Zakat paid by a person is available to
such person. However, the employer is not entitled to give any benefit of
Zakat while working out taxable salary for the year and tax thereon under
section 149.

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Rebates / Deductible allowances
Education expenses
Every individual having taxable income of less than one million rupees is
entitled to a deductible allowance in respect of tuition fee paid by the
individual in a tax year, to the lesser of

five per cent of the total tuition fee paid;

twenty-five per cent of the persons taxable income for the year;
60,000 rupees per child x No. of children

The individual would be entitled to claim the above against his taxable
income. However, the employer is not entitled to give any benefit of Zakat
while working out taxable salary for the year and tax thereon under section
149.
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Income tax rates
(Effective for the tax year 2017)
Taxable Taxable
Taxable Taxable Taxable
income from income from
Taxable income from income from income from
PKR PKR
income up to PKR 400,000 PKR 500,000 PKR 750,000
1,400,000 to 1,500,000 to
PKR 400,000 to PKR to PKR to PKR
PKR PKR
500,000 750,000 1,400,000
1,500,000 1,800,000

Tax at PKR Tax at PKR

Tax at PKR Tax at PKR
79,500 plus 92,000 plus
Tax at 2% of 2,000 plus 14,500 plus
12.5% of the 15% of the
Tax at 0% the amount 5% of the 10% of the
amount amount
exceeding amount amount
exceeding exceeding
PKR 400,000 exceeding exceeding
PKR PKR
PKR 500,000 PKR 750,000
1,400,000 1,500,000

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Income tax rates
(Effective for the tax year 2017)
Taxable Taxable Taxable Taxable Taxable
income from income from income from income from income from Taxable
PKR PKR PKR PKR PKR income
1,800,000 to 2,500,000 to 3,000,000 to 3,500,000 to 4,000,000 to exceeds PKR
PKR PKR PKR PKR PKR 7,000,000
2,500,000 3,000,000 3,500,000 4,000,000 7,000,000

Tax at PKR Tax at PKR Tax at PKR Tax at PKR Tax at PKR Tax at PKR
137,000 plus 259,500 plus 359,500 plus 472,000 plus 597,000 plus 1,422,000
17.5% of the 20% of the 22.5% of the 25% of the 27.5% of the plus 30% of
amount amount amount amount amount the amount
exceeding exceeding exceeding exceeding exceeding exceeding
PKR PKR PKR PKR PKR PKR
1,800,000 2,500,000 3,000,000 3,500,000 4,000,000 7,000,000

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Withholding tax by employer
Every employer is required to withhold tax from salary

Tax is required to be deducted at the time of payment

The amount of tax is calculated at an average rate of tax (as

provided under Part I of the First Schedule)

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Adjustments from withholding
Following adjustments can be made against the tax to be withheld by the employer :

Tax credit on:

(a) Donation;
(b) Investments in new shares;
(c) life / health insurance premium and
(d) Investment in retirement annuity schemes

Tax collected from the employee under various sections such as telephone and
electricity bills, cash withdrawals etc.

Excess or short deduction of tax by the employer from salary

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Other Adjustments
50% reduction in tax liability of the following persons where taxable income does not
exceed Rs.1,000,000
The individual is a disabled person and holds a CNIC to that effect; or

The age of the individual is 60 years or more on the first day of the tax year.

40% reduction in tax liability of an individual subject to the following conditions -

He/she should be a full time teacher or researcher; and

He/she should be employed in:

A non-profit education or research institution duly recognized by:

Higher Education Commission;

A Board of Education recognized by Higher Education Commission; or

A University recognized by Higher Education Commission; or

Government training and research institutions

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 THANK YOU

Page 24 SALARY: Taxation, Exemptions & Rebates