Income from Salary

[Section 12]

Taxation (TAX161)

Dr. Abdul Haseeb

spring-2024
 Chapter Objectives
• Income
• Heads of Income
• Salary
• Features of Salary Income
• Scope of Salary Income
• Valuation of perquisites, Allowances and benefits
• Facilities provided by employer
• Calculation of Salary income
• Calculation of Gross Tax
• Income under FTR
• Average Relief
• Calculation of Net Tax
 Income [Sec2(29)]
Income includes;
• Any amount chargeable to tax under the
Income Tax Ordinance, 2001
• Any amount subject to collection or deduction
of tax under final tax regime;
• Any amount treated as income under any
provision of the Ordinance, and
• Any loss of income.
• Heads of Income [Section (11)]
A person may earn and receive income from
different sources during the tax year. For the
purpose of charge of income tax and calculation
of tax payable, the income is classified under
five heads
i. Salary;
ii. Income from property;
iii. Income from business;
iv. Capital gains;
v. Income from other sources.
 Introduction
• Salary [Section 12]
 Salary means fixed, weekly or monthly
remuneration
 First head or source of income
 For proper understanding, It is necessary to
distinguish the income from salary and income
taxable under other heads.
 Features of Salary income

i. It is necessary that relationship of the employer and

the employee should exist.
ii. Income paid by govt. local authority, company, public
body, association or private employer in Pakistan.
iii. Income is due to employee during or after service.
iv. Employee in case of company includes he managing
director, director or an agent of the company.
v. Salary earned is taxable whether received or not (For
more understanding, please see Illustration 1).
vi. Salary received is taxable whether earned or not
(please see Illustration 2).
• Arrears of salary will be taxable in the year of
receipt, If these have not been taxed in the
year in which the amount was earned.
Example 4.1: A persons monthly salary is Rs 40,000. In
June 2023 his salary is increased by Rs. 5000 per month
retrospectively w.e.f 01-01-2022 and arrears are paid to him
on 30th June 2023 . Calculate his salary for tax year 2023.
Sol.
• Salary earned (01-07-2022-30.6.2023) 45000*12 Rs. 540000
• Arrears of last year 01.01.2022-30.06.2022
received in tax year 2023 5000*6 30000

Taxable Salary Rs. 570000

 Scope of Salary income
• The following group of receipts are included in
the term of salary under section 12.
i. Salary and wages
ii. Annuity, Pension or gratuity
iii. Fees, commission or allowances
iv. Perquisites
v. Profits in lieu of or in addition to salary or
wages
vi. Employee Share Scheme
 Explanation
• Salary: Fixed weekly or monthly remuneration
• Wages: Amounts earned by labourers and artisans,
normally payable on hourly, daily or piece work.
• Annuities: Amounts paid by the employer
annually.
• Pension: Amount Received from past employer
after retirement.
• Gratuity: Lumpsum amount given by employer
normally at the time of retirement.
 Explanation Cont.
• Fees: Amounts received from employer on the
basis of work performed.
• Commission: The work done on a
remuneration agreed on the basis of
percentage of the income of employer. E.g.
10% of profit, 2% of sales, etc.
 Explanation Cont.
• Perquisites: Facilities or benefits provided by the
employer to his employee. For example:
a) Rent free accommodation
b) Accommodation at concessional rate
c) Insurance premium
d) Debt of employee paid by the employer
e) Conveyance Facility
f) Services of house keeper, driver, gardener or other
domestic assistant.
g) Utilities, Gas, Water, Electricity and Telephone.
 Explanation Cont.
• Profits in lieu of or in addition to salary:
a) Compensation received from employer on termination of
employment.
b) Compensation on modification of terms of employment.
c) Amount received from Provident fund or any other fund
which is contributed by employer.
d) Overtime payments
e) Allowances i.e. dearness, conveyance, medical,
entertainment, utilities etc. received from employer.
f) Bonus
g) Directorship fee or fee for attending meetings of board of
directors is part and parcel of taxable salary.
 Valuation of Perquisites, Allowances and
Benefits
a) Minimum of time scale of Basic Salary: Amount
from where the salary scale of the employee starts.
E.g. Rs. 60,000 is a minimum of time scale of basic
salary of scale Rs.60,000-1000-70,000.
b) Basic Salary: Means the pay and allowances
payable monthly or otherwise but does not include:
i. Dearness allowance or dearness pay
ii. Employers contribution to the provident fund
iii. Special Allowance, accommodation allowance etc.
c) Salary: For the purpose of determining the value of
perquisites, allowances and benefits, salary:
1) Includes basic salary, overseas allowance, dearness
allowance, cost of living allowance, bonus and
commission.
2) Does not include employers contribution t a recognized
provident fund, superannuation or gratuity fund.
3) Apart from (1) and (2) any other amount paid by
employer will be included if it enters into the
computation of pension and retirement benefits.
 Facilities Provided by Employer
• The facilities provided by the employer will be taxable.
The facilities are
1) Accommodation
2) Conveyance
3) Medical charges, hospital charges or medical allowance
4) Entertainment
5) Loan to employee
6) Special allowance
7) Provident fund
 Accommodation

