What's Mandatory and What Matters
When you receive your first job offer or salary slip in Pakistan, you’ll notice it’s not just one big number. Your salary is broken down into multiple components: Basic Salary, House Rent Allowance (HRA), Conveyance Allowance, Medical Allowance, and more. But have you ever wondered why this breakup exists? Is it just an accounting formality, or does it actually matter?
More importantly, is this salary structure legally required, or is it just something companies do? Let’s break it all down in simple terms.
What is Salary Breakup?
Salary breakup is how your total compensation (CTC – Cost to Company) is divided into different components. A typical salary structure in Pakistan might look like this:
Example: Monthly Salary of Rs. 50,000
Basic Salary: Rs. 25,000 (50%)
House Rent Allowance (HRA): Rs. 12,500 (25%)
Conveyance Allowance: Rs. 5,000 (10%)
Medical Allowance: Rs. 5,000 (10%)
Utilities: Rs. 2,500 (5%)
Gross Salary = Rs. 50,000
Then deductions happen (tax, EOBI, PF if applicable), and what’s left is your take-home pay.
Why Do Companies Create These Breakups?
You might think, “Why not just pay me Rs. 50,000 and call it a day?” Well, there are three main reasons:
- Tax Benefits for Employees
Under Pakistan’s Income Tax Ordinance 2001, certain allowances are either fully or partially tax-exempt if you can provide proof:
- House Rent Allowance (HRA): Up to 45% of basic salary is tax-exempt if you’re paying rent and can provide a rent agreement
- Medical Allowance: Reimbursements against actual medical bills can be tax-exempt up to certain limits
- Conveyance Allowance: May be exempt if it’s for official travel
This means if your salary is smartly structured, you could save thousands of rupees in annual taxes.
- Lower Statutory Contributions for Companies
Here’s where it gets interesting. In Pakistan, certain mandatory contributions like EOBI and SESSI are calculated based on your basic salary only, not your gross salary.
So if a company keeps your basic salary low and inflates allowances, their statutory contribution burden reduces. This is completely legal but can sometimes work against employee interests (we’ll discuss this later).
- Market Practice and Competitiveness
It’s become standard practice in Pakistan’s formal employment sector. Companies that offer well-structured salaries appear more attractive to potential employees, even if the gross amount is the same.
What Does Pakistan's Labor Law Actually Require?
Here’s the critical question: Is salary breakup mandatory by law?
Answer: No, the detailed breakup is not mandatory. But certain components and contributions ARE legally required.
Let’s look at what the law actually says:
Legally Mandatory Components
- SESSI – Sindh Employees’ Social Security Institution
- Who it applies to: Employees with basic salary ≤ Rs. 22,000 (in Sindh; other provinces have their own schemes)
- Who pays: Only the employer
- How much: 6% of salary (capped at Rs. 1,320 per month)
- What it covers: Medical benefits, disability benefits, injury compensation
Your contribution: Rs. 0
- EOBI – Employees’ Old-Age Benefits Institution
- Who it applies to: Employees with basic salary ≤ Rs. 24,000 in establishments with 5+ employees
- Who pays: Both employer and employee
- How much:
- Employer: 5% of salary (max Rs. 1,200/month)
- Employee: Rs. 130 fixed per month
- What you get: Monthly pension after age 60
This is your future security net.
- Clear Basic Salary Declaration
While not a “component,” Pakistan’s Payment of Wages Act 1936 requires that your wages be clearly stated and transparent. Your basic salary must be identifiable because it’s the foundation for calculating other benefits.
NOT Legally Mandatory (But Commonly Provided)
- Provident Fund (PF)
- Legal status: Voluntary unless the company has registered a trust under the Employees’ Provident Funds Act
- Common practice: Most formal sector companies offer it
- How it works: 10% from employee + 10% from employer (both based on basic salary)
- Tax benefit: Employer’s contribution is tax-exempt; your contribution reduces taxable income
This is YOUR money. After 5 years, if you leave the company, you get the full amount: your contribution + employer’s contribution + profit earned.
Example: On a Rs. 50,000 basic salary:
- You contribute: Rs. 5,000/month = Rs. 60,000/year
- Employer contributes: Rs. 5,000/month = Rs. 60,000/year
- After 5 years: Rs. 600,000 (plus profit) goes into your pocket!
- Gratuity
- Legal status: NOT mandatory by law
- Common practice: Widely provided as per company policy or under Industrial and Commercial Employment (Standing Orders) Ordinance 1968
- Eligibility: After 5 years of continuous service
- Formula: Last drawn basic salary × number of years served
Example: If your basic salary is Rs. 50,000 and you work for 5 years: Gratuity = Rs. 50,000 × 5 = Rs. 250,000 (lump sum at exit)
This is a loyalty reward, essentially a thank-you gift for your years of service.
The Real-World Impact: Why Basic Salary Matters More Than You Think
Here’s where things get tricky. Many companies in Pakistan keep basic salary artificially low (sometimes just 30-40% of gross) and inflate allowances. While this might seem smart for tax purposes, it can hurt you in the long run.
