SALARY INCOME
In order to render an income chargeable under the head "Salary" the relationship of the
employee and the employer must exist between the payer and the payee. The employer
may the current, former or prospective.
EMPLOYMENT is the rendering of services by an employee against the remuneration
receivable from the employer. It includes:
1. A directorship or any other office involved in the management of a company;
2. A position which entitles its holder to a fixed or ascertainable remuneration; or
3. The holding or acting in any public office.
EMPLOYEE means an individual who is engaged in an employment.
EMPLOYER means any person who engages and remunerates an employee.
SALARY
Salary is a reward or recompense for services performed. In a more limited sense, a fixed
periodical compensation paid by an employer for the services rendered by an employee is
termed as salary. For the purpose of Income Tax, •Salary' means any amount received by
an employee from any employment It includes any:
1. Pay;
2. Wages;
3. Leave pay;
4. Overtime;
5. Bonus,
6. Gratuity,
7. Working conditions supplements (i.e., additional pay for unpleasant or dangerous work)
8. Fees
9. Commission;
10. Allowances,
11. Perquisites;
12 Profit in lieu of or in to the salary or wages; and
13. Any other benefit provided by the employer to his employee
PERQUISITES
Black's Law Dictionary defines the perquisites as "emoluments, fringe benefits or other
incidental profits or benefits attaching to an office or position". Under the Income Tax Law
"perquisites" includes:
1. The value of rent-free accommodation.
2. The value of any concession in rent of any accommodation.
3. Any payment by the employer for the benefit of the employee, hts spouse or
dependent child, such as:
i) Payment of life insurance, and
ii) Payment towards a contract of annuity
4. The value of any benefit provided free of cost;
5. The value of any benefit provided at a concessional rate;
6. Any sum paid by an employer in respect of any obligation of an employee; and
7. Facility of motor vehicle provided by an employer to his employee wholly or partly for
private use of the employee.
PROFIT IN LIEU OF OR IN ADDITION TO SALARY
Profit in lieu of or in addition to salary” includes:
1. Any amount received as consideration for an agreement to enter into an
employment relationship;
2. Any amount received as consideration for an employee’s agreement to any
conditions of employment or any change therein;
3. Any amount received as compensation for the termination of employment. It
includes any compensation for redundancy or loss of employment and golden
handshake payments;
4. Any amount received from any fund (e.g., provident fund, etc.,) constituted by the
employer to the extent to which the amount is not a repayment of contributions
made by the employee to the fund;
5. Any amount received as consideration for an employee's agreement to a restrictive
covenant in respect of any past, present or prospective employment;
6. Any pension or annuity or any supplement to a pension or annuity; and
7. Any amount chargeable to tax on account of employee share option scheme under
section 14.
SALARY INCOME
The following incomes are chargeable to tax under the head "salary"
1. Any salary received during the year. The receipt may be on account of current
Salary, arrears or advance; and
2. Valuation of perquisites allowances and benefits according to the Income Tax
Ordinance, 2001 and the Income Tax Rules, 2002.
Notes:
1. Salary income is chargeable to tax on the ‘receipt basis. It means any salary that is
actually received during the tax year (which may be current salary, arrears of
salary and advance salary) shall be charged to tax. Normally, the salary is not taxed
on accrual basis. However, there are two exceptions to this general rule, which are:
a. In case of an employee of a Private Limited Company the CIR may opt the accrual
basis for taxation of salary income if he has reasonable grounds to believe that
payment of salary was deliberately deferred for tax avoidance; and
b. Where the employee has opted that his income be charged to tax on accrual basis.
It is permitted in a case where the taxpayer has received 'salary in arrears'
resulting in the application of higher rate of tax in the year of receipt of the arrears.
2. An employee shall not be entitled to deduct any expenditure incurred by him in
deriving salary income.
3. An amount or perquisite shall be treated as received by an employee whether it is
paid or provided:
I. By his employer (including present, past or prospective), an associate of his
employer or a third party on behalf of his employer; or
II. To him, to his associate or to a third party on his behalf.
TAX FREE SALARY TO EMPLOYEE
Where an employer agrees to pay the tax liability of his employee, then the amount so paid
shall be treated as an additional benefit to the employee. The salary income of the
employee shall be increased by the amount of tax paid by the employer.
Example: 1
Mr. Ahsan is an employee of a company and draws an annual salary of Rs. 2,500,000. As
per terms of employment his employer has undertaken to pay the amount of tax on his
salary income. Compute his tax liability for the year assuming that he is liable to pay tax @
5% of his taxable income.