a. House Rent Allowance (whole amount will be

taxable)
b. Accommodation Facility (If provides furnished or
unfurnished accommodation)
1) Amount that would have been paid by the
employer in case such accommodation was not
provided; or
2) 45% of the minimum of time scale of the basic
salary;
Whichever of (1) or (2) is higher.
c. Accommodation facility in the areas other
than big cities:
In areas other than big cities the house
allowance admissible to government employees
is 30% of minimum of time scale of basic salary.
Note: (a) If there is no time scale, basic salary
should be taken for computation.
(b) If it is not known whether the area of
accommodation is a big city or not, it is assumed
that person is employed in a big city unless
otherwise mentioned.
 Conveyance
a. Conveyance Allowance (whole allowance will be fully
taxable)
b. Conveyance provided by employer for personal use of
employee (10% of acquisition cost of motor vehicle)
c. Conveyance provided by employer partly for personal
use and partly for official use (5% of acquisition cost of
motor vehicle)
d. Employer acquires the conveyance on lease (In case of
(b) 10% of fair market value and for (c) 5% of fair
market value of motor vehicle)
 Medical Charges, Hospital charges or
medical allowance
In case an employee:
i. Receives free medical treatment or
hospitalization or both by the employer or
receives reimbursement of the medical
expenses, whole such benefit will be exempt
from tax.
ii. If above mentioned facilities are not
provided, any medical allowance will be
exempt up to 10% of basic salary.
 Entertainment
1) Actual entertainment expenditure incurred by
employee for entertainment on behalf of organization
and then reimbursement to him by employer are not
taxable.
2) If any employee is provided free tea, coffee at
office premises during work are not taxable.
3) Free or subsidized food provided by employer of
hotel or restaurant during duty hour are not taxable.
4) In all the remaining case, the entire entertainment
allowance received by employee will be added in his
total income for tax purpose.
 Loan to Employee
Where a loan is made by an employer to an employee and
either no profit on loan is payable by the employee or the
rate of profit on loan is less than 10%, the amount chargeable
to tax to the employee
1) The profit on loan computed at the rate of 10%, where no
profit on loan is payable by the employee, or
2) The difference between the amount of profit on loan paid
by the employee in the tax year and the amount of profit on
loan computed at the rate of 10%.
Note: Loan is exempt up to Rs. 10,00,000 provided by the
employer to employee. If exceed, above rule will apply.
 Special Allowance
Special allowance is exempt from tax
granted to meet expenses incurred in the
performance of official duties.
 Provident Fund
It is maintained by many organization for
the benefit of their employees.
 Types of Provident Fund
 Government Provident Fund
It is maintained by government or semi government
organization. It is known as statutory provident fund.
 Recognized Provident Fund
When the private organization fulfills the condition prescribed in
law for recognition and on an application made, the commissioner of
income tax grants recognition to such funds.
 Unrecognized Provident
Fund
When private organization has not been granted recognition by
income tax authorities because:
1) The conditions prescribed in the law regarding the provident fund
are not fulfilled; or
2) No application for recognition has been made; or
3) Application is turned down on some technical grounds by the
 Treatment of Provident Fund

Items Government Recognized Provident Fund Unrecognized Provident

Provident Fund Fund

Employees’s Included in taxable Included in taxable income Included in taxable

Contribution income income
Employer’s Not Included in Not included lesser of 10% Not Included in taxable
Contribution taxable income of (basic salary + dearness income
allowance) or Rs.150,000.
In case it exceeds, the
excess amount is taxable.

Interest Not Included in Not included if rate is up to Not Included in taxable

credited taxable income 16% and amount is less income
than 1/3 of salary. (basic
salary + dearness
allowance) otherwise the
excess will be taxable.

