You are on page 1of 22

SALARY [Section 12]

Definition of salary - Section 12(2)

 Salary means any amount received by an employee from any employment


whether of a revenue or capital nature including:
 Pay, wages or other remuneration
 Perquisites
 Allowances including cost of living, subsistence, rent, utilities, education,
entertainment or travel allowance excluding any allowance solely expended for
office purpose
 Profits in lieu of salary
 Pension or annuity
 Employee share scheme
Perquisites – [Section 13] & [Income Tax
Rules, 2002]
 Difference between Allowance and perquisite
 Perquisites include:
 Motor vehicle provided wholly or partly for private use by an employee
 Services of house keeper, driver, gardener or other domestic assistant.
 Utilities: gas, water, electricity and telephone.
 Any obligation of an employee to the employer is waived by the employer
 Any obligation of an employee to another person is paid by the employer
Perquisites – [Section 13] & [Income Tax
Rules, 2002]
 Perquisites include:
 Housing or accommodation
 Loan obtained by an employee from his employer on or after 1.07.2002 which is
interest free or at a rate lower than the benchmark rate, the difference between
actual rate and the benchmark rate shall be included in his taxable salary.
Benchmark rate is 10% [section 13(7) and 13(14)(a)].
 Provision of loan is not applicable in the following cases:
 where the amount of loan does not exceed Rs.1,000,000; or
 where such benefit is extended by the employer due to the waiver of interest by
such employee on his accounts (e.g. provident fund etc.) maintained with the
employer.
Section 13(8): Utilization of interest free or
concessional loan to generate any taxable
income:
 If an employee utilizes the said interest free or concessional loan to
generate any taxable income against which interest expense is deductible
then the interest expense shall be allowed at the benchmark rate instead
of actual interest paid by him.
Profits in lieu of salary

 Any amount received as profit in lieu of salary including:


a) Provident fund
b) Amount on termination of employment whether on voluntary basis or under
any agreement, compensation for redundancy or loss of employment and
golden handshake payment.
 This amount may be taxable @ last 3 years' average rate of tax at the option of
taxpayer. If this option is exercised then the said amount shall become a separate block
of income on which tax shall be calculated at a rate as under.
 Last 3 years' tax liability

 Last 3 years' taxable income


Profits in lieu of salary

c) Consideration for an employee's agreement to:


 enter into an employment agreement
 any condition
 a restrictive covenant to any past, present or future employment)
Salary received in arrears - Section
12(7)
 Where salary is paid to an employee in· arrears and as a result the
employee is chargeable at higher rate of tax, the employee may, by
notice in writing to the Commissioner, elect for the amount to be taxed at
the rates of tax that would have been applicable if the salary had been
paid to the employee in the tax year in which the services were rendered.
 It means that salary is taxable on receipt basis but however, arrears of
salary may be taxed on accrual basis at the option of the taxpayer by a
notice in writing to the Commissioner on or before the due date for filing of
return of income.
Perquisites taxable at notional value

 Valuation of accommodation provided by the employer- Rule 4


 The value of accommodation provided by an employer shall be taken as equal
to the amount that would have been paid by the employer in case such
accommodation was not provided.
 The value taken for this purpose shall not be less than 45% of minimum of the time
scale (MTS) or the basic salary where there is no time scale.
 Note:
 House rent allowance is fully taxable.
Valuation for conveyance - Rule 5

 (a) If a conveyance is provided by an employer, its value to be included in


taxable income of the employee shall be worked out as under:

Conveyance Amount to be included in taxable salary


provided
Partly for personal 5% of the cost of vehicle to the employer
and partly for office
use

For personal use only 10% of the cost of vehicle to the employer
Valuation for conveyance - Rule 5

