SALARY INCOME ( SEC 12)
1)Salary received by an employee in a tax year other than that is exempt under this Ordinance shall be chargeable to tax.
2)Salary means any amount received by an employee from employment, whether of a revenue or capital nature, and includes pay, wages, leave pay, earned leave, overtime, bonus, commission, fee, gratuity, work condition supplements.
Salary includes perquisites whether convertible in cash or not (sec 12 & 13)
a) Cash allowances like cost of living, subsistence, rent, utilities, education allowance, entertainment allowance, or travel allowances in excess of actual expense incurred in the performance of duties of employment.
b) Any amount expenditure incurred by the employee but reimbursed by employer other than the expenses incurred by employee in the performance of his duties.
c) Perquisites in kind i.e. utilities provided, services of house keeper, driver Gardner, motor vehicle, and accommodation provided by the employer. The salary of above servants actually paid by the employer reduced by any payment made by the employee shall be added to salary as perquisites. The valuation of perquisites like motor vehicle and accommodation has been prescribed in Income Tax Rules.
d) The amounts of any profit in lieu of or in addition to salary such as any consideration to enter into an employment relationship OR consideration for any employee’s agreement to any condition or change of any condition OR the amount received on termination of employment whether voluntary or compensation for redundancy or loss of employment including golden hand shake payments or the amount received as consideration to restrict him of any past, present or prospective employment.
e) Pension or annuity, amount received from provident fund
f) Any amount chargeable to tax as salary as employee share scheme u/s 14.
3. Where the employer agrees to pay tax on employee’s salary, the salary of employee shall be grossed up by adding the amount of tax to salary.
4. No deduction shall be allowed for any expenditure incurred by an employee in deriving income under this head.
5. The amount of perquisites received by an employee from an associate of the employer, or by a third party , or by a past employer or prospective employer shall be treated as received by an employee from an employment.
6. Where an employee received an amount on termination of employment voluntarily or under agreement or under golden handshake payment, he may by notice in writing request the Commissioner in writing by due date of filing of return to tax him at “average rate” in accordance with the following formula.
A/B %
A) is the total tax paid or payable by the employee on the employee’s total taxable income for the three preceding tax years: and
B) is the employee’s total taxable income for the three preceding tax years.
7. In case arrears of salary are paid in a tax year and the total taxable salary falls in higher slab; the employee can request to the Commissioner in writing by due date of filing of return to add such arrears in the year in which services were rendered and tax liability may be re-assessed for that tax year.
8. Where salary is paid by a private company to an employee for services rendered in earlier years and salary was not taxed in that earlier year; the commissioner may allow to include the said salary in that earlier year.
9. Where the utilities are actually provided by the employer, the amount chargeable to tax shall be the fair market value of such utilities as reduced by the payment made by the employee. It means if the employer subsidies the utilities; the amount of subsidy is taxable.
10.Where the Soft loan are provided by the employer on or after 1st July 2002 on no markup basis or at markup less than bench mark rate; the difference benchmark up rate over actual markup payable to employee shall be taxable as benefit to the employee under the head salary. Incase no markup is payable the total bench mark up is to be added to his salary. 11. Where an Obligation of employee is waived off by the employer; the amount so waved shall be included in his salary.
12. Where an Obligation of employee to pay an amount to another person is paid by the employer; the amount so paid shall be included in his salary income.
13.Where any property is transferred or services are provided by the employer to an employee; the fair market value of such property or service determined at that point of time shall be taxable under the head “salary”.
14.Where accommodation or housing is provided by the employer the amount to be included in salary of employee shall be equal to the fair market rental value of the accommodation provided but in any case it should not be less than 45% of minimum time scale or the basic salary where there is no MTS.
15. The value of perk representing provision of a motor vehicle shall as determined as under:
a) Where motor vehicle is provided wholly for personal use of the employee; 10% of the cost of vehicle or FMV of the vehicle at the commencement of lease shall be added to salary.
b) Where it is partly used or private and partly for employer purpose; 5% of above shall be added to salary.
16. Where any perquisite is provided which has not been covered in above mentioned paras the amount chargeable to tax under the head salary shall be the FMV of that perk as reduced by the amount paid by the employee for that perk.
