TAX NOTES

Chapter 1 – System Of Taxation In Pakistan

 Tax definition

Taxation is the legal process by which a government raises revenue to fund public expenses,
promote social welfare, and ensure the protection of its citizens. It involves collecting a portion of
individual and organizational income under the authority of law to support governmental functions
and services.

 Revenue Objective

The Government demands taxes for collection of revenue to run and administer the Government, to
use as a tool for implementation of its policies and for fair distribution of wealth.

 Non-Revenue Objective

Taxation isn’t just about funding the government—it also plays a key role in shaping the economy
and society. It helps businesses grow by offering tax incentives, protects local industries from foreign
competition, and serves as a tool in international trade negotiations. Taxes can also be used to control
inflation, reduce wealth inequality, support education and innovation, promote fairness in markets,
and discourage harmful activities.

 Taxes as a means for development

Taxes play a vital role in a country's development beyond just funding government projects.
They can encourage business growth by offering tax incentives in special economic zones,
create fairness by taxing the wealthy at higher rates, and support local industries by imposing
high taxes on luxury imports. Tax breaks can also promote charity, education, and
agriculture, helping to uplift communities and strengthen the economy.

 Basics of tax laws

Adam Smith outlined four key principles of taxation in his book Wealth Of Nations
Fairness- Taxes should be based on a person’s income, ensuring everyone contributes
fairly.
Clarity- People should know exactly what they owe, without confusion.
Ease of payment- Taxes should be collected in a way that is convenient for the tax
payers.
Efficiency- Tax collection should be simple, cost effective and should not hurt business.

 Principles for levy of tax

The Benefit Principle- People should pay taxes based on the benefits they receive from
government services.
The Ability To Pay Principle- Those who earn more should pay more, & tax rates may
increase with higher income.

The Equal Distribution Principle- Taxes should be charged at a fixed percentage,

meaning people who earn and spend more will pay more, but at the same rates as others.

 Kinds Of Taxes

Proportional Tax / Flat tax- This system requires the same percentage of income from
all taxpayers regardless of their earnings. A proportional tax applies the same tax rate
across low, middle and high income taxpayers. A proportional tax is also called a flat tax.

Regressive Tax- Lower-income earners pay a higher percentage of their income

compared to higher-income earners. This system applies tax to all groups uniformly,
impacting lower income payers, the most.

Progressive Tax- Higher income earners pay a larger percentage of their income,
meaning wealthier individuals contribute more. The tax amount is according to a
person’s status in society.

 Characteristics Of Tax Laws

Taxes are mandatory- People must pay taxes, it is not optional.
Paid in cash- Taxes are usually paid through banks & not through goods or services.
Based on income- Higher earners pay more tax.
Applied to income, transactions or property- Taxes can be charged on what people
earn, spend, or own.
Set by the Government- The government decides tax laws & collects taxes within it’s
jurisdiction.
Used for public services- Tax money helps fund Government projects & programs for
society.

 The Principles Of A Sound Tax System

Sufficient Revenue – Taxes should generate enough funds to cover government

expenses and adjust as needed.

Fairness – People should pay taxes based on their ability to afford them.
 Ease of Implementation – Taxes should be simple to understand, easy to collect, and not
hurt businesses.

Support Economic Goals – Tax laws should align with government plans to benefit the
public.

Chapter 4- Basic Concepts Of Taxation

There are three kinds of tax years as stipulated in Section 74 of the Income Tax Ordinance,
2001:

 Normal tax year

Normal tax year is a period of twelve months ending on the 30th day of June and is
denoted by the calendar year in which the said date falls.

 Special tax year

A special tax year is a unique 12-month period that does not follow the standard tax
year ending on June 30. Instead, it can start and end on different dates, depending on
specific business or financial needs. The tax year is identified by the calendar year in
which it ends. A person using a special tax year may apply in writing to the
Commissioner to allow him to use normal tax year and the Commissioner may by an
order, allow him to use normal tax year The Commissioner shall grant permission
only if the person has shown a compelling need to use special tax year or normal tax
year, as the case may be, and the permission shall be subject to such conditions, if
any, as the Commissioner may impose.