The Hidden Cost of Low Basic Salary
Let’s compare two salary structures for the same gross amount of Rs. 100,000:
Structure A (Employee-Friendly):
- Basic: Rs. 60,000 (60%)
- Allowances: Rs. 40,000 (40%)
Structure B (Company-Friendly):
- Basic: Rs. 35,000 (35%)
- Allowances: Rs. 65,000 (65%)
Now let’s see the impact after 5 years:
Benefit | Structure | Structure | Your Loss |
P.F | Rs. 720,000 | Rs. 420,000 | -Rs. 300,000 |
Gratuity | Rs. 300,000 | Rs. 175,000 | -Rs. 125,000 |
Total Loss | – | – | -Rs. 425,000 |
That’s a difference of over 4 lakh rupees over just 5 years! And this gap widens the longer you stay.
What You Should Negotiate
When you’re discussing salary with a potential employer, don’t just look at the gross figure. Ask:
- “What percentage is basic salary?” (Aim for at least 50-60%)
- “Do you offer Provident Fund?” (This is huge for long-term wealth)
- “What’s your gratuity policy?” (Even though not mandatory, most good companies offer it)
- “Are EOBI and SESSI being deducted properly?” (Your legal right)
Understanding Your Payslip: A Real Example
Let’s walk through a realistic salary breakdown for someone earning Rs. 80,000 gross in Karachi:
Earnings:
- Basic Salary: Rs. 45,000
- House Rent Allowance: Rs. 20,000
- Conveyance: Rs. 8,000
- Medical: Rs. 5,000
- Utilities: Rs. 2,000
- Gross Salary: Rs. 80,000
Deductions:
- Income Tax (varies by total annual income): Rs. 3,500
- EOBI (Rs. 130 fixed): Rs. 130
- Provident Fund (10% of basic): Rs. 4,500
- Total Deductions: Rs. 8,130
Net Take-Home: Rs. 71,870
Meanwhile, your employer is also contributing:
- EOBI (5% of basic, max Rs. 1,200): Rs. 1,200
- SESSI (6% of basic, max Rs. 1,320): Won’t apply here (salary > Rs. 22,000)
- Provident Fund (10% of basic): Rs. 4,500
So the company’s actual cost for you per month is Rs. 85,700, but you see Rs. 71,870 in your bank account.
Tax Optimization Tips
To make the most of your salary structure:
- Keep Rent Receipts
If you’re getting HRA, maintain proper rent agreements and receipts. Up to 45% of your basic salary can be tax-exempt.
- Use Medical Reimbursements
Submit medical bills against your medical allowance. These can be tax-exempt.
- Understand Your Tax Slabs
As of 2024-25, Pakistan’s tax slabs start from:
- Up to Rs. 600,000/year: 0%
- Rs. 600,001 – Rs. 1,200,000: 5%
- And so on…
Structuring your salary properly can help you stay in lower tax brackets.
- Claim All Exemptions
When filing your annual tax return, claim exemptions for:
- Provident Fund contributions
- Life insurance premiums
- Charitable donations
- Investment in approved pension funds
Red Flags to Watch Out For
Be cautious if your employer:
- Refuses to provide a detailed salary breakup – Transparency is key
- Doesn’t register you for EOBI even though you’re eligible – This is illegal
- Keeps changing the “basic” definition – Basic should be fixed, not variable
- Doesn’t give you payslips – You have a legal right to know your earnings and deductions
- Doesn’t contribute to PF despite promising it in your offer letter
These could be signs of poor HR practices or, worse, deliberate exploitation
The Bottom Line: Is Salary Breakup Important?
For Employees: Absolutely yes. Even though it’s not fully mandated by law, it directly impacts:
- Your tax liability
- Your retirement savings (PF and EOBI)
- Your exit benefits (Gratuity)
- Your long-term financial security
For Companies: Also yes. It helps with:
- Tax compliance
- Cost management
- Attracting and retaining talent
- Meeting statutory obligations
Is it compulsory? Not the detailed breakup itself, but certain contributions (EOBI, SESSI) are mandatory by law, and these require a clear basic salary declaration.
Final Thoughts: Knowledge is Power
In Pakistan’s job market, many employees simply accept whatever salary structure is offered without understanding the implications. Don’t be that person.
Your salary isn’t just about the monthly amount hitting your bank account. It’s about building long-term wealth, securing your retirement, and ensuring you’re getting what you legally deserve.
Before signing that offer letter:
- Understand every component
- Calculate your take-home after all deductions
- Project your PF and gratuity accumulation over 5-10 years
- Ensure your basic salary is at least 50-60% of gross
- Verify that statutory contributions are being made
Remember: A well-structured salary today means a financially secure tomorrow.
Have questions about your salary structure? Drop them in the comments below, and let’s discuss!
Disclaimer: This article is for informational purposes only and should not be considered legal or financial advice. Salary structures and tax laws can change. Always consult with a qualified professional for your specific situation.