Answer:
Salary received 2500000
Add: Tax paid by the Employer (Rs. @ 5%) 125000
Total taxable salary income Tax computation 2625000
Total tax liability for the year (Rs. 2,625,000 @ 5%) 131250
Less: Tax already paid (by the employer on behalf of Mr Ahsan) 125000
Net tax payable 6250
For the simplicity of the calculations a tax rate of 5% has been applied. In order to compute
the actual tax liability the rates specified in the First Schedule shall be applied.
Example 2
Compute the exact tax liability of Mr. Ahsan under the Income Tax Ordinance, 2001 by
using the information in example 1.
Salary received 2500000
Add: Tax paid by the Employer (As per the first schedule) 195000
Total taxable salary income Tax computation 2695000
Total tax liability for the year (as per the first schedule) 229125
Less: Tax already paid (by the employer on behalf of Mr Ahsan) 195000
Net tax payable 34125
TAX ON AMOUNTS RECEIVED ON TERMINATION OF EMPLOYMENT
The amount of any profit in lieu of or in addition to salary (i.e., compensation for
redundancy or loss of employment, golden handshake payments, etc.) may, at the option
of the employee, be taxed in any of the following ways:
1. It may be included in total income of the employee for the tax year in which it is
received; or
2. It may be taxed as a separate block. The rate of tax applicable to such amount shall
be computed in accordance with the following formula:
(A / B)%
Where:
A is total tax paid or payable by the employee on his total taxable income for the
three preceding tax years; and
B is the employee's total taxable income for the three preceding tax years.
Note: In the above formula total taxable income has been used, which depicts that while
computing the applicable tax rate, income of the employee from all sources taxable under
NTR shall be taken into account.
Example: 3
Mr. Azeem has a taxable salary income of Rs. 2,500,000 during the tax year. At the end of
the year he opted to retire under a scheme announced by his employer and received Rs.
3,000,000 as a golden handshake payment. The taxable incomes and tax liabilities of Mr.
Azeem for the three immediately preceding tax years were as below:
Tax year Taxable Income Tax Liability
1 800,000 10,000
2 1,200,000 30,000
3 1,800,000 90,000
Compute the tax liability for the current tax year assuming that he opted that:
1. The golden handshake payment be taxed as a separate block; and
2. The golden handshake payment be taxed together with salary income.
Answer:
1. Golden handshake taxable as a Separate Bock of Income
Income taxable as per normal rates 2,500,000
Income taxable at a special rate (i.e., golden handshake payment) 3,000,000
Total income for the year 5,500,000
Total Tax Liability
Tax on taxable income of Rs. 2,500,000 (N-1) 195,000
Tax on golden handshake payment (N-2) 102.633
Total tax liability for the year 297.633
N-1Tax on regular income is as per schedule to the Income Tax Ordinance, 2001
N-2 Tax Rate applicable to Golden Handshake Payments
Tax year Taxable Income Tax Liability
1 800,000 10,000
2 1,200,000 30,000
3 1,800,000 90,000
Total 3,800,000 130,000
Average Rate = (Tax of last 3 years / Taxable income of last 3 years) X 100
= (130,000 / 3,800,000) x 100 = 3.4211%
2. Golden Handshake Payment Taxable together with Salary Income
Income taxable as per normal rates 2,500,000
Income taxable at a special rate (i.e., golden handshake payment) 3,000,000
Total income for the year 5,500,000
Total Tax Liability (As per the first schedule to the income tax ordinance) 782,500
Perquisites, Allowances and Benefits
Section 13 of the Income Tax Ordinance, 2001 and Rule-3 through Rule-7 of the Income
Tax Rules, 2002 discuss the provisions regarding the valuation of different perquisites,
allowances and other benefits for the purposes of determining the salary income
chargeable to tax under the Income Tax Ordinance, 2001.
SERVICES OF DOMESTIC SERVANTS
The total amount of salary paid by the employer to the domestic servants of an employee
(e.g., housekeeper, driver, gardener or other domestic servants) shall be included in the
salary income of the employee for the tax year in which the services are rendered.
Example: 4
Mr. Raza is an officer in an autonomous corporation. He is in pay scale of 15,000-1,000-
25,000. During the tax year he received Rs. 240,000 as basic salary. Further, he was also
paid the following amounts:
S. No. Type of allowance Amount
1. Dearness allowance 18,000
2. Cost of living allowance 24,000
3. Bonus 20,000
4 Commission 30,000
The Employer of Mr. Raza has also provided the services of a driver and a housekeeper.
