Class Lectures By:

M. Rameez Asif, ACA

CHAPTER # 05
SALARY

1 Conveyance:

a) Conveyance Allowance:
0 Fixed in nature
0 Full amount is taxable

b) Motor Vehicle

Amount to be included in taxable salary (Time

basis)
Partly-Personal Personal Use Official Use
& Official Only Only

Owned Car (New/Old) 5% of cost 10% of cost 0%

5% of FMV at 10% of FMV at 0%
time of time of
commencement commencement
Leased Car of lease of lease
Rent a Car Basis 50% of rent 100% of rent 0%

Note:
Deduction from salary of employee in this respect shall be reduced from the taxable amount of the
perquisite.

2 Accommodation:

a) House Rent Allowance:

0 Fixed in nature
0 Full amount is taxable

b) Free Accommodation:

Higher of following:
Rental value % of MTS/BS

Rental value- if
no
accommodation
Mufasal Areas provided 30% of MTS/BS
Rental value- if
no
accommodation
Other than Musafal Areas provided 45% of MTS/BS
Class Lectures By:
M. Rameez Asif, ACA
Note:
MTS (4,900-800-8,500) means salary scale of a particular employee starts with Rs. 4,900, with per annum
increment of Rs. 800etc, subject to maximum increased salary upto Rs. 8,500.

3 Self Hiring Of Property:

0 Concept of self hiring- building given to employee by employer for use is owned by employer/his
spouse
0 Salary income: same rule as for free accommodation
0 Income from property for employee-Rent received by the employee (will discuss in Chapter # 06)

4 Utilities:

0 E.g.-Gas/Water/Electricity
0 FMV of utilities is taxable

Note:
Deduction from salary of employee in this respect shall be reduced from the taxable amount of the
perquisite.

5 Domestic Servants:

0 E.g.-Housekeeper/Gardner/Driver/Cook etc.
0 Amount of salary paid to these servants is taxable

Note:
Deduction from salary of employee in this respect shall be reduced from the taxable amount of the
perquisite.

6 Obligation Waiver/Settlement:

0 Taxable-equal to amount waived by the employer

0 Taxable-equal to amount repaid by the employer to another person

7 Interest Free / Concessional Loan:

0 Concept of interest free/concessional loan;

0 No interest payable by employee- Interest @ benchmark rate i.e. 10%
0 Interest @ less than benchmark rate- differential amount of interest @ concessional and benchmark rate
0 Interest rate> benchmark rate, -no addition in salary
0 Interest calculation on time basis

Exception:
a) Loan =<1,000,000
b) waiver of interest by employee on his accounts maintained with the employer e.g.Provident Fund
Class Lectures By:
M. Rameez Asif, ACA
Acquiring any asset or property (producing taxable income) from such loan:
a) Interest @ benchmark rate i.e. 10% on such loan shall be allowed as deduction against income from such
asset.
b) If interest charged at higher rate than benchmark rate, then, actual amount of loan allowed as deduction
from income

8 Transfer of property or provision of services to employees:

0 FMV of property/service determined at the time of transfer of property/provision of service

Note:
Deduction from salary of employee in this respect shall be reduced from the taxable amount of the
perquisite.

9 Property/asset (AC/Fridge/Washing machine/ovent etc) given for use to emplyee:

0 Rental value/depreciation charged by the employer (on time basis) is taxable benefit

Examples:
Two AC and 1 washing machine for use at home given to emplyee. Combined book value is Rs. 300,000
and dep charged by the employer @ 10@. (Taxable benefit= 300,000*10% =30,000)

10 Any other perquisite:

0 FMV of perquisite

Note:
Deduction from salary of employee in this respect shall be reduced from the taxable amount of the
perquisite.
Class Lectures By:
M. Rameez Asif, ACA

RETIREMENT BENEFITS:

1 Gratuity:

0 Defined benefit plan

0 Government employees-Fully exempt

Other cases:

Amount to be included in taxable salary

Unapproved
Approved Approved
Gratuity
Gratuity Fund Gratuity Scheme
Scheme/Fund

Fully Exempt Exempt upto Rs. Exempt (Lower

300,000 of:
1-Rs. 75,000 or
2- 50% of the
amount
receivable

Exception (Exemption in respect of unapproved gratuity not applicable):

0 Payment-not received in Pakistan

0 Payment to director-not a regular employee
0 Payment-non resident
0 Payment to employee-already received the gratuity from the same/other employer.

