SALARY TAXATION IN PAKISTAN
DIFFERENCE BETWEEN WAGE AND SALARY
Wage:
· Payment Basic: Wages are typically paid on an hourly or daily basis.
· Fluctuation: The amount earned can vary based on the number of hours worked. Overtime, holidays, and shift differentials can increase total pay.
· Job Type: Often associated with jobs where the work hours are flexible or irregular, such as retail, construction, or part-time roles.
· Overtime Pay: Workers earning wages are usually eligible for overtime pay.
Salary:
· Payment Basic: Wages are typically paid on an hourly or daily basis.
· Fluctuation: The amount earned can vary based on the number of hours worked. Overtime, holidays, and shift differentials can increase total pay.
· Job Type: Often associated with jobs where the work hours are flexible or irregular, such as retail, construction, or part-time roles.
· Overtime Pay: Workers earning wages are usually eligible for overtime pay.
· Payment Basic: Salaries are paid as a fixed amount (usually annually) and are divided into regular pay periods (e.g., monthly, biweekly).
· Consistency: Salaried employees receive the same amount each pay period regardless of the number of hours worked, as long as they meet the basic expectations of their role.
· Job Type: Often associated with professional or managerial roles with more predictable schedules.
Example:
· Wage: A retail worker earns Rs.100/hour and works 30 hours in a week, earning Rs. 3,000 that week. If they work 40 hours the next week, they earn Rs. 4,000.
· Salary: An office worker has a set salary of Rs. 600,000/year. They receive Rs. 50,000/month, regardless of whether they work 35 or 45 hours in a week.
The choice between wage and salary often depends on the nature of the job and the level of flexibility or stability desired by the employee.
In 2024, the minimum wage has been increased across several provinces to ensure fair compensation for workers.
· Punjab: PKR 32,000
· Sindh: PKR 35,550
· KPK and Balochistan: PKR 30,000
It is important for employers to comply with these regulations to avoid penalties and ensure a satisfied workforce.
MAJOR COMPONENTS OF A SALARY.
Basic Salary: 50%of Gross Salary.
DA (Dearness Allowance): 100% of Basic Salary in Govt. Sector & 10/20% of Basic in Private Sectors.
House Rent Allowance (HRA): 30% of the Basic Salary. (Taxable).
Conveyance Allowance: 10% of the Basic Salary. (Taxable).
Medical Allowance: 10% of the basic salary is exempt from tax.
LTA (Leave Travelling Allowance): It is allowed only Once in a years. Exemption allowance will be actual amount spent in LTA showing in pay-slip whichever less is.
Special Allowance: Should be defined (Such as car/house/transport/Laptop etc.)
Other Allowance: Need to be defined (Whatever amount remains balance after putting into major components comes in this head)
Provident Fund (PF): 10% of the basic Salary Rs. 5,k (Employee) + Rs. 5k (Employer) = Rs. 10k
Scenario:
- Basic Salary: PKR 50,000/month
- Employee PF Contribution (10%): PKR 5,000
- Employer PF Contribution (10%): PKR 5,000
Total Monthly Contribution (added to the PF account):
- PKR 5,000 (Employee) + PKR 5,000 (Employer) = PKR 10,000
SECTION – 149 INCOME FROM SALARY.
Definition of Salary
a) Salary refers to any sum received by an employee from employment, whether of a revenue or capital nature, and includes: Compensation such as pay, wages, leave pay, leave encashment, overtime, bonuses, commissions, fees, gratuities, or supplements for challenging or hazardous work conditions.
b) Benefits, including any personal expenses covered or reimbursed by the employer, except those incurred solely for office purposes.
c) Allowances, such as those for cost of living, subsistence, rent, utilities, education, entertainment, or travel, excluding allowances strictly for office-related purposes, like washing or kit allowances for employees required to wear a uniform during their duties.
FBR Brochure for Salary:
Tea, coffee or other similar refreshment provided by the employer to the employee at business premises during the course of work is not treated as a perquisite.