Receipt of Not Included in Not Included in taxable Included to the extent of

accumulated taxable income income employer contribution
balance and interest thereon.
Example 4.2: Calculate taxable income.
• Mr. Imran is employed in a scale of 32,000-3000-47,000. Basic salary is
35,000 p.m. other benefits during the year ended on 30th June 2023 are
dearness allowance: 18,000. Entertainment allowance: 26,000
Conveyance allowance: 24,000. Travelling allowance: 15,000.
Contribution to recognized provident fund:
Mr. Imran’s Contribution 13,000
Employer’s contribution 13,000
Interest credited 22,000
Notes:
• Mr. Imran has been provided a rent free furnished accommodation by
his employer. Mr. Imran was entitled to an accommodation allowance
of 100,000 if accommodation was not provided to him.
• Employer also provided him gas, water and electricity worth 45,000
free of charge.
• Salary of sweeper who works in Mr. Imran ‘s accommodation is 72,000.
This salary is also paid by his employer.
 Mr. Imran
Tax year: 2022
Tax year ended: 30.6.2023
Residential Status: Resident
Computation of Taxable Income
Basic salary Rs.
(Scale Rs. 32,000-3000-47,000)
@Rs. 35,000 p.m. 420,000
Dearness allowance 18,000
Entertainment allowance 26,000
Conveyance allowance 24,000
Contribution to RPF: Rs.
Employee’s contribution (automatically included) 13,000
Employer’s contribution (not to be included less than
10% of salary 420,000+18,000)43,800 or 13,000 or 150000) 13,000
Interest credited (not to be included) 22,000
Travelling Allowance 15,000
Value of accommodation:
Entitlement if accommodation was not provided 100,000
45% of minimum of time scale of basic salary, 45% of 384000 172,800
(Whichever is higher will be value of accommodation) 172,800
Value of utilities 45,000
Salary of sweeper paid by employer 72,000
 Calculation of Gross Tax
If the taxpayer has made any of the following six
payments, these should be deducted out of the
total income:
1) Zakat paid under Zakat and Ushr ordinance
(Section 61)
2) Payment to workers Welfare Fund [Section
60A]
3) Payment to workers Profit Participation
fund [Section 60B]
4) Educational Expenses [Section 60D]
A deduction in respect of tuition fee paid
during tax year provided that taxable income of
the individual is less than Rs. 15,00,000. it will be
restricted to:
i. 5% of the total tuition fee paid for the year.
ii. 25% of the person’s taxable income
iii. Number of children of the individual
multiplying by Rs. 60,000.
Whichever is less.
 Example 4.3
A person having taxable income for tax year
2022 is Rs. 900,000. He has paid Rs.600,000 as
tuition fee of his children. Find the deduction
amount.
I. 5% of tution fee= 5%(600,000)= Rs. 30,000
II. 25% of taxable income= 25% (900,000)
=Rs. 225,000
III. No. of children * 60,000= 4*60,000
= Rs. 240,000.
Deduction amount is Rs. 30,000
 Notes
At this stage, two decisions are to be made:
1. Whether the person is a salaried person? If
salary income is more than 50% of taxable
income, the person will be treated as salaried
person. This differentiation is necessary
because salaried persons are entitled to
concessional tax rates.
2. Whether tax will be payable or not? No
income tax shall be payable by salaried
person if his taxable income does not exceed
Rs. 600,000.
 Block of Income under FTR
a) Rate of dividend taxation
Rates of tax on dividend received from a company
shall be as follows
• dividend Paid by independent power projects where it is
paid under implementation agreement or power
purchase agreement or energy purchase agreement and
is reimbursed by central power purchasing agency (7.5%)
• Dividend received from a company, where no tax is
payable by the company- 25%
• Dividend from mutual fund or In all other cases - 15%
b) Royalty payment to non-resident – 15% of
payment
c) Income by way of prize on prize bonds or
crossword puzzle (Filer)- 15% of such prize
d) Income by way of prize on prize bonds or
crossword puzzle (non Filer)- 30% of such prize
e) Income from wining a lottery or quizz, price
offered by a company for promotion of sale- 20% of
such winning
 Example 4.5
Calculation of Tax payable
Taxable income as calculated in Example 4.4 is
Rs. 616,800. So, Rs.
Taxable income 616,800
Computation of tax payable
(Tax on exceeding 600,000 but
does not exceed to 12,00,000)
Tax Payable (616,800-600,000)*2.5%
 Average Relief
Government allows tax concession on
some expenditures and investments. Relief in
tax will be provided if the person makes any of
the following payments:
1. Donation for charitable purposes [Section 61]
2. Contribution to Approved Pension Fund
[Section 63]
3. Installation of point of sale machine [Section
64D]
Calculation of Average Relief