 Transitional tax year

A transitional tax year occurs when a taxpayer switches from one tax year type to another. It
covers the gap between the previous tax year and the newly adopted one. The order of the
Commissioner is necessary in order to implement this.

 Income

According to section 2 of the Income Tax Ordinance, 2001, Income includes:

 Any money that is taxed under this law, like a salary.

 Any money on which tax is collected or deducted under a special tax
system, like dividends or bonus shares.
 Any money that is considered income under the law, like royalty or profit
from a loan.
  Loss of income is also included

 Heads of Income

For the purposes of the imposition of tax and the computation of total income, all
incomes shall be classified under the following heads:

1. Salary;

2. Income from property;

3. Income from business;

4. Capital gains; and

5. Income from other sources.

Basic Illustration:

Sum of amounts chargeable to tax under any particular head xxx

Less: Deductions (expenses) allowed in relevant head of income (xx)
Income under a particular head of income xxx

 Total Income

The total income of a person for a tax year shall be the sum of the

 Person’s income under all heads of income for that tax year; and
 Person’s income exempt from tax for that tax year under any of the provisions of
Income Tax Ordinance, 2001.
 Taxable Income

A person’s taxable income for the year is their total income, excluding any income that
is tax-free. From this amount, they can subtract any deductions allowed by law, but the
final taxable income can’t go below zero.

Basic Illustration:

Total income other than exempt xxx

Less: Deductible Allowances (xxx)
Taxable Income xxx

 Deductible Allowance
 A deductible allowance is a specific expense or amount that a person can subtract from
their total income before calculating their taxable income. It helps reduce the amount of
income that is taxed.

Zakat

 If a person pays Zakat in a tax year, they can deduct that amount from their taxable
income as an allowance.
 If Zakat is deducted from profit on debt (which falls under "income from other
sources"), it will only be deducted from that specific income, not from the total
income.
 If the amount of Zakat paid is more than the total income, the extra amount cannot be
refunded, carried forward, or carried back.

Worker’s Welfare Fund

 If a person pays into the Workers’ Welfare Fund (WWF) in a tax year, they can
deduct that amount from their taxable income.
 This applies if the payment is made under the Workers’ Welfare Fund Ordinance,
1971 or any provincial WWF law created after 2010.
 However, if a company operates in multiple provinces and pays WWF to the
provinces, they cannot deduct this amount from their taxable income.

Worker’s Participation Fund

 If a person or company pays into the Workers’ Participation Fund in a tax year,
they can deduct that amount from their taxable income.
 This deduction applies if the payment is made under the Companies Profit
(Workers’ Participation) Act, 1968 or any provincial law passed after 2010.
 However, if a company operates in multiple provinces and pays the fund to the
provinces, they cannot deduct this amount from their taxable income.

Deductible Allowance For Education Expense

❑ Every individual shall be entitled to a deductible allowance in respect of tuition fee

paid by the individual in a tax year provided that the taxable income of the individual is
less than Rs.1,500,000.

 The amount of an individual‘s deductible allowance allowed for a tax year shall not
exceed the lesser of —

a) 5% of the total tuition fee paid by the individual in the year;

b) 25% of the person’s taxable income for the year; and

c) an amount computed by multiplying 60,000 with number of children of the

individual.
  Any allowance or part of an allowance for a tax year that is not able to be deducted
for the year shall not be carried forward to a subsequent tax year.
 Allowance shall be allowed against the tax liability of either of the parents making
payment of the fee on furnishing national tax number (NTN) or name of the
educational institution.
 Allowance shall not be taken into account for computation of tax deduction from
Salary under section 149.

 Person

▪ an individual;

▪ a company or association of persons incorporated, formed, organised or established in

Pakistan or elsewhere;

▪ the Federal Government, a foreign government, a political subdivision of a foreign

government, or public international organisation.