Basic Tax Structure of Salary
Salary is taxable in a tax year (July to June) on Receipt basis. However, salary may be taxed on accrual basis in the case of an employer of a private company if the Commissioner is of the view that the payment of salary was deferred. Receipt has been defined as:
a) Actually received by the employee
b) Applied on behalf of the employee at the instruction of the employee or under any law e.g. employee contribution to provident Funds or tax deducted at source and deposited into Government treasury.
c) Made available to the employee e.g. a cheque to an employee or a benefit/ perquisite including benefit in kind is made available to an employee.
Employee 1: Joined on 1st July
- Salary: Rs. 100,000 per month.
- Worked Period: Full fiscal year (July to June, 12 months).
- Total Salary for FY: 100,000 × 12 = 1,200,000
- Taxable Income: Rs. 1,200,000. Tax = Rs. 15,000.
Employee 2: Joined on 1st January
- Salary: Rs. 100,000 per month.
- Worked Period: January to June (6 months in the fiscal year).
- Total Salary for FY: 100,000 × 6 = 600,000
- Taxable Income: Rs. 600,000. Tax = Rs. 0.
Salary-Exemption
1. Pension
Pension is fully exempt irrespective of age limit subject to two condition:
• If an employee works for the same employer or any of its associates after retirement, then pension shall be taxable.
• If a person receives more than one pension, then exemption shall apply only to the higher of such pension received.
These two condition are not applicable for a person over 60 years of age.
Government employee Fully exempt
Approved Pension Scheme Fully exempt
Unapproved pension scheme Exempt up to Rs 75,000/- or 50% of amount received whichever is lower
Exemption in case of unapproved commutation of pension shall not apply following cases.
• Any payment which in 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 non-resident
• Any gratuity received by an employee who has already received a gratuity from the same or any other employer
2. Special Allowance
Any allowance or benefit (other than in the nature of conveyance or entertainment allowance) specially granted to meet expenses wholly and necessarily incurred in the performance of office duties e.g.
• Travelling allowance and daily allowance (TA/DA) for an official trip
• Relocation allowance i.e. an allowance to facilitate change of residence to fulfill job requirements
Special allowance as above is exempt but if the employer pays any special pay (e.g. any additional amount for any particular extra responsibility) then the special pay shall be taxable.
3. Medical Allowance
Exempt up to 10% of basic salary. However, medical allowance is fully taxable if it is in addition to medical facility or reimbursement in accordance with term of job.
4. Provident Funds (PF)
There are three Type of provident funds
1. Unrecognized Provident Fund under the Income Tax Ordinance 2. Recognized Provident Fund under the Income Tax Ordinance, 2001. 3. Provident Fund formed under the Provident Fund Act, 1925 (fully exempt).
• Unrecognized PF
Employees contribution to PF is a part and parcel of salary received by the employee and therefore not separately taxable in the name of PF.
Employer yearly contribution and yearly interest rate are not taxable unless received by the employee on or before termination of job.
• Recognized PF
Employee contribution to PF is a part and parcel of salary received by the employee and therefore not separately taxable in the name of PF.
Accumulated balance received on or before termination of job in not taxable. However, there are limit on employer year contribution and yearly interest credited to PF balance. If the amount is in excess of the limit then the excess shall be taxable on yearly basis.
Limit on employer year contribution is lower of:
• Rs 150,000/-
• 10% of (Basic + Dearness Allowance D/A)
Any excess shall be deemed to have been received & taxable in the year of contribution
Yearly interest credited to PF balance is exempt up to 16% interest rate on accumulated balance or 1/3rd of (Basic+DA) whichever is lower. Any excess shall be deemed to have been received and taxable in the year in which the said interest is credit to PF balance.