The Corporation paid Rs. 4,000 p.m. to each of these employees. Compute the taxable
income of Mr. Raza.
Answer:
Basic salary 240,000
Dearness allowance 18000
Cost of living allowance 24,000
Bonus 20,000
Commission
Salaries of domestic servants: 30,000
Driver (Rs. 4,000 x 12) 96 000
Housekeeper (Rs. 4,000 x 12)
Total Taxable Income 428,000
UTILITIES TO EMPLOYEE
Where the employer has provided any facility to his employee in the form of utilities, the
salary income of the employee shall be determined as below
Fair Market value of the utilities provided XXXXXX
Less any amount paid by the employee for utilities XXXXXX
XXXXXX
Utilities include the following facilities.
I. Electricity,
II. Gas,
III. Water, and
IV. Telephone
Utilities may be in the form of a free or concessional facility or a utility allowance
receivable in cash. Under both the cases any benefit provided by an employer to an
employee on account of utilities shall be taxable and included in salary income of the
employee
Example: 5
Further assume to the example 4 that during the year following domestic bills of Mr. Raza
were also paid by his employer.
Telephone 12,000
Water 6,000
Electricity 9,600
Gas 4,800
Required: Determine the taxable income of Mr. Raza.
Answer.
Taxable Income as determined in Example 4. 428,000
Add taxable utilities.
Telephone 12,000
Water 6,000
Electricity 9,600
Gas 4,800
Total Taxable Income of Mr. Raza for the tax year 460,400
LOAN FROM EMPLOYER
Where a loan is received from an employer (whether interest bearing or otherwise) then
any of the following two amounts shall be added to the salary income of the employee:
1. The amount of interest/profit computed at the benchmark rate, if no interest/profit
is payable by the employee; or
2. The amount computed at the 'benchmark rate' less the actual amount of interest /
profit paid by an employee, if lower rate is applicable on the loan.
Note: Benefit shall not be taxable if the loan amount is up to Rs. 1,000,000
'Benchmark rate', means a rate of ten percent (10%) per annum
Example: 6
Take another assumption along with the data of example 5, i.e., Mr. Raza obtained a loan of
Rs. 1,200,000 from his employer on the first day of tax year, which remained unpaid till
end of the year. Compute taxable income in each of the following situations:
1. The loan was interest-free,
2. The employer charged interest at a rate of 8% p.a.; and
3. The employer charged interest @ 15% p.a.
Answer:
1. Interest-Free Loan
Income as determined in Example 5 460,400
Add: Taxable benefit on account of interest-free loan
Loan amount x Benchmark Rate (Rs. 1,200,000 x 10%) 120,000
Taxable Income 580,400
2. Interest charged @ 8%
Income as determined in Example 5 460,400
Add: Taxable benefit on account of interest-free loan
Interest at Benchmark Rate (Rs. 1,200,000 x 10%) 120,000
Less: Interest charged by employer(Rs. 1,200,000 x 8%) 96,000 24,000
Taxable Income 484,000
3. Interest charged @ 15%
As the employer has charged the interest at a rate, which is higher than the benchmark
rate thus nothing will be included in the income of Mr. Raza. His taxable income and the
tax liability shall remain the same as given in example 5.
Note: From the combined study of the later proviso and its explanation given by FBR it may
be construed that any notional benefit arising to an employee due to waiver of his right of
interest on his account with the employer shall be exempt from tax.
WAIVER OF AN AMOUNT PAYABLE BY EMPLOYEE
Any amount waived of by the employer out of the amount payable by the employee shall
be included in the income of the employee.
OBLIGATION OF AN EMPLOYEE PAID BY THE EMPLOYER
Any payment by the employer to another person on account of an obligation of the
employee insurance premium, etc.,) shall be included in the salary income of the
employee.
TRANSFER OF PROPERTY OR PROVISION OF SERVICES TO EMPLOYEE
Where an employer transfers his property or provides services to the employee, the
amount calculated as below shall be included in the income of the employee.
Fair Market Value of Property, etc. XXX
Less. Payment made by the employee, if any. (XXX)
Amount to be included in the salary income XXX
ANY OTHER PERQUISITE
The amount calculated as below shall be included in the income of the employee:
Fair market value of the perquisite XXX
Less: Payment made by the employee, if any. (XXX)
Amount to be included in the salary income XXX
Example: 7
Using the data available in example 6, compute the taxable income of Mr. Raza, if the
following additional information is also provided.
