Salary

SALARY AND ITS COMPONENTS

Definition and scope of salary [Sec 12(2)]
• Salary means any amount received by an employee from any
employment, whether of a revenue or capital nature, and includes:
(i) 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):
(ii) any perquisite whether convertible into money or not;
(iii) 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;
(iv) any expenditure reimbursed by employer other than expenditure
incurred solely in the performance of duties of employment
(v) profits in lieu of , or 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.
(vi) any pension or annuity or any supplement to a pension or annuity
received / receivable from employer;
(vii) any amount of gain earned under “Employee Share Scheme”;
(viii) amount of tax chargeable on employee’s salary and borne by employer.
“Employee” means any individual engaged in employment.
“Employer” means any person who engages and remunerates an
employee
“Employment” includes:
o a directorship or any other office involved in the management of a
company;
o a position entitling the holder to a fixed or ascertainable remuneration;
or
o the holding or acting in any public office;
• An employee’s salary income, wherever received is taxed in Pakistan to
the extent it relates to employment exercised in Pakistan. 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 [Section 12(1)]
• 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
(i) actually received by the person
(ii) applied on behalf of the person, at the instruction of
the person or under any law
(iii) made available to the person.
 Exercise
Mr. Bilal, a citizen of Pakistan, is working with PMX (Pvt.) Limited as
their head of treasury for the last 15 years. He has provided you with
the following information for the year ended June 30, 2021.
(i) His salary was Rs. 300,000 per month (inclusive of all allowances)
till June 30, 2020, which was increased to Rs. 400,000 per month
effective from 1 July 2020.
(ii) Salary and allowances are deposited into each employee’s bank
account on the 8th working day of the following month.
(iii) On 31 December 2020, Bilal opted for early retirement and final
settlement was made on 8 January 2021.

Required: Compute Mr. Bilal’s taxable income for the tax year 2021.
 Answer
Mr. BILAL
COMPUTATION OF TAXABLE INCOME
INCOME YEAR ENDED ON 30-06-2021
TAX YEAR 2021
Salary for month of June received
on 08 July 300,000
Six month salary from July 2020 to
December 2020
(400,000x6) 2,400,000
Total taxable salary 2,700,000

Note: Salary is taxed on receipt basis. As salary is transferred on the 8th working day
following the end of the month, salary for the month of June 2020 will be taxable in
the tax year 2021.
Deductions not allowed [Sec 12(4)]
In computing the income under the head salary, no deduction shall
be allowed for expenses incurred by the employee in earning such
income.
Termination of employment [Sec 12(6)]
• 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 paid for three preceding tax years/Total taxable
income for three preceding tax years * 100
• The option should be exercised by the due date of furnishing return
of income
 Exercise
MFD Ltd paid a sum of Rs. 500,000 under the Golden Hand shake
scheme to Mr. X in addition to the taxable salary of Rs. 1,600,000
in the tax year 200Z. The past three years assessed tax results of
his assessment are as under:
Tax year Taxable Income Tax Liability (Say)
20Y 1,450,000 159,500
20X 1,200,000 120,000
20W 800,000 60,000
Total 3,450,000 339,500
Mr. X is interested to know the options available to him for
taxation of Golden Hand shake scheme for the tax year 20Z.
 Answer
Taxation under Normal Manner (Option 1)
Particulars Amount in Rs.
Taxable Salary 1,600,000
Sum received under Golden
Hand shake Scheme 500,000
Taxable Income 2,100,000
Total Tax liability of Rs 2,100,000
[5% of amount above Rs. 1,200,000] 45,000
Taxation under section 12(6) (Option II)
Particulars Amount in Rs.
Taxable income as computed
aforesaid 1,600,000
Tax on salary exceeding
Rs. 1,200,000 x 5% 20,000
Tax on Rs. 500,000 x 339,500/3,450,000 49,203
Total Tax liability 69,203
Note: As tax under option I is lower than the tax under option II,
therefore, it is better to exercise option I
Relief where salary is received in arrears [Sec 12(7)(8)]
• In case of receipt of amount under salary which is paid in
arrears 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 such later date as may
be extended by the Commissioner.