PF formed under Provident Fund Act, 1925
Employee’s Contribution: Already included in taxable salary income of employees
Employee’s Contribution: Exempt under clause 22 of Part 1 of 2nd Schedule to the Income tax Ordinance, 2001
Recognized Provident Fund
Employee’s Contribution: Already included in taxable salary income of employees
Employer’s contribution less lower of 1/10th of the salary (Basic pay + dearness allowance)
Unrecognized Provident Fund
Employee’s Contribution: Already included in taxable salary income of employees
Not taxable at the time of contribution
How PF Works in Pakistan
1. Interest Growth: PF funds earn interest, reinvested to grow savings.
2. Withdrawal: Employees can withdraw savings upon retirement, leaving the organization, or for specific needs like medical emergencies.
3. Management: Managed by a trust to ensure compliance and fund security.
When an employer gives an interest-free or concessional loan to an employee, the taxable amount in the salary is calculated as per the table below.
Loan provided at:
- Interest free loan, or no profit on interest is Interest computed at benchmark rate. Charged.
- 0%, less than the benchmark rate, equal to benchmark rate.
- Higher than the benchmark rate OR Amount of loan is equal to or less than Rs. 1,000,000.
Amount to be included in the salary of the employee:
- Interest computed at benchmark rate.
- Interest computed at benchmark rate. less actual amount paid by employee on account of loan.
- Nothing shall be include.
The benchmark rate in tax year 2003 was 5% p.a. (with 1% increase in each following tax year and in 2012 it was 14% p.a. as defined in section 12(14). From tax year 2013 to onwards benchmark rate has been capped at 10%.
Example-1
Basic salary
Rs 960,000/-
Bonus
300,000/-
Dearness allowance
96,000/-
Employer contribution to PF
Rs 120,000/-
Interest credit to PF a/c 432,000/- @ 18% of accumulated balance
Answer
Basic salary 960,000
Dearness allowance 96,000
Bonus 300,000
Employer contribution to RPF 120,000
Less: Rs 150,000/- or 10% of Basic+ DA whichever
Is lower (960,000+96,000) *10% 105,600 14,400
Interest credited @ 18% 432,000
Less: Interest @ 16% or 384,000
1/3rd of basic+ DA whichever is lower 352,000 80,000
Taxable Salary 1,450,400
SECTIONS RELATED TO SALARY IN INCOME TAX ORDINANCE, 2001
In Pakistan’s Income Tax Ordinance, 2001, the sections related to salary are primarily found in Part III of Chapter III, titled “Tax on Salary”. Below is a list of relevant sections that address the taxation of salary and related matters:
- Section 12: Salary Defines what constitutes “salary,” including wages, pensions, perquisites, and benefits.
- Section 13: Income from Property Transferred to Employer Discusses tax implications for income arising from property transferred to an employee.
- Section 14: Exemptions for Income from Salary Covers exemptions related to salary income, such as specific allowances or benefits.
- Section 149: Deduction of Tax from Salary (Withholding Tax) Obligates employers to deduct tax at the source from employees’ salaries and outlines the procedure for withholding.
- Section 21(m): Disallowance of Expenditure Relates to the disallowance of salary expenses that are not in compliance with the law.
- Section 39(1): Income from Other Sources Mentions salary-related benefits that may fall under other income classifications.
- First Schedule (Part I): Rates of Tax on Salary Provides the annual tax rates for salaried individuals.
- Second Schedule (Various Clauses) Lists exemptions, concessions, and reduced rates related to salary income, including: Pension Gratuity Leave encashment Provident funds Medical allowances or reimbursements
- Section 101(2)(b): Taxation of Non-Resident Individuals Discusses salary income for non-residents, including Pakistan-source income.
- Section 231A & 231AA: Transactions via Salary
- Touches on taxes applicable to transactions related to employee salaries, such as through banks.
* Important definitions are giving in the “INCOME TAX ORDINANCE, 2001” and “Exemptions under 2nd Schedule Part-II, III & IV of Income Tax Ordinance, 2001.
