ByTaxation Based on Receipt Basis Salary taxation in Pakistan follows the receipt basis, meaning the salary received in a particular tax year is taxable in that year. For instance, if an employee works for 12 months but receives the last three months’ salary in July or August of the following year, that amount is taxed in the year it is received. However, in such cases, the employee may approach the commissioner to apply for tax at the previous year’s rates based on arrears.
Taxation of Performance and Incentive Bonuses Performance bonuses, particularly in sales-based jobs, are taxed at the same rate as salary. Any bonus received as part of an employment contract is treated as part of salary income and taxed accordingly.
Deductions Allowed Against Salary Generally, no deductions are allowed against salary income. However, two exceptions exist:
- Zakat: Deductible if paid strictly under Zakat and Shariah laws.
- Education Deduction: Employees earning up to Pak Rs. 1.5 million annually may claim a deduction for their children’s education expenses. The deductible amount is the lesser of 25% of taxable income, 5% of total tenure, or the number of children multiplied by Pak Rs. 60,000.
Commission and Salary Tax Treatment If an employee receives commission under an employment agreement, it is considered part of salary income and taxed at the same rate as salary. This means the commission is aggregated with salary for tax calculation purposes.
Taxation of Loans Provided by Employers When an employer provides a loan:
- If the loan is up to Pak Rs. 1 million, it is not included in taxable income.
- If the loan exceeds Pak Rs. 1 million and is interest-free, the Federal Board of Revenue (FBR) applies a benchmark interest rate annually. The interest for the period the loan remains outstanding is added to the employee’s taxable income.
- If the employer charges a reduced interest rate (e.g., 2% instead of 10%), the difference (8% in this case) is added to the employee’s taxable income.
Taxation of Allowances and Benefits Allowances and benefits provided by an employer are generally taxable. Key provisions include:
- Accommodation: If an employer provides housing, 45% of the Market Trading Salary (MTS) or the basic salary, whichever is higher, is included in taxable income.
- Allowances: Any allowance received in cash is taxable unless it is strictly for official duties.
- Leave Encashment: Any leave encashment is considered taxable income.
Special Tax Considerations for Teachers and Researchers Full-time teachers and researchers working in non-profit organizations, government institutions, or institutions recognized by the Higher Education Commission (HEC) of Punjab or Federal HEC receive a 25% reduction in taxable salary. This serves as an incentive to encourage professionals in the education sector.
Income from Multiple Sources If an employee earns income from multiple sources, salary taxation applies if at least 75% of their total income comes from salary. Otherwise, tax is assessed based on different applicable heads of income.
Changes in Tax Treatment of Loans for House Purchases Previously, interest and profit payments on housing loans were eligible for deductions, but these have been abolished. Neither conventional nor Islamic banking loan payments qualify for deductions.
Understanding salary taxation is crucial for employees to ensure compliance and optimize tax liabilities. Employees should stay updated with FBR regulations and consult tax professionals for personalized advice.