Tax free salary to employee [Sec 12(3)]
Exercise
The employer of Mr.Usman has undertaken to bear the amount of
tax on his salary income of Rs. 2,000,000. Compute tax liability of
Mr.Usman for the year. For the sake of simplicity assume that he is
liable to pay tax @ 15% of his taxable income instead of rate
mentioned in the first schedule.
Where an employer agrees to pay the tax chargeable on an
employee’s salary, then the amount so paid shall be treated as an
additional benefit to the employee. The salary income of the
employee shall be grossed up by the amount of tax payable by the
employer.
Answer
Salary income 2,000,000
Add tax paid by employer
(2,000,000 x 15%) 300,000
Taxable salary 2,300,000
Tax liability for the year @ 15% 345,000
Less tax already paid by employer
on Usman’s behalf (300,000)
Net tax payable 45,000
• In the above example employee is still paying tax of Rs. 45,000. The question
that arises is that whether the extra tax of Rs. 45,000 is recoverable by the
employee from the employer.
• It will be a question of fact in each case to determine whether the extra tax,
being the difference of the tax paid by the employer and that calculated on
the gross salary, is recovered or recoverable by the employee from his
employer. If it is not so recoverable, the matter is simple, as the gross
income of the employee in that case will consist of the salary plus the
amount paid by the employer as tax, and will be assessed in the hands of the
employee, the extra tax, if any being borne by the employee himself. (As
illustrated in the above exercise).
• However, if the extra tax is also borne by the employer, the gross salary and
the rate applicable have to be worked out again by making addition in two
or three or four steps. This is illustrated in the following exercise:
 Illustration
Particulars Gross taxable Income Tax Difference
Salary Taxable Income 1,550,000
Tax on salary exceeding Rs. 1,200,000 but does not exceed Rs. 1,800,000 (i.-e Rs.30,000 + 10% of the amount exceeding Rs.1,200,000)
[Rs. (1,550,000 - Rs. 1.200,000) x 5%] 65,000 65,000
Salary income after addition
u/s 12(3) in income due to
payment of tax of Rs. 65,000
by the employer 1,615,000
Tax on the Revised income after including effect of tax
Rs. 30,000 + [10% x (1,615,000 - 1,200,000)] 71,500 6,500

Salary income after addition u/s 12(3)

in income due to payment of tax of
Rs. 6,500 by the employer 1,621,500
Tax on the Revised income after
including effect of tax 5%
(1,568,375 - 1,200,000) 72,150 650
In the above illustration, tax is being added to the taxable income in 2 steps. Ideal solution is to keep on adding
the differential tax amount until it becomes zero.
Amount or Perquisite when treated received [Sec 12(5)]
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:
(i) 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;
(ii) 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.
 DETERMINATION/COMPUTATION OF VALUE
OF PERQUISITES
Introduction to valuation of perquisites
The term „perquisites‟ refers to the non-cash benefits‟
provided by an employer to an employee. Section 13 of the
Ordinance contains provisions relating to determination of
value of perquisites. The said provisions describe the methods
for determination of value of perquisites in the following
manner:
Conveyance [Sec13(3) and Rule 5]
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 • If owned: 5% of the
official use 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 [Sec 13(12) and Rule 4]
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 @ thirty percent, the value
taken for the purpose shall be an amount not less than thirty percent of
minimum of the time scale of basic salary or the basic salary where there
is no time scale
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 upto Rs. 8,500.
 Exercise
Case No 1
(1) Minimum time scale 250,000-25,000-450,000
(2) Basic salary 140,000 p.m
(3) Bonus 1,000,000 p.a
Free accommodation whose rental value is Rs 1,000,000
Determine the taxable Income?
Solution
Value under Rule 4
= 1,350,000 [i.e. 250,000 x 12 x 45%] or Rs. 1,000,000 whichever is higher.
His taxable income will be:
Basic salary 1,680,000
Bonus 1,000,000
Addition under rule 4 1,350,000
Taxable income 4,030,000
Case No 2
(i) Basic Salary 160,000 p.m
(ii) Accommodation [annual rental value Rs. 1,200,000]
(iii) Bonus 1,200,000 p.a
(iv) Dearness allowance 30,000 p.m
Determine taxable income
Solution
Value of perquisite under Rule 4
= Rs. 864,000 [i.e. 160,000 x 12 x 45%]
Total income chargeable
Basic salary 1,920,000
Accommodation under Rule 4 [higher of Rs.1,200,000 or Rs.864,000] 1,200,000
Bonus 1,200,000
Dearness allowance 360,000
Taxable income 4,680,000
Case No 3
Mr X, an employee of ABC Ltd. was residing in a rented
house at monthly rent of Rs. 50,000/-. On 1st July 20X1
his employer agreed to pay Rs.25,000/- for his rent and
converted it into an accommodation. All his other
emoluments remained same which are as under:
Basic salary 200,000 p.m
Bonus 300,000 p.a
Conveyance allowance 30,000 p.m
What will be his taxable salary?