 Any deduction from the salary of employee in this respect shall also be
 If an employee takes a vehicle on rent-a-car basis and rent is paid by the
employer then the rentals paid by the employer are fully taxable [or 50% of
the rentals may be claimed as exempt if the vehicle is also being used for
office purpose] reduced from the taxable amount of this perquisite.
 Conveyance allowance is fully taxable.
Salary - Exemptions under Part I, 2nd
Schedule
 Pension - Clause 8 of Income Tax Rules 2002
 Pension is fully exempt Irrespective of age limit subject to two conditions:
 If an employee works for the same employer or any of its associates after
retirement then pension shall be taxable.
 If a person receives more than one pension then exemption shall apply only to
the higher of such pensions received.
 These two conditions are not applicable for a person over 60 years of age
[Circular 28 of 1991].
Salary - Exemptions under Part I, 2nd
Schedule
 Commutation of pension

Government employee. Fully exempt

Approved Pension Scheme [Clause


Fully exempt
12]
Exempt up to Rs. 75,000 or 50% of
Unapproved Pension Scheme
amount receivable whichever is
[Clause 13]
lower.
Salary - Exemptions under Part I, 2nd
Schedule
 Commutation of pension
 Exemption in case of unapproved commutation of pension shall not apply
in the following cases:
 Any payment which is not received in Pakistan
 Any payment received by a director of a company who is not a regular
employee of such company -
 Any payment received by a non-resident
Salary - Exemptions under Part I, 2nd
Schedule
 Gratuity - Clause 13
i) Government employees Fully exempt
ii) Approved Gratuity Fund Fully exempt
iii) Approved Gratuity Scheme Exempt up to Rs.300,000

Exempt up to RS. 75,000 or 50% of


iv) Unapproved Gratuity
amount receivable whichever is lower.
Salary - Exemptions under Part I, 2nd
Schedule
 Gratuity - Clause 13
 Exemption in case of unapproved gratuity shall not apply in the following
cases:
 Any gratuity which is not received in Pakistan
 Any gratuity received by a director of a company who is not a regular employee
of such
 company
 Any gratuity received by a non-resident
 Any gratuity received by an employee who has already received any gratuity
from the
 same or any other employer.
Salary - Exemptions under Part I, 2nd
Schedule
 Workers' Profit Participation Fund (WPPF) - Clause 26
 Amount received from WPPF is fully exempt.
Salary - Exemptions under Part I, 2nd
Schedule
 Special Allowance - Clause 39
 Any allowance or benefit (other than in the nature of conveyance or
entertainment allowance) specially granted to meet expenses wholly and
necessarily incurred in the performance of office duties e.g.
 Travelling allowance and Daily allowance (TA/DA) for an official trip
 Relocation allowance i.e. change of residence to fulfill job requirements.
 Special allowance as above is exempt but if the employer pays any
·special pay (e.g. any additional amount for any particular extra
responsibility) then the special pay shall be taxable.
Salary - Exemptions under Part I, 2nd
Schedule
 Certain perquisites without marginal cost to the employer- Clause 53A
 Value of the following perquisites received by an employee is exempt:
 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 notified by the FBR.
Salary - Exemptions under Part I, 2nd
Schedule
 Medical - Clause 139 of Income Tax Rules 2002
Only medical allowance: Exempt up to 10% of basic salary
Medical allowance + medical facility or Medical allowance is fully taxable and
reimbursement in accordance with terms medical facility or reimbursement is
of employment exempt if NTN of medical practitioner and
employer's attestation are available
If NTN of medical practitioner or
employer's attestation is not available
then both the figures are fully taxable.

Medical allowance + medical facility or Medical allowance is exempt up to 10% of


reimbursement not in accordance with basic salary and medical facility or
terms of reimbursement is fully taxable.
employment:
Provident Fund (PF)
Recognized PF Unrecognized PF
Employee’s yearly
No treatment No treatment
contribution
Taxable in excess of limit.
The limit is the lower of:
Employer's yearly
 Rs.150,000; or No treatment
contribution
 10% of (basic salary +
dearness allowance)
Taxable in excess of limit.
The limit is lower of:
Interest credited in the
 16% of accumulated
employee's account of PF for No treatment
balance; or
the year
 1/3rd of (basic salary +
dearness allowance
Employer's contribution and
Payment of accumulated
Exempt interest is taxable in the year
balance
of receipt.
THANKU