Taxation of Salary

Income
 Income under the head
‘SALARY’
 Basis – Salary received in a tax year
[S.12(1)]
 Receipt – Direct or indirect [S. 69]
 Nature – Capital or revenue (Revenue:
less than one year economic benefit,
capital: more than one year economic
benefit
 From whom
 Present employer
 Past employer
 Future employer
 Income under the head
‘SALARY’
 Definition [S.12(2)]
 Part A – Any amount received from
employment directly or indirectly
 Part B – Specific amounts
 Part A – Receipts from
employment
 Employee – Any individual engaged in
employment [S.2(20)]
 Employer – Any person who engages
and remunerates an employee [S.2(21)]
 Employment [S.2(22)]
 Ordinary meaning

 Three specific categories

 EMPLOYMENT – Ordinary
meaning
 Fixed, regular (usually monthly)
payment to employees (other than
manual or mechanical work)
 Employer – Employee relationship
compulsory
 Remuneration drawn by virtue of being
an employee of an employer (and not
on account of contractual arrangement)
 Payment received by an individual
without employer – employee
relationship is not salary
 EMPLOYMENT – Other
categories
 Directorship/office involved in the
management of a company
 Elected director is otherwise not employee
but treated as employee in this ordinance
 Position entitling the holder to a fixed or
ascertainable remuneration
 Official Receiver/Liquidator
 Holding / acting in any public office
 PM, President, Parliamentarians
 ILLUSTRATIONS
 Tip received by a waiter from customers
 Tip received by an employee taxi driver
from passengers
 Fee paid to a Government College
lecturer by a university for paper-setting
 ILLUSTRATIONS
 Hospital share received from an
attached hospital by a professor doctor
employed in a medical college
 Remuneration received by the liquidator
of a company
 Remuneration received by an official
receiver appointed by a Commissioner
IR for recovery of Tax Arrears
 Part B – Specific amounts
 Direct remuneration to the employee in
connection with employment [S.12(2)
(a)]
 Pay
 Wages
 Other remuneration
 Leave pay
 Payment in lieu of leave
 Part B – Specific amounts
 Direct remuneration to the employee in
connection with employment
 Overtime
 Bonus
 Commission
 Fee
 Gratuity
 Work condition supplements
 Part B – Specific amounts
 Perquisites [S. 12(2)(b)]
 Indirect benefit/advantage/facility in money
or goods
 Normally in kind
 Residence, conveyance, free food, free
education, free electricity
 Measured through valuation
 Part B – Specific amounts
 Allowances in addition to salary [S.
12(2)(c)]
 Cost of living allowance
 House rent allowance
 Conveyance allowance
 Utilities allowance
 Dearness allowance
 Subsistence allowance
 Part B – Specific amounts
 Allowances in addition to salary [S.
12(2)(c)]
 Education allowance
 Travel allowance
 Orderly allowance
 Entertainment allowance
 Exception: Allowance solely expended for
official duties like TA/DA
 Part B – Specific amounts
 Personal expenditure of the employee
paid or reimbursed by the employer [S.
12(2)(d)]
 Utility bills
 Educational fee of children
 Local or foreign visit
 Part B – Specific amounts
 Profits in lieu of or in addition to salary
or wages [S. 12(2)(e)]
 Consideration for agreeing to accept
employment
 Consideration (compensation) for agreeing
to any conditions of employment or any
changes to the conditions of employment
 Payment on termination of employment,
whether paid voluntarily or under an
agreement
 Part B – Specific amounts
 Profits in lieu of or in addition to salary
or wages [S. 12(2)(e)]
 Compensation for redundancy or loss of
employment and golden handshake
payments
 Payment from a provident or other fund, to
the extent to which the amount is not a
repayment of contributions made by the
employee
 Consideration for restrictions in respect of
any past, present or prospective
employment
 Part B – Specific amounts
 Any pension or annuity, or any
supplement to a pension or annuity,
subject to exemptions available under
the Ordinance [S. 12(2)(f)]
 Benefit under Employee Share Scheme
[S. 12(2)(g)]
 Deductions (Expenditure)
 No deduction/expenditure admissible
against salary income [S. 12(4)]
 Tax free salary
 Treatment of tax-free salary [S.12(3)]
 Tax to be added to the employee’s income
chargeable under the head “Salary”
 Golden Hand Shake
 Treatment of payment under golden
hand shake [S.12(6)]
 The employee may elect for the amount to
be taxed at the average rate of tax for
three preceding tax years
 Option to be exercised by notice in writing
to the Commissioner
 Last date to give notice: Last date for
filing of return
 Time may be extended by Commissioner
IR
 Arrears of salary
 Treatment of arrears of salary [S.12(7)]
 If higher rate of tax applicable due to
late receipt of salary, the employee may
elect for payment of tax at the tax rates
for the tax year to which the salary
relates
 Option is to be exercised by notice in writing to
the Commissioner
 Last date to give notice: Last date for filing of
return
 Time may be extended by CIR
 Perquisites [S. 13]
 Value of perquisites provided by an employer
to the employee to be included in the
employee’s salary
 How to determine value of perquisites:
 Providing of a motor vehicle wholly or

partly for the private use of the employee

[S.13(3)]
 The amount to be included in salary to

be determined under Rule 5

 Perquisites [S. 13]
 Providing of services of a housekeeper,
driver, gardener or other domestic assistant
[S.13(5)]
 Amount to be included: total salary paid