Solution
Value of accommodation [Rs.2,400,000 x 45% = 1,080,00 or Rs. 600,000
whichever is higher]
His taxable salary would be as under
Basic salary 2,400,000
Bonus 300,000
Value of accommodation 1,080,000
Conveyance allowance 360,000
________
Taxable salary 4,140,000
Note: It is assumed in all above cases that annual rental value is equal to the
amount that would have been paid by employer if such accommodation is not
provided.
Utilities and services of domestic servants [Sec 13(5) & (6)]
Definition: Utilities
“Utilities” includes electricity, gas, water and telephone. [(Section 13(14)(c)]
The amount chargeable to tax under the head salary shall include the FMV of
utilities as reduced by any payment made to the employer for such utilities.
Domestic servants [Section 13(5)]
In case services of housekeeper, gardener, driver, or other domestic assistant
is provided by an employer to the employee, the amount chargeable to tax
under the head salary shall include the amount of total salary paid to
housekeeper, gardener, driver, or other domestic assistant as reduced by any
payment made by the employee to the employer for such services.
Interest Free / Concessional Loan [Sec 13(7), (8) & (14)]
1) 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,
2) The above provision shall not apply
• Loans of one million rupees 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.
3) Benchmark rate for tax year 2003 is 5% and increased by 1% for each successive
year but not exceeding 10% per annum for any tax year. Hence for tax year 2009
onwards, benchmark rate is 10%
4) Where an amount has been included in salary of an employee in
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.
5) Similarly, where an amount has been included in salary of an employee in
connection with above loan, and the employee uses the loan for
construction of a new house or acquisition of a house, the amount of
interest on such loan shall entitle the employee to claim a deductible
allowance under section 64A of the Income Tax Ordinance, 2001 subject to
specified conditions
 Exercise
Mr. A is granted a loan of Rs. 1,500,000 by his employer ABC Ltd
on 1 July 201X. The loan is subject to interest rate of 2% per
annum. Compute the amount of perquisite relevant to the
interest for the tax year 201Y.
Answer
Interest chargeable at Benchmark Rate
=> 1,500,000 x 10% 150,000
Less: Interest charged to the loan by ABC Ltd
=> 1,500,000 x 2% (30,000)
Balance perquisite to be added in the _______
income of Mr. A 120,000
Obligations waiver / settlement [Sec 13(9), (10)]
• Any obligation waived of which an employee
owed to the employer shall be included in the
salary income of the employee, equal to the
amount waived.
• Any repayment by the employer to another
person on account of an obligation of the
employee shall be included in the salary income
of the employee equal to the amount repaid.
Self-hiring of property [Sec 15(5)]
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 as per the rule stated above.
 Exercise
An employer owns a residential house and has provided
the same to one of its employees for no rent. Explain the
tax implications in respect of this transaction.
Answer
The fair market rent or 45% of minimum of time scale /
basic salary whichever is higher will be added to
employee’s taxable salary. The employer will not be
considered to have earned any rental income from this
property and accordingly there will be no tax
consequences for him. [Ref: S 15(5) and Rule 4]
Transfer of property or provision of services to employees [Sec 13(11)]
If any property is transferred or any services are rendered by an employer
to an employee, the amount chargeable to tax to the employee under the
head salary for that year shall include the fair market value of the property
or services determined at the time the property is transferred or the
services are provided, less any payment made by the employee for the
property or services.
