Chapter 3
Employee Taxation
Instructor: Dr. Arshad Hasan
3-2
Employee
• Whose duties are controlled by an employer:
• How
• When
• Where
• Who works:
• According to a regular schedule
• In return for periodic payments
3-3
Salary - Concepts
• Salary means any amount received by an employee
from any employment, whether of a revenue or capital
nature, including:
• Basic Pay
• Wages
• Leave pay
• Overtime
• Bonus
• Commission
• Cost of living allowance
• Retirement benefits (Gratuity, Pension)
• Rent allowance
• Utilities allowance
• Medical allowance
• Travel allowance
• Perquisites (Conveyance, Accommodation, Loan)
3-4
Profits in lieu or in addition to Salary
• Consideration for an agreement to enter into
an employment
• Consideration for an agreement to any
conditions of employment or any changes
• Termination compensation
• Retirement Benefits
3-5
Conveyance
• Where employee is provided with motor
vehicle the following amount would be added
to the income of the employee:
• Private use 10% of cost
• Private and Business use 5% of cost
• Business use No addition
3-6
Accommodation
• Where accommodation is provided to the
employee the value included in his/her salary
would be equal to the higher of:
• Actual amount paid by the employer
• 45% of basic salary.
3-7
Loan to employees
• Where a loan is made by an employer to an
employee, then any of the following amounts
shall be added to the salary income of the
employee:
• If the amount of loan is Rs.1,000,000 or less, nothing
shall be added to the salary income.
• If the amount of loan is more than Rs.1,000,000 and no
interest on loan is being charged, an amount of interest
on loan computed at the benchmark rate (10%).
• If the amount of loan is more than Rs.1,000,000 and
interest rate being charged is less than benchmark rate,
the difference between interest computed at the
benchmark rate and the actual amount of interest.
3-8
Retirement Benefits
• Employer’s contribution to Provident Fund
• Government Provident Fund Fully exempt
• Unrecognized Provident Fund No treatment
• Recognized Provident Fund Exempt up to 10% of
salary or Rs.150,000
whichever is lower
•
• Salary = Basic Salary + Dearness Allowance
3-9
Retirement Benefits
• Payment of Accumulated Balance –
Provident Fund
• Government Provident Fund Fully exempt
• Recognized Provident Fund Fully exempt
• Unrecognized Provident Fund Employer contribution
and interest thereon
taxable (50% of
accumulated balance)
3-10
Retirement Benefits
• Payment of Accumulated Balance –
Gratuity Fund
• Government Gratuity Fund Fully exempt
• Gratuity Fund approved by Fully exempt
Commissioner
• Gratuity Fund approved by Exempt up to Rs.300,000
Board (For all employees)
• Unrecognized Gratuity Fund Lesser of Rs.75,000 or 50% of
amount received exempt
3-11
Medical Allowance
• Medical Allowance equal to 10% of basic
salary is exempt.
• Actual Reimbursement of Medical Expenses
is totally exempt.
3-12
Overseas Allowance
• Any allowances and perquisites are exempt
from tax if:
• paid by the Government
• to a Pakistani citizen
• rendering services outside Pakistan
3-13
Employee Share Scheme
• The following amount will be included in salary
income of an employee for Employee Share
Scheme:
• Fair market value of shares at the date of issue
• Less: Consideration given by employee for shares
• Less: Amount paid for the Right or Option
3-14
Leave Encashment
• Encashment of all types of leaves is taxable if
received by the private sector employees.
• Encashment of ‘Leaves Preparatory to Retirement’
(LPR) received by government employees is
exempt from tax.
• Encashment of all other leaves by government
employees is taxable.
3-15
Employee Expenses
• When employers reimburse employees for
employment-related expenses, the employee
neither reports the cash reimbursement as income
nor deducts the expense
1-16
Reduction in Tax Liability
• Teachers or Researchers
• Employees of non profit education and research
institutions
• Full time teachers
• Full time researchers
• Reduction in tax liability of 25%.
1-17
Salaried Person
• Where the income of an individual chargeable
under the head "salary" exceeds 75% of his taxable
income.
• Rates of tax for ‘Salaried Individuals’ will be
applicable in this case.
1-18
Tax Rates - Salaries
# Taxable Income Rate of Tax
1 Taxable Income up to Rs. 600,000 0%
2 Rs. 600,000 – Rs. 1,200,000 5% Exceeding Rs.600,000
3 Rs. 1,200,000 – Rs. 1,800,000 Rs. 30,000 + 10 % Exceeding Rs. 1,200,000
4 Rs. 1,800,000 – Rs. 2,500,000 Rs. 90,000 + 15 % Exceeding Rs. 1,800,000
5 Rs. 2,500,000 – Rs. 3,500,000 Rs. 195,000 + 17.5 % Exceeding Rs. 2,500,000
6 Rs. 3,500,000 – Rs. 5,000,000 Rs. 370,000 + 20 % Exceeding Rs. 3,500,000
7 Rs. 5,000,000 – Rs. 8,000,000 Rs. 670,000 + 22.5 % Exceeding Rs. 5,000,000
8 Rs. 8,000,000 – Rs. 12,000,000 Rs. 1,345,000 + 25 % Exceeding Rs. 8,000,000
9 Rs. 12,000,000 – Rs. 30,000,000 Rs. 2,345,000 + 27.5 % Exceeding Rs. 12,000,000
10 Rs. 30,000,000 – Rs. 50,000,000 Rs. 7,295,000 + 30 % Exceeding Rs. 30,000,000
11 Rs. 50,000,000 – Rs. 75,000,000 Rs. 13,295,000 + 32.5 % Exceeding Rs. 50,000,000
12 Rs. 75,000,000 Rs. 21,420,000 + 35 % Exceeding Rs. 75,000,000
2-19