2 Pension:

0 Exempt-if received by citizen of Pakistan from X-Employer

0 Exempt-if received by employees of Armed forces/Government

Exception :

0 Person continues to work for same employer/associate employer

0 Person received more than 1 pension- higher of such pension exempt (Person for age of over 60 years, all
pensions exempt

3 Provident Fund:

0 Defined contribution plan

0 Government PF-Fully exempt
Class Lectures By:
M. Rameez Asif, ACA
Recognized PF (Under 6th schedule of I.T, 2001):

Amount to be included in taxable salary

Interest Payment of
Employe Employer
Credited During Accumulated
e Share Contribution
The Year Balance

Fully Exempt (Lower Exempt (Higher Fully Exempt

Exempt of: of:
1-Rs. 150,000 or 1-interest @ 16%
2- 1/10th of the on Acc. Balance
(BS+DA) or
2- 1/3rd of the
(BS+DA)

Un-Recognized PF :

Amount to be included in taxable salary

Interest Payment of
Employe Employer
Credited During Accumulated
e Share Contribution
The Year Balance

No No Treatment No Treatment Only employer's

Treatme contribution &
nt interest on acc.
Balance-taxable
in the year of
receipt

4 Annuities (fixed stream of payment):

0 Fully taxable even if paid on voluntary basis without any contractual obligation.
0 May be received from current/Ex employer.
0 Tax credit in this regard shall be discussed in Chapter # 11.

5 Superannuation Fund:

Approved Fund:

0 Employment benefit just like pension plan.

Approved Fund-Tax treatment:

0 Yearly Employer contribution-Exempt
0 Yearly Interest on accumulated balance-Exempt
Class Lectures By:
M. Rameez Asif, ACA

Upon Death of Employee:

0 Payment from the fund is exempt.

During Life Time of Employee:

0 Payment (contribution+interest) from the fund is taxable and tax shall be deducted at source by the
Trustees of the Fund .

Un-Approved Fund:

0 Payment from unapproved fund is taxable in the hands of employees.

6 Benevolent Fund (for Charitable Purpose):

0 Grants paid out of this fund to employees or their families-exempt -if paid in accordance with
provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969.

7 Commutation of Pension:

0 Lump sump payment of pension

0 Exempt from tax if received from:
1-Government
2-Approved Scheme
0 In case of Unapproved Scheme- same provisions as applicable to unapproved gratuity scheme.

8 Special Allowance:

0 Special allowance e.g. Travelling/Daily Allowance (TA/DA) / Relocation Allowance (RA).

0 Exempt from tax if incurred for official duties.
0 If actual amount of expense is < TA/DA/RA, event then exempt from tax.

9 Certain Perquisites without by virtue of employment:

following perquisites received by an employee by virtue of his employmentare exempt from tax:
0 Free/subsidized food by hotels to its employees
0 Free/subsidized education by educational institutes to its employees children
0 Free/subsidized medical treatment by hospitals to its employees
0 Any other perquisite for which the employer does not have to bear any marginal cost, as notified by the
Board

10 Medical Facility/Reimbursement/Allowance:

Medical Facility/Reimbursement:
Class Lectures By:
M. Rameez Asif, ACA
In accordance with terms of employment:
0 Exempt from tax if following available:
1-NTN/CNIC of medical practitioner
2-Employer attestation

0 Medical bills reimbursement by insurance company (in case of group insurance) exempt from tax if
above mentioned conditions are met.
0 Insurance premium paid by the employer in this regard is not part of salary of employees.