 Association of Persons

“Association of persons” includes a firm, a Hindu undivided family, any artificial juridical
person and anybody of persons formed under a foreign law, but does not include a
company;

“Firm” means the relation between persons who have agreed to share the profits of a
business carried on by all or any of them acting for all.

 Taxpayer

Taxpayer means any person who:

▪ derives an amount chargeable to tax under the Income Tax Ordinance, 2001;

▪ may be a representative of a person who derives an amount chargeable to tax;

▪ is required to deduct or collect tax under the Ordinance; or

▪ is required to furnish a return of income or pay tax under the Ordinance;

 Resident & Non-Resident Person

 A person shall be a resident in Pakistan for a tax year if the person is:
a resident individual, resident company or resident association of persons for
the year;
or the Federal Government.
 A person shall be non-resident person for a tax year if the person is not a
resident person for that year.
  Resident Individual

An individual shall be a resident individual for a tax year if the individual:

a) is present in Pakistan for a period of, or periods amounting in aggregate to,183 days
or more in the tax year;

b) is an employee or official of the Federal Government or a Provincial Government

posted abroad in the tax year.

c) A citizen of Pakistan who is not present in any other country for more than 182 days
during the tax year or he is not a resident taxpayer of any other country.

A person will also be considered resident in situations:

• Part of a day that an individual is present in Pakistan (including the day of arrival in,
and the day of departure from, Pakistan) counts as a whole day of such presence;

• the following days in which an individual is wholly or partly present in Pakistan count
as a whole day of such presence, namely:

a public holiday; a day of leave, including sick leave;

a day that the individual’s activity in Pakistan is interrupted because of a strike, lock-out
or delay in receipt of supplies;

or a holiday spent by the individual in Pakistan before, during or after any activity in
Pakistan; and

• A day or part of a day where an individual is in Pakistan solely by reason of being in

transit between two different places outside Pakistan does not count as a day present in
Pakistan.

 Resident Company

A company shall be a resident company in Pakistan for a tax year if:

it is incorporated or formed by or under any law in force in Pakistan the control and
management of its affairs is situated wholly in Pakistan at any time in the year;

or it’s a Provincial Government or Local Government in Pakistan.

  Resident Association Of Persons

An association of persons shall be a resident association of persons for a tax year if the
control and management of the affairs of the association is situated wholly or partly in
Pakistan at any time in the year.

 Normal Tax Regime

Under the Normal Tax Regime (NTR) tax is levied on net income basis, meaning a
taxpayer's total income is reduced by allowable deductions and tax credits before
applying the relevant tax rates. This regime allows for loss adjustments, deductions
for expenses, and refunds if advance tax paid exceeds the assessed liability. The tax
is calculated based on progressive rates as outlined in the First Schedule of the
ordinance.

 Separate Block of income

Definition: This regime applies to certain types of income, where specific tax rates
are applied and various expenses related to earning that income can be deducted.

Expense Deductibility: Under this regime, taxpayers are allowed to deduct relevant
expenses from their income. For example, if you have income from the disposal of
securities or immovable assets (capital assets), you can subtract related expenses to
determine your net taxable income.

Losses: Losses can arise and are generally considered under this regime. For instance,
if you incur a loss from the sale of securities or capital assets, this loss can be carried
forward or adjusted against future gains from similar sources.

Examples: Income from the gain on disposal of securities, gain on disposal of

immovable assets (capital assets), etc.

Following rules apply to income subject to separate charge:

Tax imposed is a final tax.

The amount of such income is not reduced by:

(a) Any deductible allowance

(b) The set off of any loss

The final tax payable is not reduced by any tax credit allowed (foreign tax credit or tax
credits on donations, investments etc.)

The liability of the recipient of such income is discharged to the extent that:
 (a) In the case of shipping and air transport income, the tax is paid in accordance with
relevant sections of the Ordinance; or

(b) In any other case, the final tax payable has been deducted at source.

 Final Tax Regime

Definition: This regime applies to certain types of income where the tax paid is
considered final, and no further deductions or adjustments are allowed.

Expense Deductibility: Under FTR, expenses related to earning the income cannot
be deducted.