Any other perquisite [Sec 13(13)]
The amount calculated as below shall be included in the income of the
employee;
Fair market value of the perquisite xxx
Less: Payment made by the employee if any (xx)
Amount to be included in salary income xxx
 DETERMINATION/COMPUTATION OF OTHER
COMPONENTS OF SALARY INCOME
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 upto the following
limits:
Gratuity type Tax treatment
Government employees Fully exempt
Gratuity Fund approved
by the Commissioner
Inland Revenue Fully exempt
Gratuity Scheme approved
by the Board Exempt upto Rs. 300,000
Unapproved gratuity
scheme/fund Exempt upto 75,000 or 50% of the amount
receivable whichever is lower
• Exemption in respect of unapproved gratuity shall
not apply in the following cases:
(i) Any payment not received in Pakistan
(ii) Any payment received by a director of a company
who is not a regular employee of such company
(iii) Any payment received by a non-resident
(iv) 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 (Circular 28 of
1991)
• 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:
(i) Government provident fund
(ii) Recognized provident fund
(iii) 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 (basics
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.
 EXERCISE
Mr. Asad and Mr. Alamgir are close friends and working in two reputed
companies. During the year, the detail of their income is as under:
Particulars Mr. Asad Mr. Alamgir
Salary 2,400,000 3,200,000
Recognised Provident Fund
Contribution by The Employer 35,000 36,000
Interest Credited to P Fund 100,000 45,000

Interest rate for the income credited to the Provident Fund is 16% in case of
Mr. Asad and 20% in case of Mr. Alamgir. Mr. Asad is expecting his
retirement in 2022 whereas Mr. Alamgir is expecting his retirement in 2023.
Compute the taxable income of the employees for the year 2021.
 ANSWER
Computation of Taxable Income
Particulars Mr. Asad Mr. Alamgir
Salary 2,400,000 3,200,000
Provident Fund Contribution By
The Employer
[35,000 – 24,000 (i.e. 240,000 x 10% ) 11,000
[36,000 – 32,000 (i.e. 320,000 x 10% ) 4,000
Interest Credited to P Fund - -
[35,000 –100,000]
Higher of Rs.100,000 @ 16% or
Rs. 80,000 (i.e.) 240,000 x1/3) and
In case of Mr. Alamgir [45,000 –106,667]
Higher of Rs.36,000 (i.e. 45,000/20% x 16%)
or Rs. 106,667 (i.e. 320,000 x 1/3)]
Taxable income 2,411,000 3,204,000

• Provident Fund Contribution exceeding one tenth of the salary is taxable.

• Interest credited is exempt upto 16% interest rate on accumulated balance or 1/3rd of salary (basic salary + dearness
allowance) is higher.
Annuities
• Annuities or any supplement to annuity are taxable
as salary even it is paid voluntarily without any
contractual obligation of the present or ex-employer.
All the annuities are taxable in the normal manner.
• Another aspect of the annuities is discussed in
section 63 of the Ordinance wherein tax credit has
been allowed on the contribution or premium paid
on a contract of annuities.
Superannuation fund
Definition: Approved superannuation fund
Means a superannuation fund, or any part of the superannuation fund approved by the
Commissioner in accordance with Part II of the Sixth Schedule. Section 2(4) of the Income
Tax Ordinance, 2001
The tax treatment of any contribution to and from the approved superannuation fund is as
under:
• Employer‟s contribution is exempt from tax.
• Interest on accumulated balance is exempt from tax.
• Payment from an approved superannuation fund on death of a beneficiary or in lieu of or
in commutation of any annuity or by way of refund of contribution on the death of a
beneficiary is exempt from tax. (Clause 25 Part I of the Second Schedule)
• Where any contribution made by an employer (including interest) is repaid to an
employee during his life-time in circumstances other than those referred to in clause 25 of
Part I of the Second Schedule, tax on the amount so repaid shall be deducted by the
trustees at the rate applicable to the year of withdrawal.
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. (Clause 24 Part I of
the Second Schedule)
Other benefits
Special Allowance (Clause 39 Part I of 2nd Sch.)
Any special allowance or benefit (not being
entertainment or conveyance allowance) or other
perquisite within the meaning of salary specially
granted to meet expenses wholly and necessarily
incurred in the performance of the duties of an
office or employment of profit is exempt from tax.
Certain Perquisites without by virtue of employment (Clause 53A
Part I of 2nd Sch.)
The following perquisites received by an employee by virtue of his
employment are exempt from tax.