Not in accordance with terms of employment:

0 Fully taxable

Medical Allowance (only):

0 Exempt upto 10% of basic salary

Medical Allowance+Medical Facility/Reimbursement (as per employment terms):

0 Medical allowance-taxable
0 Medical Facility exempt from tax if following available:
1-NTN/CNIC of medical practitioner
2-Employer attestation

0 if following not available, then both i.e. MA & MF taxable:

1-NTN/CNIC of medical practitioner
2-Employer attestation

Medical Allowance+Medical Facility/Reimbursement (not as per employment terms):

0 Medical allowance-exempt upto 10% of BS
0 Medical Facility-taxable

11 Worker’s Profit Participation Fund (WPPF) :

0 Amount received as WPPF is exempt.

12 Leave Encashment :

0 Exempt from tax only if received by Government employee- leave preparatory to retirement.

13 Allowances etc., to person working outside Pakistan :

0 Exempt from tax only if paid or allowed outside Pakistan by the Government to a citizen of Pakistan for
rendering service outside Pakistan.

14 Salary income of Seafarer :

Exempt from tax only if received by:

0 a Pakistani seafarer, working on Pakistan flag vessels for 183 or more during a tax year; or
Class Lectures By:
M. Rameez Asif, ACA
0 a Pakistani seafarer working on a foreign vessel provided that such income is remitted to Pakistan, not
later than two months of the relevant tax year, through normal banking channels.

15 Directorship Fee/BOD Meeting Fee:

0 Taxable as salary
0 Tax deducted at source @ 20% adjustable against normal tax liability
0 Same provisions applicable if non working director/ non resident director.
Class Lectures By:
M. Rameez Asif, ACA

EMPLOYEE SHARE SCHEME:

1 Right or option to acquire shares:

0 Value of right/option is not taxable;

0 If option/right is disposed, then gain on its disposal is taxable in the year of disposal as follows;

Consideration received (1,000*10) 10,000

Less:Cost of right/option (1,000*2) 2,000
Gain (taxable under the head "Salary" 8,000

2 Issue of shares:

0 Taxable, in the year of issuance

0 Taxable amount shall be calculated as follows;

FMV of shares at the time of issuance (1,000*10) 10,000

Less:Cost of right/option (1,000*2) 2,000
Less:Consideration paid for issuance of shares (1,000*4) 4,000
Benefit (taxable under the head "Salary" 4,000

3 Issue of shares-subject to restriction on transfer:

0 Taxable in the year in which employee:

1-has free right to transfer the shares; or

2-disposes off the shares;

0 Taxable amount shall be calculated as follows;

FMV of shares at the time of free right to transfer/dispose (1,000*10) 10,000

Less:Cost of right/option (1,000*2) 2,000
Less:Consideration paid for issuance of shares (1,000*4) 4,000
Benefit (taxable under the head "Salary") 4,000
Class Lectures By:
M. Rameez Asif, ACA

SALARY-TAX ON TAX

1 100% Tax liability Paid by The Employer:

0 The salary income of the employee shall be grossed up by the amount of tax payable by the
employer.

Eaxample 5.1-Solution

BS 954,000
HRA 381,600
Car 135,000
MA Exempt -
Taxable salary excluding tax borne by the employer 1,470,600
Tax liability:
(1,470,600-1,200,000)*5% 13,530

Grossed up amount of TL TL/100%-TR% 13,530/100%-5% 14,242

Computation of taxable salary+Tax liability

Taxable salary excluding tax borne by the employer 1,470,600

Grossed up amount of TL 14,242
1,484,842
Tax liability:
(1,470,600-1,200,000)*5% 14,242

2 Specified Amount of Tax liability Paid by The Employer:

0 In this case, no grossing up formula is required. Specified amount of tax borne by the employer
is simply added in the taxable salary and taxable in the normal manner.

3 Specified Amount of Tax liability Paid by The Employee And Rest By The Employer:

0 In this case, excess amount of tax liability borne by the employer is grossed up.
Eaxample 5.5-Solution
BS 1,200,000
HRA 480,000
Car 135,000
MA Exempt -
Taxable salary excluding tax borne by the employer 1,815,000
Tax liability:
5%(1,815,000-1,200,000) 30,750
Tax paid by employee (12,000)
18,750
Class Lectures By:
M. Rameez Asif, ACA

Grossed up amount of TL TL/100%-TR% 18,750/100%-5% 19,737

Computation of taxable salary+Tax liability

Taxable salary excluding tax borne by the employer 1,815,000

Grossed up amount of TL 19,737
1,834,737
Tax liability:
5%(1,834,737-1,200,000) 31,737
Less: Tax borne by employee (12,000)
19,737