Tax Credits: Tax credits are also not allowed under this regime. This means that even
if you qualify for tax credits, they cannot be applied to reduce the tax liability for
income falling under FTR.

Income Classification: Income under FTR does not fall under any specific heads of
income. Instead, it is included in the total income solely to calculate the total income.
After calculating the total income, the amount of FTR income is then subtracted from
the total income to apply separate tax rates.

Losses: Losses are not considered under FTR. If losses are incurred from sources of
income taxed under FTR, they cannot be used to offset other income or be carried
forward.

Refunds: There is no refund of non-adjustable tax collected or deducted at source

unless such tax exceeds the amount of final tax for which the taxpayer is chargeable.

Assessment: An assessment is deemed to have been made, and the taxpayer is

required to furnish a return of income in respect of such income.

Examples: Examples include dividends, lottery winnings, prize bond winnings, and
profit from profit and loss accounts.

 Minimum Tax Regime

Under the Minimum Tax Regime tax that has already been deducted at the source is treated
as the minimum tax. This amount is then compared with the tax liability under the Normal
Tax Regime:

 If the tax liability under the Normal Tax Regime is higher than the tax already
deducted, the taxpayer must pay the difference.
 If the tax already deducted is higher than the liability under the Normal Tax Regime,
then the deducted tax is considered final, and no additional tax is required.

Some types of income are always subject to minimum tax, ensuring that taxpayers
contribute a certain amount regardless of their total earnings. These include:

1. Turnover-based minimum tax (Section 113).

2. Tax on commercial importers (Section 148(7)).
3. Tax deducted at source (11%) on services provided by individuals and businesses
(Section 153).
4. Minimum tax on exports (Section 154).
5. Tax collected on electricity bills exceeding Rs. 360,000 per year for non-company
taxpayers (Section 235).

 Minimum Tax on the Income of certain persons

 This section shall apply to a resident company, an individual (having
turnover of hundred million rupees or above in the tax year 2017 or in any
subsequent tax year) and an association of persons (having turnover of
hundred million rupees or above in the tax year 2017 or in any subsequent tax
year) where no tax is payable or paid by the person for a tax year or the tax
payable or paid by the person for a tax year is less than 1.25% of the amount
representing the person‘s turnover from all sources for that year:
 loss for the year;
 the setting off of a loss of an earlier year;
 exemption from tax;
 the application of credits or rebates;
 or the claiming of allowances or deductions (including depreciation and
amortization deductions)

 Where this section applies:

 the aggregate of the person’s turnover as defined in subsection (3) for
the tax year shall be treated as the income of the person for the year
chargeable to tax;

 the person shall pay as income tax for the tax year (instead of the
actual tax payable under this Ordinance), minimum tax ranging from
0.2% to 1.25% for different categories of Persons;
where minimum tax paid exceeds the actual tax payable under Part I, clause
(1) of Division I or Division II of the First Schedule, the excess amount of tax
paid shall be carried forward for adjustment against tax liability under the
mentioned Part of the subsequent tax year. Given that the amount under this
clause shall be carried forward and adjusted against tax liability for three tax
years immediately succeeding the tax year for which the amount was paid.
Provided that if minimum tax is paid due to the fact that no tax is payable or
paid for the year (due to taxable loss etc.), the entire amount of minimum tax
paid shall be carried forward for three years.

 Turnover means,-
(a) the gross sales or gross receipts, exclusive of Sales Tax and Federal Excise
duty or any trade discounts shown on invoices, or bills, derived from the sale
of goods, and also excluding any amount taken as deemed income and is
assessed as final discharge of the tax liability for which tax is already paid or
payable;
(b) the gross fees for the rendering of services for giving benefits including
commissions; except covered by final discharge of tax liability for which tax is
separately paid or payable;
 (c) the gross receipts from the execution of contracts; except covered by final
discharge of tax liability for which tax is separately paid or payable;
(d) and the company‘s share of the amounts stated above of any association of
persons of which the company is a member.

