Salary Income

Basis of Taxation
a) Receipts Basis (exceptions u/s 110 by Commissioner and 12(7) by an employee)
b) Employment Relationship
c) Services may be past, present, future
d) Any expenditure for business purposes shall not be considered.
Salary Income
a.
b.
c.
d.

Allowances
Perquisites
Terminal benefits
Other benefits

Deductions

No deductions are allowed except Payment to professional bodies

Benefits
Basic Salary
HRA
Accommodation
Conveyance Allowance
Conveyance
Medical Allowance
Medical Facility- UTC
Medical Facility- Not
UTC
Loan
Traveling Allowance
Entertainment
Allowance
Utility Allowance
Bonus
Tax born by employer
Employee Share
Scheme

Rule
TT
TT
45% or Actual (higher is
taxable)
TT
10% / 5% of Cost / FMV
Exempt up to 10% of BS
TE
TT

TE
TE
TT
TT
TT
Benefit is taxable

Exceptions
30% for mufasal area
Business used
TT if medical fac. under the contract

No tax up to Rs.500,000/- Benchmark

rate of interest 10%.
Personal travelling taxed
Non-business is taxable

Q-5 Sept 2011

Terminal Benefits

Benefits
Pension

Rule
TE

Gratuity / Commutation of Pension

Govt .Employees
TE
Gratuity Fund
TE

Exceptions
Age below 60 + Re-employment
Age below 60 + Receives more than one
pensions

Gratuity Scheme
Un approved

Ex up to Rs.200,000
Rs. 75,000 or 50%
(lower is exempt)

i.
ii.
iii.
iv.

Provident Fund RG
Provident Fund URG
Profits in lieu of Salary

Not received in Pakistan

By Non-employee director of a
company
Received by non-resident
Receiving more than one gratuity

Employer Contribution Rs. 100,000/- OR 10% of BS+DSA Exempt

Interest Credited
16% of Acc. Bal. OR 1/3 of BS + DSA exempt
Annually no treatment
Option: Add in Salary OR separately taxed at last 3 years avg. rate of tax

Tax Year 2015

Directorship fee or fee for attending board meeting or such fee whatever fee name called shall be
taxed under the head SALARY. The WHT @ 20% is applicable.

Tax on Tax
A -Full Tax born by Employer
Example 5.1 (K.Petiwala example)
Basic salary Rs.318,000
House rent allowance Rs.127,200
Company car for office and personal use (cost Rs.900,000)
Medical allowance Rs.31,800
Tax is to be borne by the company
Solution 5.1
Basic salary
House rent allowance
Company maintained car: (5% of Rs.900,000)
Medical allowance
31,800
Less: 10% of basic salary
31,800
Taxable salary excluding tax borne by the employer
Tax born by Employer (W-)
Taxable Salary
Tax @ 5% on Rs.494,946 400,000
Working

1
2
3

318,000
127,200
45,000
nil
490,200
4,746
497,946
4,747

(490,200 -400,000) x 5%
490,200 + 4,510 = 494,710
(494,710 -400,000) x 5%
490,200 + 4,735 = 494,935
(494,935 -400,000) x 5%

4,510
4,735
4,746

A -Partial Tax born by Employer

Example 5.5 (K.Petiwala example)
- Basic salary 552,000
- House rent allowance Rs.220,800
- Company maintained car for both purposes (cost Rs.1,000,000)
- Medical allowance 55,200
- 70% tax is to be borne by the company and 30% tax shall be deducted from salary.
Solution 5.5
Basic salary
House rent allowance
Company maintained car: 5% of Rs.1m
Medical allowance
55,200

552,000
220,800
50,000

Less: 10% of basic salary

55,200
Taxable salary excluding tax borne by the employer
Tax born by employer
Taxable Salary

nil
822,800
18,645
840,445

Working
1

(822,800 -750,000) x 10% +17,500

24,780 X 70%

17,346

822,800
17,346
(840,146 -750,000) x 10% +17,500

26,514 X 70%

18,560

822,800
18,560
(841,360 -750,000) x 10% +17,500

26,636 X 70%

18,645

EMPLOYEE SHARE SCHEME

An employee share scheme (ESS) is a scheme under which shares or rights to acquire the shares
in a company are provided to an employee or their associates in relation to the employees
employment. Normally the price of the shares is below the fair market value (FMV) so that,
employees may be able to get benefit from the sale of shares.
Types of Schemes:
a. Shares are issued against the full payment made by the employee on the same day.
b. Option (letter) is given to the employee to get shares on a stipulated date after some
period after the day of announcement. No advance payment is made by the employee to
get that option.
c. Option (letter) is given to the employee to get shares on a stipulated date after some
period after the day of announcement. Some payment is made in advance by the
employee to get that option and balance is made at the time the shares are issued to the
employee.
d. Shares are allotted to the employees with restriction to sale that shares but the employee
can sale the share when restrictions are withdrawn.
Possible Actions Taken by the Employee:
1. Sale of Options
2. Acquisition of Shares and disposed after the acquisition.
3. Disposal of Shares with restrictions

Following formulae may be adopted to compute gain or loss under the ESS.
1. Sale of Option (Salary)
Gain = Sale Price(SP) Cost (if any)
2. Acquisition of Shares (Salary)
Gain = Fair Market Value (FMV) Total Cost
FMV at the day when he was able to get benefit
3. Disposal of Shares (Salary)
Gain = SP Cost (With Restrictions)
4. Disposal of Shares (Capital Gain)
SP/FMV (Higher) FMV (Without Restrictions)

Illustration (ESS)
CAPS Limited has offered an employee share scheme to benefit its employees. The model of the scheme
is as follows:
Date of announcement:
Offer value
No. of share
Advance
Share issue date
Balance (Rs.28/-) is payable
FMV / Sale price
March 2010
March 2011
March 2012

March 2010
= Rs. 30/share
= 500 shares
= Rs. 2 per share
= March 2011
= March 2011

= Rs.50/Share
= Rs. 60/Share
= Rs.70/Share

Information of three employees of the company is provided to compute their taxable income and the
heads of income under which it would be taxed.
Kashif Shahzada:

March 2010 : he sold all the options for Rs.5,000/-

Rameez Raja:

March 2010 : participate in the scheme and paid Rs.2/share.

March 2011: acquired the shares and paid Rs.28/share
March 2012: Sold all the shares.

Farhan Khanzada:

March 2010 : participate in the scheme and paid Rs.2/share. Sold option of 200
shares for Rs. 2,000/March 2011: acquired 300 shares and paid Rs.28/share
March 2011: Sold 300 shares.

SOLUTON:
Kashif

Persons
Salary
Capital Gain
Salary

Rameez

2010
Rs. 4,000 = (5,000
1,000)
X
X

2012

X
15,000
(500 X 30 )

Capital Gain
X

Farhan

2011

Salary
Capital Gain

Rs. 1,600
{2,000 - (200 X 2 )
X

X
9,000
(300 X 30 )
X

X
70 - 60=10
500 X 10 = 5,000
X
X