1. The employer has waived of a loan of Rs. 20,000 receivable from Mr. Raza.
2. Life insurance premium of Mr. Raza amounting to Rs. 12,000 has been paid by his
employer; and
3. A car with fair market value of Rs. 400,000 has been transferred to Mr. Raza against
Rs 300,000
Answer:
Total Income as determined in Example 6 460,400
Add' the value of benefits provided to Raza
1. Waiver of an amount payable by Raza 20,000
2. Life insurance premium paid by his employer 12,000
3. Fair market value of the car 400,000
Less: Payment made by Raza (300.000) 100, 000 132,000
Taxable Income 592,400
VALUATION OF ACCOMMODATION
Facility in respect of housing may either be in the form of house rent allowance or an
accommodation provided by the employer. House rent allowance receivable in cash by an
employee is totally taxable.
Where an employer has provided an accommodation to his employee, the value of such
accommodation shall be the amount that would have been paid by the employee if the
accommodation was not provided to him. This amount shall be included in the salary
income of the employee.
a. Accommodation in Large Cities
The value shall not be taken less than forty-five percent (45%) of the minimum of the time
scale of the basic salary (MTS) or the basic salary if the time scale is not provided. In other
words the value to be included in salary income on account of accommodation provided
by an employer shall be an amount which is higher of the following amounts:
1. Fair market rent of the accommodation; or
2. Forty-five percent (45%) of MTS or basic salary.
b. Accommodation in Small Cities
In small cities house rent allowance is allowed @ 30% of MTS or basic salary. If
accommodation is provided in those areas where rate for house rent allowance is 30%
then value taken for the accommodation shall not be less than 30% of MTS or the basic
salary Under this case the amount to be included in salary income will be higher of the:
1. Fair market rent of the accommodation; or
2. 30% of the MTS or the basic salary.
Example 8
Mr. Raza is provided with a House by the employer. Other details of salary are given
below;
Basic salary 240,000
Dearness allowance 18,000
Bonus 20,000
Commission 30,000
Total 308,000
Required;
1. Compute the amount to be added to the taxable salary of Mr. Raza assuming that
the house is in a large city.
2. Compute the amount to be added to the taxable salary of Mr. Raza assuming that
the house is in a Small city.
Answer
1. Accommodation in a large city.
Total salare 308,000
Basic salary 240,000
House facility 108,000
@45% of basic salary
Total Taxable salary 416,000
2. Accommodation in a small city.
Total salary 308,000
Basic salary 240,000
House facility 72,000
@45% of basic salary
Total Taxable salary 380,000
VALUATION OF CONVEYANCE
An employer has provided a conveyance to an employee, the value to be included in salary
income of the employee shall be determined as per the table given below.
Use of Motor Vehicle Amount to be included in salary
Only for Official use Nothing shall be added to the salary of
employee
Only for Private use 10% of the cost to the employer for
acquiring the vehicle or the fair market
value of the vehicle at commencement of
lease, if it is taken on lease.
Partly for private use of the 5% of the cost to the employer for
employee and partly for acquiring the motor vehicle or the fair
official market value of the vehicle at the
commencement of lease, if it is taken on
lease.
Example 9:
Assuming the data in example 8, Mr. Raza is provided with a car by the employer. The car
was leased from a bank at the price of Rs. 2,000,000.
Required: compute the value of the conveyance to be added to the taxable salary of Mr.
Raza assuming that;
1. Car was only for official use
2. Car was for both personal and official use
3. Car was only for the personal use
Answer:
Car was only for official use
Salary = 416,000
Value of conveyance =0
Total taxable salary = 416,000
Car was for both personal and official use
Salary = 416,000
Value of conveyance (5% of the value of car) =100,000
Total taxable salary = 516,000
Car was only for the personal use
Salary = 416,000
Value of conveyance (10% of the value of car) =200,000
Total taxable salary = 616,000
Medical allowance
Medical allowance is exempt up to 10% of basic salary if no other medical facility is
provided by employer.
If the Medical treatment or hospitalization facility is provided by employer; it is
totally exempt from tax.