 Taxation On Women Enterprises

Woman enterprise means a start-up established on or after first day of July 2021 as
sole proprietorship concern owned by a woman or an AOP all of whose members
are women or a company whose 100% shareholding is held or owned by women.
Tax payable by women enterprise on profits and gains derived from business
chargeable to tax under the head income from business shall be reduced by 25%,
However, this benefit will not be available to business that is formed by the transfer or
reconstitution or splitting up of an existing business.

 Apportionment of Deductions

This concept implies that an expenditure, deduction and allowance which relates to
the following, shall be apportioned on any reasonable basis taking into account the
relative nature and size of the activities to which the amount relates:

(i) the derivation of more than one head of income; or

(ii) derivation of taxable income and any class of income subject to Final Tax
Regime.

(iii) the derivation of income chargeable to tax under any head of income and to some
other purpose

Common expenditure, deductions and allowances means any expenditure, deductions

and allowances that is not clearly allocable to any particular class or classes of
incomes. Rules for apportionment of such expenses, deductions and allowances are
given as:

❑ Any expenditure, deduction or allowance that is incurred for particular class of

income (chargeable income, FTR income or exempt income) shall be
allocated/apportioned to that class only.

❑ Any common expenditure shall be apportioned amongst each class of income

according to the following formula:

 Amount of expense x Gross receipts for the class of income Gross receipts
for all class of income Note: Gross receipts means net off receipts or turnover
of sales tax of FED paid

. ❑ While allocating common expenditure, deductions and allowances (particularly

selling expenses) the nature and source of each class of income must be taken into
account.
 ❑ The basis determined for allocation of expenditure, deductions and allowances
should be certified by a Chartered Accountant or a Cost and Management Accountant.
This certificate shall be accepted by CIR unless there are significant variations (10%
+ beyond the limits) from allocation under the rules.

❑ Where in case of certain transaction the net gain, brokerage, commission and other
income is taken as turnover, then the gross profit from business shall be taken as gross
receipts for the purpose of apportionment of expenditures.

❑ For the purpose of these rules a person may have following classes of incomes:

Pakistan source incomes as well as Foreign source income further classified as:

 Salary
 Income from property
 Income from business – Non-speculation
 Income from business – speculation
 Capital gains
 Income from other source
 Income chargeable to tax as separate block
 Income exempt from tax e.g. agriculture income
 Income chargeable to tax under final tax regime.

 Fair Market Value

 Fair market value (FMV) of any property, or rent, asset, service, benefit or
perquisite at a particular time shall be the price which the property, or rent,
asset, service, benefit or perquisite would ordinarily fetch on sale or supply in
the open market at that time.
 The fair market value of any property, or rent, asset, service, benefit or
perquisite shall be determined without having regard to any restriction on
transfer or to the fact that it is not otherwise convertible to cash.
 Where the price referred above is not ordinarily ascertainable, the Board may,
from time to time, by notification in the official gazette determine the fair
market value of the immoveable property of the area and areas as may be
specified in the notification.
 Where the fair market value of any immoveable property of an area or areas
has not been determined by the board in the notification referred as above, the
fair market of such immoveable property shall be deemed to be the value fixed
by the district officer (revenue) or provincial or any other authority authorize
in this behalf for the purposes of stamp duty.

 Rules to prevent double derivation and double deductions

 If any amount is chargeable to tax on the basis that it is receivable, the
amount shall not be chargeable again on the basis that it is received.
 If any amount is chargeable to tax on the basis that it is received, the amount
shall not be chargeable again on the basis that it is receivable.
  If any expenditure is allowable as deduction on the basis that it is payable,
the expenditure shall not be allowed as deduction again on the basis that it is
paid. If any expenditure is allowable as deduction on the basis that it is paid,
the expenditure shall not be allowed as deduction again on the basis that it is
payable.