(i) Free or subsidized food provided by hotels and restaurants to its
employees during duty hours
(ii) Free or subsidized education provided by an educational
institution to the children of employees
(iii) Free or subsidized medical treatment provided by a hospital or
clinic to its employees
(iv) Any other perquisite for which the employer does not have to
bear any marginal cost, as notified by the Board
Medical allowance and reimbursement (Clause 139 Part I of
2nd Sch.)
• Medical facility or the reimbursement received by an
employee is exempt where such provision or reimbursement
is in accordance with the terms of employment provided
that the NTN of the hospital or clinic is provided and
employer also certifies and attests the medical bills.
• Medical allowance is exempt upto 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 (Clause 19 Part I of 2nd Sch.)
Any amount received on encashment of leave preparatory to retirement is
exempt, if it is received by a Government employee.
Worker‟s Profit Participation Fund (WPPF) (Clause 26 Part I of 2nd Sch.)
Amount received from WPPF as worker is fully exempt.
Salary income of Seafarer (Clause 4 Part I of 2nd Sch.)
Salary income shall be exempt if received by:
(i) a Pakistani seafarer, working on Pakistan flag vessels for one hundred
and eighty three days or more during a tax year; or
(ii) 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.
Allowances etc., to person working outside
Pakistan (Clause 5)
Any allowance or perquisite paid or allowed as such
outside Pakistan by the Government to a citizen of
Pakistan for rendering service outside Pakistan.
Commutation of pension (Clause 12)
Commutation of pension received from government
or any pension scheme approved by the Board.
Reduction in tax liability - Part II of the Second Schedule
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 (Sec 51 (2))
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 (Sec 102)
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.
 Exercise
Being a tax consultant, you are required to explain the tax implications/taxable
income under the appropriate head in respect of each of the following independent
situations:
(i) As part of remuneration package, a company provides for reimbursement of
telephone costs on actual basis to its employees.
(ii) Actual expenditure incurred by an employee in relation to travelling and daily
allowances is less than the amount of allowances paid by the employer.
(iii) Mr. Hamid, a citizen of Pakistan was working with Zee (Pvt.) Ltd for last 15 years
when he opted for early retirement on 31 October 2020. He was due Rs. 5
million as a gratuity under the gratuity scheme of Zee (Pvt.) Limited. The scheme
was not approved by the FBR. Due to cash constraints, the gratuity though due
to Hamid on 31 October 2020 was not paid to Hamid. 0n 30 April 2021 at the
request of Zee (Pvt.) Limited, Kee (Pvt.) Ltd- an associated company of Zee (Pvt.)
Ltd transferred the equivalent of Rs. 5million in US Dollars into Hamid's US dollar
account in UAE in lieu of gratuity due from Zee (Pvt.) Limited.
(iv) A company has taken health insurance cover for its employees. The
insurance company reimburses employees for actual cost of medical services
for themselves and their dependents.
(v) ABC Ltd has provided scholarship to one of his employees for higher studies
abroad.
(vi) Mr. A has leased a car and pays for its lease rentals from his own sources.
He uses the car for business purpose. What will be the treatment of lease
rentals paid and expenditure incurred on vehicle running and maintenance?
(vii)A partner in a firm is entitled to a fixed remuneration each month. Would
this constitute his salary income?
(viii)Mr. Azhar is 65 years old and his taxable salary for the tax year is Rs.
943,000. Mr. Azhar has obtained a housing loan from a local bank. How the
tax reduction for senior citizenship and deductible allowance for mark-up
paid on loan will be calculated?
(ix) Mr. Aslam is 67 year old and employed as research
scholar in a recognized nonprofit institution. His taxable
salary for the tax year is Rs. 654,000. Azhar is of the view
that he is entitled to both reductions i.e. in respect of senior
citizen allowance as well as for full time teacher allowance.
(x) Mr. Sarmad has purchased a generator amounting to Rs.
1,000,000 from an interest free loan taken from his
employer. He rented the generator at an annual rental value
of Rs. 250,000. Total expense of Rs. 25,000 was expanded on
repair, transport and maintenance of the generator.
 Answer
(i) Reimbursements of telephone expenses by the company will be
treated as taxable benefits of employees in case the facility is used for
private purposes. There will be no tax consequences to the extent the
facility is used for official purpose. [Ref: S13 and 2st Sch. Part I : Cl. (39)]
(ii) Travelling and daily allowance payments are tax exempt irrespective
of the actual amount of expenditure incurred by an employee (Ref: 2st
Sch. Part I : Cl. (39)
(iii) Since gratuity scheme is not approved, amount exempt from tax
should be 50% of the amount received or Rs. 75,000 whichever is less.
