Income Tax Ordinance section 12 sub section 2 deals with the taxation of termination benefits received at the time of leaving a job, including golden handshake payments. Termination benefits can be a large sum of money received in one year, making it difficult for taxpayers to deal with higher tax rates. In this article, we will discuss how taxpayers can manage the taxation of termination benefits in Pakistan.
Termination benefits mean any and all benefits received at the time of leaving a job, including compensation due to loss of employment or as a golden handshake payment. Since salary income is taxed on a slab rate basis, the higher the income, the higher the tax rate. Therefore, it becomes a headache for the taxpayer to be charged such a high rate of tax in one particular year. However, the ordinance provides an option to get an average rate of tax for taxation of such benefits.
By applying to the commissioner of income tax, such an average rate can be applied. It is calculated as the total tax paid for the preceding three tax years divided by the total taxable income for the preceding three years multiplied by 100 to get to the average rate of tax. This can help taxpayers deal with the taxation of termination benefits in a more manageable way.
It is important to note that no deductions are allowed for the termination benefits received at the time of end of employment. Therefore, it is essential to plan and manage the taxation of termination benefits to avoid any surprises in tax bills. Taxpayers should seek professional help while dealing with taxation matters to avoid any legal issues.
In conclusion, termination benefits or golden handshake payments are taxable under the Income Tax Ordinance section 12 sub section 2. However, taxpayers can apply for an average rate of tax to deal with the lump sum amount received in one year. By doing so, taxpayers can avoid the burden of higher tax rates and plan their finances accordingly. It is always advisable to seek professional help while dealing with taxation matters to avoid any legal issues.