SALARY TAXATION AND

RELATED CONCEPTS

Malik Faisal Mehmood, ACA

TOPICS
 Concept of salary and definitions

 General Rules

 Taxation of allowances and perquisites

 Exemptions and rebates

 Withholding tax and adjustments by employer

 Employee retirement benefits

 Taxation of Income from Property

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SALARY DEFINITION AND CONCEPTS
Salary [section 12(2)]
means any amount received by an employee from any employment,
including —

 Any pay, wages or other remuneration

 Perquisites

 Allowances

 Reimbursement of expenses

 Profits in lieu of

 Pension

Except for amount expended in the performance of employment

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SALARY DEFINITION AND CONCEPTS
Salary [section 12(5)]
includes any amount received:
a) by the employee’s employer, an associate of the employer, or by a third
party under an arrangement with the employer or an associate of the
employer;
b) by a past employer or a prospective employer; or
c) 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.

Receipt of income [section 69]

A person shall be treated as having received an amount, benefit, or perquisite
if it is:
(a) actually received by the person;
(b) applied on behalf of the person, at the instruction of the person or under
any law; or
(c) made available to the person.

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SALARY – GENERAL RULES
1) Salary is taxable on receipt basis - [Section 12(1)]

2) For salary received in Arrears: Option available with the taxpayer to elect
salary to be taxed as if it was received in a relevant tax year -[section 12(7)]

3) No deduction is allowed for any expenditure incurred by an employee in

deriving salary income – [section 12 (4)]

4) 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.
[section 12(6)]

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SALARY – GEOGRAPHICAL SOURCE

1) Salary shall be Pakistan source if it is received from exercise of

employment in Pakistan - [section 101]

2) Foreign-source salary is exempt if tax is deducted in foreign country -

[Section 102]

3) Foreign-source salary is exempt if citizen of Pakistan leaves Pakistan and

remains abroad - [section 51(2)]

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ALLOWANCES AND PERQUISITES
1) All allowances received by an employee in relation to his employment are
fully taxable - [section 12(2)(c)]

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

employment are taxable at fair market value (FMV) less the amount
contributed by the employee - [section 13]

3) The value of accommodation provided by an employer shall not be less

than 45% of his basic salary - [Rule 4]

4) 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) - [Rule 5]

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ALLOWANCES AND PERQUISITES
5) 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; and

 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
[Clause (139) Second Schedule]

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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.1,000,000
[section 13(7)]

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CONCESSIONAL LOAN

loan provided with 5% p.a. interest Rs. 1,000,000

Addition in salary : Nil

loan provided with 8% p.a. interest Rs. 2,000,000

Addition in salary :

Rs. 2,000,000 @ 10% = 200,000

Rs. 2,000,000 @ 8% = 160,000
Addition in salary = 40,000
[section 13(7)]

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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. [section 12(3)]

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REBATES / DEDUCTIBLE ALLOWANCES

Profit on debt [section 60C]

A deductible allowance against salary income is allowed to the lower of 50% of
taxable income or Rs.2 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 [section 60]

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 [section 60D]

Every individual having taxable income of less than 1.5 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 –

- 5% of the total tuition fee paid;

- 25% of the person’s taxable income for the year;
- Rs. 60,000 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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EMPLOYEE SHARE SCHEME
a) Option / Right Shall not be Chargeable to Tax
b) Shares:
 Unrestricted
Include amount in the year the option is exercised and Shares Acquired:
FMV of Shares on date of Issue
Less: Consideration for Shares & Share options

 Restricted
Amount shall be chargeable to tax upon the earlier of :
a) the time the employee has a free right to transfer the shares; or
b) the time the employee disposes of the shares; and

In the above case, use FMV of the earlier of date when Restrict to Transfer Expires /
Disposal Date

Cost of Share will be sum of:

Consideration given by Employee for Share: XXXX
Consideration given by Employee for Right / Option XXXX

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WITHHOLDING TAX - SALARY
Withholding of tax [section 149]
1) Every employer (person responsible for payment) is required to withhold
tax from salary

2) Tax is required to be deducted at the time of payment

3) The amount of tax is calculated at an average rate of tax

(as provided under Part I of the First Schedule) – rates on next slide

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SLAB RATES
S.No Taxable Income Rate of tax

1. Where the taxable income does not exceed Rs. 0%

400,000

2. Where the taxable income exceeds Rs. 400,000 but Rs. 1,000
does not exceed Rs. 800,000
3. Where the taxable income exceeds Rs. 800,000 but Rs. 2,000
does not exceed Rs. 1,200,000

4. Where the taxable income exceeds Rs.1,200,000 but 5% of the amount exceeding Rs.
does not exceed Rs. 2,500,000
1,200,000
5. Where the taxable income exceeds Rs. 2,500,000 but Rs. 65,000 + 15% of the amount
does not exceed Rs. 4,000,000 exceeding Rs. 2,500,000