Chapter 5- Salary

 Definition & Scope of Salary

Salary means any amount received by an employee from any employment, whether
of a revenue or capital nature, and includes:

 any pay, wages or other remuneration including leave pay, overtime, bonus,
commission, fees, gratuity, work condition supplements (such as for the un-
pleasant or dangerous working conditions):
 any perquisite whether convertible into money or not; any allowance provided
to employee including cost of living, rent, utilities, education, entertainment,
travelling etc. excluding allowance solely expended in the performance of
duties of employment;

Note: Any allowance solely expended in the performance of employee’s duty does
not include:

(a) allowance which is paid in monthly salary on fixed basis or percentage of salary;
or

(b) allowance which is not wholly, exclusively, necessarily or actually spent on

behalf of the employer.

 any expenditure reimbursed by employer other than expenditure incurred

solely in the performance of duties of employment profits in addition to salary
including:
(a) consideration received for entering into an employment agreement or for
agreement to any condition of employment or changes to the employment
conditions or to a restrictive covenant to any past, present or future
employment.
(b) amount received on the termination of employment, including golden
handshake payments.
(c)amount received from provident fund except for a contribution made by the
employee in respect of which the employee was not entitled to a deduction.
 any pension or annuity or any supplement to a pension or annuity received /
receivable from employer;
 any amount of gain earned under “Employee Share Scheme”;
 amount of tax chargeable on employee’s salary and borne by employer.
 Pakistan Source Salary

An employee’s salary income, wherever received is taxed in Pakistan to the extent it

relates to employment exercised in Pakistan (Pakistan Source Income). However,
salary received by Pakistan Government employee is taxable in Pakistan whether
employment is exercised in Pakistan or abroad.

 Basis of chargeability Taxable on receipt basis

 Salary is taxable on receipt basis i.e. any salary received by an employee in a
tax year shall be chargeable to tax.
 A person shall be treated as having received an amount, benefit, or perquisite
if it is
 actually received by the person;
 applied on behalf of the person, at the instruction of the person; or
 under any law made available to the person.

Note: A salaried taxpayer means a taxpayer whose salary income constitutes more
than 75% of his taxable income.

 Termination of employment
 If an employee has received compensation on the termination of employment,
the employee may, by notice to Commissioner, elect for the amount to be
taxed at the rate computed as:
Total tax paid or payable for three preceding tax years / Total taxable income
for three preceding tax years x 100
 The option should be exercised by the due date of furnishing return of
income.
 Relief where salary is received in arrears
 In case where employee is receiving accrued salary and is expected to be
charged at rate higher than the rate which would have been charged if the
amount was received in its relevant tax year, the employee may by a notice to
the Commissioner elect for tax rate applicable in the tax year in which such
salary was earned.
 The above option shall be exercised by the due date for furnishing employee’s
return of income for the tax year in which the amount was received or at later
date as may be extended by the Commissioner.

 Amount or Perquisite when treated received

An amount or perquisite shall be treated as received by an employee from any

employment regardless of whether the amount or perquisite is paid or provided:

 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;
 By a past employer or a prospective employer; or
  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.

 Perquisites

The term ‘perquisites’ may be defined as the benefits provided, fee or profit attached
to an office or position in addition to salary or wages. Perquisite may be cash (such as
utility) or in kind (such as accommodation or motor vehicle provided by the employer
to an employee).

 Conveyance

In case where motor vehicle is provided by an employer to an employee (including

director), the amount chargeable to tax under the head salary shall be determined as
follows:

Partly for personal and official use If owned: 5% of the cost of vehicle to
the employer; or

If leased: 5% of fair market value

(FMV) of motor vehicle at the
commencement of lease
For personal use only If owned: 10% of the cost of vehicle to
the employer; or

If leased: 10% of FMV of motor

vehicle at the commencement of lease
For office use only No addition

 Accommodation

If accommodation or housing is provided by an employer to an employee (including

director), the amount chargeable to tax under the head salary shall include higher of
the following:

• Amount that would have been paid in case if such accommodation was not
provided; and

• 45% of the minimum of time scale (MTS) of the basic salary or the basic salary if
there is no MTS.