to the domestic assistant for services

rendered to the employee
 Providing of utilities [S.13(6)]
 Amount to be included: fair market value

of the utilities
 Perquisites [S. 13]
 Interest-free loan [13(7)]
 The amount to be included in salary:

interest at ‘bench mark rate’ minus

interest charged by employer
 Exceptions
 Where employee does not receive interest
 Loan up to Rs.1,000,000 [TY 2018 onward]
 No inclusion if loan used to acquire an asset or
property which is producing income chargeable
to tax
 Perquisites [S. 13]
 Payment/Waiver of obligations/Loans of
the Employee [13(9)]
 Waiver of obligation of employee to

pay/repay amount owing by him to

the employer to be included in the
salary of the employee.
 Payment by the employer of any loan
owing by the employee to another
person [13(10)]
 Amount paid to be included in the

salary of the employee

 Perquisites [S. 13]
 Transfer of property or providing of
services to the employee [S.13(11)]
 Amount to be included in the salary

of employee: Fair market value of

property or services at the relevant
time
 Fair market value – S. 68
 Perquisites [S. 13]
 Providing of accommodation or housing
[13(12)]
 Amount to be included in salary to

be determined under Rule 4

 Example: BS 17 40000

 General Rule regarding perquisites

[13(13)]:
 Perquisite not covered in S.13 or any

Rule – Fair market value to be

included in income
 EMPLOYEE SHARE SCHEME
[S.14]
 Benefit under Employee Share Scheme
is taxable as salary
 Definition - Any agreement or
arrangement to issue shares to:
 an employee of the company;
 an employee of an associated company;

 the trustees of a trust for the benefit of

the company’s employees or of its

associates.
 When taxable
Nature of perquisite
Right or option to acquire
shares
Disposal of right/option to
acquire shares
Issuance of shares
[Restriction on transfer]
Issuance of shares [End of
restriction on transfer, or
disposal of shares]
Issuance of shares [without
restriction on transfer]
Amount taxable as salary Time to determine
FMV
NIL -
Consideration received – -
Cost of right/option
NIL [Until end of restriction or -
disposal of shares]
FMV of shares – cost to End of restriction or
employee disposal of shares,
whichever is earlier
FMV of shares – cost to When shares are
employee issued
 Disposal of shares
 Gain or loss on disposal to be taxed
under the head ‘capital gains’
 Gain = Consideration received – Cost
 Cost = consideration paid for acquisition
of the shares + consideration paid for
grant of right/ option + amount
chargeable to tax on exercise of option.
 Exemptions/Concessions
 Amount received against compulsory
monetization of transport facility
 Taxable @5% as separate block of income [Cl
(27), Part II, 2nd Schedule]
 Full time teacher/researcher employed
 in non-profit education/research institution
recognized by HEC/BoE/University
recognized by HEC
 In a government training & research
institution
 Tax concession – 25% of tax payable
 Exemptions/Concessions
 PENSION
 Received by – A citizen of Pakistan
 From – A former employer
 Exception – Where the person continues to
work for the employer (or an associate of the
employer).
 Pension from two employers – exemption
applicable to the higher of the pensions [Cl
(8), Part I, 2nd Schedule]
 Exemptions/Concessions
 PENSION
 Received by employees of
 Armed Forces
 Federal Government
 A Provincial Government
 Granted to families and dependents of
public servants or members of the
Armed Forces who die during service.
[Cl (9), Part I, 2nd Schedule]
 Exemptions/Concessions
 Commutation of pension
 Received
 From Government
 Under any pension scheme approved by
the Board
[Cl (12), Part I, 2nd Schedule]
 Exemptions/Concessions
 Gratuity/Commutation of pension
 received by an employee on his
retirement or, in the event of his death,
by his heirs
 Employees of Government, a local
authority, a statutory body or corporation –
Entire amount
 From approved gratuity fund – Entire
amount
 Exemptions/Concessions
 Gratuity/Commutation of pension
 receivable under any scheme approved by

the Board– Up to Rs.300,000

 Other employees not covered above
 50% of the amount receivable or
 Rs.75,000, whichever is the less:

[Cl (13), Part I, 2nd Schedule]

 Exemptions/Concessions
 Leave encashment
 Employees of Armed Forces, Federal Govt.,

Provincial Govt.
 Continue to work instead of availing LPR

 Receive leave encashment

[Cl (19), Part I, 2nd Schedule]

 Exemptions/Concessions
 PAYMENT FROM PRIVIDENT FUND
 Provident Fund established under the Provident
Funds Act,1925 [Govt. and Semi-Govt. Organizations]
 Wholly exempt [Clause (22)]

 Recognized Provident Fund [Private organizations]

 Wholly exempt [Clause (23)]

 Other Provident Fund [Neither recognized nor set up

under law]
 Wholly taxable
 Exemptions/Concessions
 PAYMENT FROM OTHER FUNDS
 Benevolent Fund established under the
Central Employees Benevolent Fund and
Group Insurance Act, 1969 [Clause (24)]
 Approved Superannuation Fund [Clause (25)]
 Workers Participation Fund [Clause (26)]
 Exemptions/Concessions
 Perquisites without additional cost to
employer:
 Free food by hotels/restaurants
 Free education by educational institutions

 Free medical treatment by hospitals

 Any other such benefit

[Cl (53A)]
 Exemptions/Concessions
 Reimbursement of medical
treatment/hospitalization [Cl(139)(a)]
 Medical allowance up to 10% of basic
salary [Cl(139)(b)]