6. Where the taxable income exceeds Rs. 4,000,000 but Rs. 290,000 + 20% of the amount
does not exceed Rs. 8,000,000 exceeding Rs. 4,000,000

8. Where the taxable income exceeds Rs. 8,000,000 Rs. 1,090,000 + 25% of the amount
exceeding Rs. 8,000,000

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EXAMPLE
Mr. Asad has been working for a listed company Turtle Limited (TL) for the last
many years. The details of his emoluments during the tax year ended June 30,
2019 are as under:

Basic salary (per month) Rs. 350,000

Conveyance allowance (per month) Rs. 50,000

In addition to the above cash emoluments, Mr. Asad was also provided with the
following:

(a) A rent free furnished accommodation with a fair market rent of Rs. 100,000 per
month.

(b) An 1800cc company maintained car, both for business and private use. The
car was purchased at a fair market value of Rs. 2,000,000.

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SOLUTION
Income from Salary (Mr. Asad) Amount in
Rupees

Basic salary for six months (350,000 × 12) 4,200,000

Conveyance allowance (50,000 × 12) 600,000

Value of accommodation
(45% of basic salary or fair market rent whichever is higher)
(45% x 4,200,000 = 1,890,000 or 100,000 x 12 = 1,200,000) 1,890,000

Company maintained car (2,000,000 × 5%) 100,000

Total Salary income 6,790,000

Tax liability
upto Rs. 4,000,000 290,000
20% of the amount exceeding Rs. 4,000,000 (2,790,000 x 20%) 558,000
Total Tax Liability 848,000

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ADJUSTMENT FROM WITHHOLDING TAX
Following adjustments can be made against the tax to be withheld by the
employer as per section 149:

Tax credit on:

(a) Donation [section 61];
(b) Investments in new shares [section 62];
(c) life insurance premium [section 62] and
(d) Contribution to an Approved Pension Fund [section 63].

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

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EXEMPTIONS
Rebate for teachers/researcher [Clause (2), Part III Second Schedule
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 recognized by HEC;
- A Board of Education recognized by HEC; or
- A University recognized by HEC; or
- Government training and research institution

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POST EMPLOYMENT BENEFITS
1) Pension - A regular payment made by the employer to employee of or
above retirement age and to some widows and disabled people.

2) Gratuity - a sum of money paid to an employee at the end of a period

of employment. Normally it is last drawn salary multiply by number of
years in an employment

3) Provident fund - an investment fund contributed to by employees,

employers, and (sometimes) the state, out of which a lump sum is
provided to each employee on retirement. Normally it is 10% of
monthly basic salary each contributed by employee and employer till
the life of employment.

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POST EMPLOYMENT BENEFITS
 Pension received by the citizen of Pakistan from the former employer shall
be exempt from tax except where the person continues to work for the same
employer or an associate of the employer.

 Where a person receives more than one pension, the exemption shall apply
to higher of such pensions.

 Pension received in respect of services rendered by a member of Armed

Forces of Pakistan or Federal Government or a Provincial Government is
exempt from tax.

(Clause 8,12,13, Part 1, 2nd Schedule)

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 POST EMPLOYMENT BENEFITS
 Gratuity received from Federal/Provincial Governments is fully exempt
 Gratuity received from gratuity fund approved by the Commissioner is fully exempt
 Gratuity received from gratuity scheme approved by FBR is exempt upto Rs. 300,000
 Gratuity received from unapproved scheme is exempt upto 50% or Rs.75,000 which
ever is higher

Exemption in respect of unapproved gratuity shall not apply in the following

cases:
(i) Any payment not received in Pakistan
(ii) Any payment received by a director of a company who is not a regular employee of
such company
(iii) Any payment received by a non-resident
(iv) Any gratuity received by an employee who has already received any gratuity from the
same or other employer.
(Clause 13, Part 1, 2nd Schedule)

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POST EMPLOYMENT BENEFITS
 Provident Fund
Provident fund is categorized into the following three categories:
• Government provident fund
• Recognized provident fund
• Unrecognized provident fund
Provisions regarding taxability in respect of employer/employee contribution, interest
credited and accumulated balance thereon is as follows:
Event Government PF Recognized PF Unrecognized PF
Employee’s No treatment No treatment No treatment
Contribution
Employer’s Exempt Limit on employer’s yearly contribution No treatment
Contribution is Rs.150,000 or 1/10th of (basic salary
+ dearness allowance) whichever is
lower
Interest Exempt Yearly interest is exempt higher No treatment
credited of:
during the - 16% interest rate on
year accumulated balance; or
- 1/3rd of (basics salary +
dearness allowance)
Payment of Exempt Exempt Only the employer’s
accumulated contribution and interest on
balances accumulated balance is
taxable in the year of receipt.
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Thank you