Example 10:
In addition to the data in Example 6 Compute the total taxable income of Mr. Raza if he is
provided with either of the following;
1. Medical allowance of Rs. 3000 per month.
2. Mr. Raza does not receive any medical allowance, however, his bill of
hospitalization amounting Rs. 50,000 was paid by employer
Answer:
Medical allowance
Total salary 416,000
Basic salary 240,000
Medical allowance (3000 X 12=36,000)
*upto 10@ of basic is exempt (36000-24000) 12,000
Total taxable Income 428,000
Hospitalization
Total salary 416,000
* Nothing shall be added in the salary if Hospitalization facility is provided by the
employer.
COMPUTATION OF TAXABLE SALARY INCOME
Basic salary Amount
Dearness allowance XXXXX
Cost of living allowance (COLA) XXXXX
Overseas allowance (N-I) XXXXX
Bonus XXXXX
Commission XXXXX
Leave encashment (N-2) XXXXX
Overtime XXXXX
Water XXXXX
Electricity XXXXX
Telephone XXXXX
Tax on salary paid by the employer (in case of tax-free salary) XXXXX
Receipts on termination of employment(e.g. Golden Handshake XXXXX
payment) (N-3)
Salary received in arrears (N-4) XXXXX
Services of domestic servants (e.g., housekeeper, driver, etc.) XXXXX
Interest Free Loan (N-5) XXXXX
Waiver of an amount payable by employee XXXXX
Obligation of an employee paid by employer XXXXX
Transfer of property or provision of services to employee: XXXXX
Fair market value of property or services
Less: Payment made by the employee, if any
House rent allowance XXXXX
Rent-free accommodation-Higher of FMR or 45% (or 30%) of MTS or XXXXX
basic salary
Conveyance Allowance XXXXX
Value of Conveyance (N-6) XXXXX
Leave fare assistance (LFA) (N-7) XXXXX
Medical allowance (N-8) XXXXX
Entertainment allowance XXXXX
Less: Amount expended for official purposes
Employer's contribution to provident fund: XXXXX
Government provident fund - Totally exempt
Unrecognized provident fund -- No tax treatment
Recognized provident fund
Less: Exempt up to lesser of 10% of the salary or Rs. 150,000 (N-9)
Interest on provident fund: XXXXX
Government provident fund -- Totally exempt
Unrecognized provident fund -- No tax treatment
Recognized provident fund
Less: Exempt (Higher of 1/3rd of salary or amount calculated @ 16%)
Receipt of accumulated balance of provident fund XXXXX
Government provident fund - Totally exempt
Recognized provident fund - Totally exempt
Unrecognized provident fund (N-10)
Profit in lieu of or in addition to salary XXXXX
Gratuity or commutation of pension received from: XXXXX
Government (Federal, Provincial or Local) -- Totally exempt
Fund approved by CIR-- Totally exempt
Approved superannuation fund -- Totally exempt
Gratuity scheme approved by Board
Less: Exempt Rs 300 000
Any other case
Less. Exempt (Lesser Of Rs. 75,000 or 50% Of amount received)
Pension — only one pension with higher amount is exempt XXXXX
Any other benefits, allowances, etc XXXXX
Benefit under Employee Share Option Scheme XXXXX
Total taxable salary income XXXXX
N-l Any allowances and perquisites paid by the Government to a Pakistani, rendering
services outside Pakistan are exempt from tax.
N-2 Encashment of all types of leaves is taxable if received by private sector employees
However, encashment of 'leaves preparatory to retirement' (commonly known as L PR)
received by government employees shall be exempt from tax. Encashment of all other
leaves by Government employees is taxable.
N-3 These amounts may be included in the salary income for the tax year in which it is
received or may be treated as a separate block and charged to tax at the average rate tax
based on three immediately preceding tax years.
N4 At the option of the taxpayer salary in arrear may be included in the tax year in which
it is received or in the tax year in which services were rendered.
N-5 An amount equal to benchmark rate (i.e., 10% p.a.) shall be treated as income. Where
the interest charged by the employer is lesser than the benchmark rate, the difference
shall be treated as income. Further, this benefit will be taxable if the loan amount exceeds
Rs. 1,000,000.
N-6 The value of the conveyance to be included in salary income of an employee shall be
determined according to the principles laid down in Rule-5
N-7 The whole amount expended by employer on LFA is included in salary income of an
employee.
N-8 Medical allowance is exempt up to 10% of basic salary if no other medical facility is
Provided by employer
N-9 'Salary' for provident fund purposes means the actual drawn basic salary plus the
Dearness allowance
N-IO only the employer's contribution and interest thereon shall be taxable in the year of
Receipt.