• Where house rent allowance is admissible @ 30%, the value taken for the purpose
shall be an amount not less than 30% of minimum of the time scale of basic salary or
the basic salary where there is no time scale

Note: Minimum of time scale is the amount from where the salary scale of a
particular employee starts e.g. (4,900-800-8,500) means salary of the employee starts
with Rs. 4,900 with increment of Rs. 800 per annum etc. subject to maximum
increased salary up to Rs. 8,500.

 Interest Free / Concessional Loan

 Where a loan is given to an employee on or after 1.7.2002 (i.e. tax year
2003), then the amount to be included in salary income of the employee in
the following manner:
• If no interest is payable by the employee - the amount of interest computed
at the benchmark rate
• If interest is payable at less than benchmark rate - the interest amount
computed at the benchmark rate less the actual amount of interest paid by the
employee,
 The above provision shall not apply:
• Loans of Rs. 1,000,000 or less. Where such benefit is extended by the
employer due to waiver of interest by such employee on his accounts
maintained with the employer e.g. Provident Fund etc.
 Benchmark rate of interest is 10% per annum.
 Where an amount has been included in salary of an employee due to
connection with above loan, and the employee uses the loan wholly or partly
for acquiring any asset or property producing income chargeable to tax under
any head of income, the amount of interest on such loan shall be allowed as
deduction against income from such asset. In this regard, an amount equal to
benchmark rate shall be allowed as deduction. However, where interest
charged by the employer is higher than the benchmark rate, the whole
amount paid by the employee shall be allowed as deduction.
 Self-hiring of property
 Where an employee or his spouse is the owner of any such building that is
given on rent to the employer and the employer has provided the same
building to the employee against his entitlement for a rent-free
accommodation, then it will have following effect
• Receipt of rent of building is chargeable to tax under the head income from
property. Any rent received by the employee or his spouse shall be property
income of the recipient and be treated accordingly.
• The building is provided by the employer to his employee as a rent-free
accommodation. It will be a perquisite and added in the salary income of the
employee.

 Any other perquisite

Fair market value of the perquisite xxx

Less: Payment made by the employee if any (xx)
Amount to be included in salary income xxx

 Retirement benefits schemes

Retirement benefits generally include payments on account of gratuity, provident

fund and pension. In some cases, employees are encouraged to retire voluntarily and
are offered payments under the Golden handshake schemes.

 Gratuity
 Gratuity received from approved gratuity fund is fully exempt. Gratuity
received from approved scheme and unapproved fund or scheme is exempt
up to the following limits:

Gratuity Type Tax treatment

Government employees Fully exempt
Gratuity Fund approved by the Fully exempt
Commissioner Inland Revenue
Gratuity scheme approved by the Exempt up to Rs.300,000
board
Unapproved Gratuity scheme/ fund Exempt up to Rs.75,000 or 50% of
the amount receivable whichever is
lower. To be taxed at average rate
of last 3 tax years

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

cases:
 Any payment not received in Pakistan.
 Any payment received by a director of a company who is not a
regular employee of such company
 Any payment received by a non-resident
 Any gratuity received by an employee who has already received any
gratuity from the same or other employer.
 Pension
 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.
 For a person over 60 years of age, all such pensions are exempt
irrespective of the above mentioned conditions.
 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.
 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 No treatment
contribution yearly contribution
 is Rs.150,000 or
1/10th of ( basic
salary + dearness
allowance)
whichever is lower
Interest credited Exempt Yearly interest is No treatment
during the year exempt higher of:

 16% interest
rate on
accumulated
balance; or
 1/3rd of
(basic salary
+ dearness
allowance)

Payment of Exempt Exempt Only the

accumulated employer’s
balances contribution and
interest on
accumulated
balance is taxable
in the year of
receipt.

 Salary for the purpose of provident fund includes basic salary + dearness
allowance. All other allowances are excluded.
 There is no treatment of employee contribution as the amount is paid from
salary and the same is already included in his salary.

 Benevolent Fund
Any benevolent grant paid from a Benevolent Fund to employees or
members of their families in accordance with the provisions of the Central
Employee Benevolent Fund and Group Insurance Act, 1969 is exempt from
tax.