BENCHMARK RATE shall be 10% for the tax year 2008. UTILITIES includes electricity, gas water and telephone. SERVICES includes provision of any facility.
EMPLOYEE: means any individual engaged in employment. EMPLOYER: means any person who engages and remunerate an employee. EMPLOYMENT: includes, directorship or any other office involved in the management OR a position entitling the holder to a fixed or ascertained remuneration OR the holding or acting any public office.
EXEMPTIONS UNDER SECOND SCHEDULE TO SALARIED PERSON
PENSION (monthly payment received on retirement or death)
1) Any pension received by Pakistani citizen is exempt except that he continues with the same employer or its associate. In case person receives more than one pension; the only one highest will be exempted remaining will be taxable.
2) Pension by army or government employee on injury or invalidity and family pension to Shaheed of army.
3) Commutation of pension from Govt or pension scheme approved by the CBR is exempt.
4) Accumulated balance up to 25% received from Voluntary Pension System on retirement, death or disability.
5) Any benevolent grant paid from Benevolent Fund to employees or family members shall be exempt.
GRATUITY OR SUPERANNUATION (lump sum payment received on retirement or death)
1) Total exempt to employee of Govt or local authority, statutory body or corporation.
2) Total exempt to any employee from Gratuity fund approved by Commissioner.
3) Exempt up to Rs 200,000 received under any scheme approved by CBR.
4) IN ALL OTHER CASES: Exempt up to 50% of amount received or Rs 75,000 which ever is less. Provided that payment is received by the resident individual with in Pakistan ; that in case the payment is received from Company; he is not full time employee director of a company; that the employee has not received any gratuity from the same employer or any other employer.
Annuity: means annual payment made by insurance co. during life time in return of lump sum or periodical amounts paid in advance) Annuity received from Postal Annuity Certificate or State Life or other registered Insurance Co. is exempt up to Rs 10,000
Provident fund: Government Recognized Unrecognized
Employee contribution Taxable Taxable Taxable
Employer contribution Total Exempt Exempt lower of
10% of Salary No treatment
or Rs 100,000 at this stage
Interest credited on P. Fund Total exempt Exempt upto 1/3rd Taxable on portion
Of salary or profit of employer’s
@ 16% on balance contribution when received
Payment from accumulated fund Exempt Exempt Taxable to the extent
Of Employer’s
Contribution and
Interest thereon as
Discussed above
MEDICAL ALLOWANCE / RE-IMBURSEMENTS INCLUDING HOSPITALIZATION
1) For any employee: if it is according to the terms of employment; total re-imbursement is exempt. Provided NTN of hospital / clinic is given and employer certifies the bills. Any allowance in addition to re-imbursement of such actual medical expenditure shall be taxable.
2) For any other employee; medical allowance or re-imbursement is exempt up to 10% of the basic pay provided it is not in accordance with terms of employment.
OTHER EXEMPTIONS
1) Leave encashment preparatory to retirement (LPR) to Government and Army employee.
2) Any payment out of Workers Profit Participation fund
3) Compensatory Allowance to Pak citizen locally recruited for Pak mission abroad exemption to the extent of 75% of gross salary. Total allowance or perquisite paid or allowed outside Pakistan by Govt for rendering service outside Pakistan .
4) Any special allowance or benefit other than entertainment and conveyance to meet expenses incurred in performing official duties is exempt.
5) Flying allowance, submarine allowance, conservancy allowance to armed force people is exempt.
6) Certain benefits / perquisites to President, Governor, Army heads, Core comm., minister, judges of high courts and supreme court are exempt.
7) Full time teacher or researcher employed in non-profit / Government education or research institute recognized by Board or HEC, shall be allowed further 50% reduction in tax payable.
8) Senior citizen aged 60 years or more on 1st day of tax year and having taxable income up to Rs 750,000 shall be allowed reduction of 50% of tax liability.
9) The tax exemption limit for salaried person is Rs 150,000 in case of man and Rs 200,000 for woman tax payer in a tax year.
10) Free or concessional passage provided by transporters including airlines to its employees and his dependents.
11) Free or subsidized food provided by hotel or restaurants to his employee during office hours.