However since the payment is received outside Pakistan, the said
exemption is not available. The whole amount is chargeable to tax. (Ref.
Proviso to Clause 13(iv) of part 1)
(iv) Reimbursement of actual medical expenditure by an employer is tax
exempt. (Clause 139 Part I of 2nd Schedule). On a similar basis, there will
be no tax implications on reimbursement by the insurance company on
behalf of the employer, or any tax consequences for the employees on
payment of health insurance premium by the employer.
(v) Scholarship granted to the employee will be exempt from tax
provided the employer and the employee are not associates (Ref: Sec
47)
(vi) Expenditure incurred by an employee to earn salary income
including travelling expenses and lease rental payments is not tax
deductible. (Ref: Sec 12(4))
(vii) The remuneration paid by a firm to a partner is considered his share
in the firm‟s profit as partner is not an employee of the firm.
(viii) Mr. Azhar is entitled to deductible allowance
relating to housing loan has already allowed
against his total income. Further the tax reduction
for senior citizen is no more available.
(ix) Yes, Mr. Aslam will be entitled to 25% tax
reduction for full time teacher or researcher will be
applied on the amount of tax liability attributable
to his salary income only. Further the tax reduction
for senior citizen is no more available.
Annual rental 250,000 Less: Repair,
transport and
maintenance (25,000)
Mark up on loan from employer at bench mark
rate (Rs. 1,000,000 x 10%) [Sec. 13(8)] (10,000)
Taxable income from other source 215,000

Note
N -1 Loan amount is Rs.1,000,000, so no amount will be added in
salary for interest on loan received from employer. However mark up
at not less than benchmark rate of 10% as deduction shall be allowed
against income as such.
 EMPLOYEE SHARE SCHEME
Definition
Employee share scheme means any agreement
under which a company may issue shares to:
(i) an employee of the company; or
(ii) an employee of an associated company; or
(iii) 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 grant of right or option
When an employee is granted an option or right to acquire shares under an
employee share scheme, no amount is chargeable to tax. It is so for the reason
that no benefit is derived by the employee by a mere grant of option.
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:
(i) Fair market value of shares xxx
(ii) Consideration paid for the grant of right or option
to acquire shares (xxx)
(iii) 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:
(i) has free right to transfer the shares; or
(ii) 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 stated above, 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 as a
result of situations mentioned above, 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
 Exercise
Mr. Ahsan has been the Chief Financial Officer of XYZ Limited for the last 5 years. He
was offered 5,000 shares on 01 June 2019 by XYZ Limited at a price of $ 1 per share.
The market value on that date was $5 per share. The shares were transferrable on
completion of one year of service, from the date of issue of shares.
The market price of the shares as on 01 June 2020 was $8 per share. On 17
September 2020, Mr. Ahsan sold all shares at $9. He also paid a commission of $10
to the brokerage house.
The relevant exchange rates are as follows:
01 June 2019 $1=100
01 June 2020 $1=101
17 September 2020 $1=102
Required: Calculate the amount to be included in the taxable income of Mr. Ahsan
for tax years 2019, 2020 and 2021. Also specify the head of income under which the
income would be classified.
Tax Year 2019:
As Mr. Ahsan did not have any right to transfer the shares in tax year
2019, therefore, nothing will be included in the income of Mr. Ahsan
under the head Salary.
Tax Year 2020:
Following will be included in the income of the Mr. Ahsan under the
head Salary
Market value on removal of restriction on transfer
of shares( 5000x8x101) 4,040,000
Less cost of shares: amount paid by Mr. Ahsan
(5,000x1x100) 500,000
Amount to be included under the head salary 3,540,000
Tax Year 2021: [Capital Gains]
Following will be included in the income of Mr. Ahsan under the
head capital gain
Consideration received on sale of shares
(5,000x102x9) 4,590,000
Less cost of shares (500,000 + 3,540,000) (4,040,000)
Less commission (10x102) (1,020)
Capital gain 548,980
Note: Chargeable gain would be restricted to 3/4th on the
presumption that the above shares fall in the definition of capital
assets under section 37 of the ITO, 2001.