Other benefits

 Certain Perquisites without by virtue of employment

The following perquisites received by an employee by virtue of his
employment are exempt from tax
 Free or subsidized food provided by hotels and restaurants to its
employees during duty hours
 Free or subsidized education provided by an educational institution
to the children of employees
  Free or subsidized medical treatment provided by a hospital or clinic
to its employees
 Any other perquisite for which the employer does not have to bear
any marginal cost, as notified by the Board

 Medical allowance and reimbursement

 Medical facility or the reimbursement received by an employee is
exempt where such provision or reimbursement is according to the
terms of employment given that the NTN of the hospital or clinic is
provided and employer also certifies and certify the medical bills.
 Medical allowance is exempt up to 10% of basic salary (The same is
fully taxable if it is provided in addition to the exempt medical
facility provided by the employer, whether availed by the employee
or not)
 Leave Encashment
Any amount received on encashment of leave preparatory to retirement is
exempt, if it is received by a Government employee & member of Armed
Forces of Pakistan).
 Worker’s Profit Participation Fund (WPPF)
Amount received from WPPF as worker is fully exempt.
 Commutation of pension
Commutation of pension received from government or any pension scheme
approved by the Board is fully exempt.

Reduction in tax liability

 Full time teacher or researcher

The tax payable by a full time teacher or a researcher, employed in a non-
profit education or research institution duly recognized by Higher Education
Commission, a Board of Education or a University recognized by the Higher
Education Commission, including government training and research
institution, shall be reduced by an amount equal to 25% of tax payable on his
income from salary.

Salary earned outside Pakistan by citizen of Pakistan

Where a citizen of Pakistan leaves Pakistan during a tax year and remains
abroad during that tax year, any salary income earned by him outside
Pakistan (only during that tax year) shall be exempt from tax.
Foreign source salary
Foreign source salary received by a resident shall be exempt if the individual
has paid foreign income tax in respect of that salary i.e. the employer has
withheld income tax in respect of foreign source salary and has paid the same
to the revenue authority of that foreign country in which the employment was
exercised.

Employee share scheme

  Employee share scheme means any agreement under which a
company may issue shares to: an employee of the company; or
 an employee of an associated company; or
 the trustee of a trust and under the trust deed the trustee may transfer
the shares to an employee of the company or employee of an
associated company

Taxability at issue of shares

When an employee is issued with shares as a result of exercise of option

under an employee share scheme, the amount chargeable to tax to the
employee under the head salary shall be computed in the following manner:

Fair market value of shares xxx

Consideration paid for the grant of right or option to acquire shares (xxx)

Consideration paid for the purchase of shares (xxx)

Taxable salary xxx

Taxability at issue of shares subject to restriction on transfer

❑ If the shares issued to an employee under an employee share scheme, are subject
to a restriction on transfer, no amount shall be chargeable to tax until the earlier of the
time the employee:

has free right to transfer the shares; or

disposes off the shares; and

❑ The amount chargeable to tax shall be computed as follows:

Fair market value of shares at the time the employee has free right to transfer or
dispose of the shares xxx

Any consideration paid for shares (xxx)

Any consideration paid for grant of right or option to acquire the shares (xxx)
Taxable salary xxx

Taxability at disposal of right or option

As , when an employee is granted an option or right to acquire shares under an

employee share scheme, no amount is chargeable to tax. However if, instead of
exercising, such right or option is disposed off by the employee, amount chargeable to
tax under the head salary shall be worked out as under:-
Consideration received for the disposal of right or option xxx

Less: Employees cost in respect of the right or option (xxx)

Taxable salary xxx

Cost of shares

After an amount has been charged to tax under the head salary the cost of shares
acquired under the employees share scheme, shall be computed in the following
manner:

Consideration paid for shares xxx

Consideration paid for the grant of any right or option xxx

Taxable amount representing gain calculated on the Issue of shares by company to

employee under Employees share scheme xxx

Cost of shares (generally for the purpose of computing) xxx