12) Free or subsidized education provided by education\al institutions to the children of its employees.
13) Free or subsidized medical treatment provided by a hospital to its employees.
14) Any other perk or benefit which the employer does not have to bear any marginal cost as notified by the FBR.
Employee share scheme ( Section 14 )
a) The value of a right or option to acquire shares of the company or its associated company under an employee share scheme is exempt.
b) When the right or option is exercised and shares are acquired by the employee the amount chargeable to tax shall be the FMV of shares on date of issue less any consideration paid for buying option or right.
c) Where shares issued are subject to a restriction of transfer: No amount shall be added to income until such time such restriction is removed or the shares are actually disposed off by the employee. The amount chargeable shall be the FMV at the time when restriction was removed or at the time shares are disposed off. Any consideration paid for option or right shall be deducted from FMV.
d) When calculating the capital gain on such shares; the cost of shares shall be the sum of consideration for shares + consideration for option or right + the amount chargeable to tax as above.
e) Where employee disposes off right or option the amount chargeable to tax shall be the consideration received for disposal minus employees cost of acquiring such right or option.
INTERNALLY DISPLACED PERSON TAX (IDP Tax)
This is one time levy for tax year 2009 on those individuals and AOP having taxable income exceeding Rs one million @ 5% of tax payable on taxable income. And for tax year 2010 on those salaried individuals whose salary excluding bonus exceeds Rs one million @ 30% of the amount of bonus.
TAX CREDITS (Section 61 to 65)
a) Charitable donations: Paid in cash (through crossed cheques) or in kind by way of property (at FMV of date on which it is donated) to any board of education or Government university in Pakistan OR any Government educational institution or hospital or relief operation OR any approved NPO. The tax credit will be allowed to any person i.e. individual, AOP or company but the amount of donation allowed for tax credit shall be limited to 30% of taxable income incase of individual or AOP and 15% of taxable income in case of a company. The tax credit shall be calculated at the following formula:
Tax assessed before such allowance
------------------------------------------- * Allowable donation } = Tax credit
Taxable income worked out as above}
b) Investment in Shares: If any person other than company invest in new shares or public listed company as original allottee or invest in the shares offered through privatization commission; the amount so invested shall be entitled for tax credit The tax credit will be allowed to i.e. individual and AOP and company is not entitled to claim tax credit. The amount of investment allowed for tax credit shall be limited to 10% of taxable income of individual or AOP or Rs 300,000 which ever is less. The tax credit shall be calculated at the following formula:
Tax assessed before such allowance
------------------------------------------- * Allowable investment} = Tax credit
Taxable income worked out as above}
A very important condition to above tax credit is that the person shall not dispose off these shares within 12 months from the date of acquisition. In case he dispose off these shares before the 12 months; the tax credit enjoyed in previous year shall be disallowed and added to his tax liability in the year of disposal.
c) Contribution to an Approved Pension Fund: Tax credit allowed to Eligible Person: Eligible person: means an individual Pakistani who has obtained valid National Tax Number. Eligible person deriving income from Salary or Business can claim tax credit for any contribution or premium paid during tax year to any approved pension fund. However the amount of contribution / premium allowed for tax credit shall be limited to 20% of the taxable income of the person; however an incentive is given to join pension fund at early age. The Eligible person having age of 41 years or above starting from 01-07-06 shall be allowed additional contribution of 2% p.a. for each year of age exceeding 45 years. Another barrier for such person is that the total contribution allowed shall not exceed 50% of the taxable income of preceding year. The Maximum amount allowed shall not exceed Rs 500,000 in any case. The tax credit shall be calculated at the following formula:
Tax assessed before such allowance
------------------------------------------- * Allowable premium} = Tax credit
Taxable income worked out as above}
d) Profit on debt: Any person who has obtained loan from a scheduled bank or NBFI approved by SECP or local authority or a statutory body or Listed company and has utilized such loan for construction of new house or acquisition of house is entitled to tax credit for the amount of interest paid for such loan. The maximum limit is 45% of the taxable income or Rs 750,000 which ever is less. The tax credit shall be calculated at the following formula:
Tax assessed before such allowance
------------------------------------------- * Allowable interest} = Tax credit
Taxable income worked out as above}
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