CHAPTER-6

SALARY INCOME
In order to .ender an incomo chargeable under the head "Sala4/ the relationship of tne
enployee ard lho erDplrysr must xist bstwen the payer and th6 paye. The employer
may the cuftent, lormer or prospgclive.
EMPLOYMENT is the rendering ot seMcea by an employo against the remuneratjon
receivable lrom the employer. lt includos: [2(22)]
A direclorship or any olher otlico involvd in the management of a company;
A posilion which entitles its holder to a lix6d or asciainabl remuneralion; or

1.
2.
3.

The holding or acting in any public offico.

E fPLOYEE means an individual who is engaged in an enploynent.I2lZOll

EMPLOYER means any person who ongages and remunerates an emproyaa
[2(21 )l

S^LARY [12(2)
Salary is a reward or recompnse lor ssrvices pgdormed. In a more limited sense, a fixod
perlodical clmpensalion paid by an mployer tor the services randered by an emolovee
|s
lermod as salary. For the purpose of Income Tax, "Salan/ means any a;ount received by
qn dnploye from any employrnent. lt includ6 anla
'1. Pa)i
Wages;

2.
4.

7.

&.

10.
12.
13.

2.
4.
6.

Leave pay:
Overtime;
Bonus;
Gratuity;
Work conditions supptements (i.e., additional pay for unpleasant o, dangrous work)
Fees;
Commis8ion;
Allowances;
Perquisits;
Prolit in lieu ol dr in addition to the salary or wageg; and
Any other bnolit providd by the employg. to his empbyes.

9.

11.

PEROUTSTTES

[r3]

Biack's. Law Dictionary dfines th9 prqutuit99 aa .emoluments, tringe bonefits

or othgr
Incldonlal prolito or benefits aflaching to an offica or pNition". Under thg lncome Tax Law

"Dorou19lis" includes:

1.
2,
3.

The value ol rEnt-tree accommodation.

Thg valuo of any concesgion ln .6nt of any accommoda on.

Any paymgnt by the smployef for the benslit of lh mployes, his spou9g or
depgndenl child. such as:
i)
Payment ot life insu.ancg, and
Paynont towards a contract ot annulty,

.
ll)

SJnopsit of Taxes

2.
3-

Income Tar - Tatalion of Penons

15-t r31

lncomes to which section 153 applios (i.e., supply ol goods, rendering ol sorvices or
excutaon of conaacb).

Incomes lo which section 154 applaes (i.6., exports).

Non-application ot Minlmum Tex ds 113lolaus (11Axxiii) ol Part-lv ol Scond Schodull

Provisions regarding payment of minimum tax (u/s 113) do not apply to a Modaraba registerd
under the Modaraba Companies and Modaraba (Flotation and Control) Ordinance, 1980.
GROUP TAXATTON [59AA]

The Finance Act, 2007 inhoduced a new concpl of 'Group Taxalon'. Undgr this concept the
holding and subsidjary companies may opl lo be taxed as one fiscal unit. Provisions in this rcgard
ar sumrnadzed below:

1.
2.
3.
4.
5.

Holding companies and subsidiary companies of hundrsd per cent (100%) owned group
may opt lo b taxed as one fiscal unit.

The group as a whole besides consolidated group accounts (as are requirgd undr the
Companiss Ordinanco, 1984) shall makg computration ol income and tax payable.
The companies in the group shallgive irevocable option forlaxation as one fiscalunit.

The group taxation shall ba restrictod lo only such companies which ar locally
incoeorated und6rtheCompaniesOdinance, 1984.
Losses prior to fomation ol the group shall not bg ntitled to any reliel und6r group
laxalion,

6.

The option of group taxation shall be availabl to those group companies which comply
with the corporat governance requiremnts specified by the SECP and ar dsignated
as companies entitled to availgroup taxation.

7. The Board may rnake rules lor regulation ol group laxation.

i NIMUM TAX ON BUTLOERS [113A]
Businoss incomg ol a builder kom construction and sale ol rosidential, commercial and othr
buibings shall be subjecl to minimum tax al lhe rales specified by th6 Federal Govemment
who shall also specily the modo, manner and time of payment ol such tax.

Note: Federal Government has, so far, noi notified the Tax Bates and ils payrnent mod.
MINIMUM TAX ON LANO DEVELOPERS [1138]

Businsss income ol a land doJeloper from develophent and sal (incftding booking) ol
residsntial, commorcial and other plots shall bs subjecl lo minimum lax at the raies spcitiod
by ths Federal Govemment who shallalso spcifythe mode, manner and time of paymont of
sucn tau.

Nota: Federal Government has,

so lar, not nolitied tho Tax Bates and its payment mode.

Sl*ptb

4.
5.
6.
7.

Xf*"t

t^""^.

The value of any bnetit providd free ot cost;

The vatue of any benefit provided at a concessional rate;
Any sum pdid by ao 6mpto)r in respect ot any obtigation ol an
employse; and
Facility oi motor vshicle provided by an emptoy6r to his smployeo
Molly or paray tor
pnvate use of lhe emDlovoe.

PROFTT tN L|EU OF O" ,n ooo,r,on ,o

t12(2xe)l
"Proflt in lieu of or in addition to satar/ incruoos;
Any amount received as considration tor an agfeemgnt lo enler
into an employment

"*ARy

2.
0.
4.
5.
6.
7.

retalaonship;

Any amounl received as consideration lor an mployee,s.agreemenf

to any conditions
gmployment
of

fLy
any

or any change lhrern;

re9givod as compensation for rhe termination of employment.
tt inctudes
11g1qt

compgnsation for redundancy or loss ot employnont and g;don

ttandshake
paymenis;
Any.amount.Jeceivod trom any tund (e.g., provident fund, etc.,)
constituied by the
empbyer lo the extont to h,hich the amount ts not a repay,rnent
oi contriUurion" .aO.
bythe emptoyee to lh6 fund;
Any amount received as considefation tor an employeg,s agromsnt
to a restriclivo

covonant in respect of any past, present or prospective empto-yment;

Any pension or annuity oiany supplsment to a pension
or annuity; and

Any.amount chargable to tax on account of employeg share option

schsm unor
sction 14.

SALARY INCOME
The lollowing incomes are chargeabl to tax undr the
hsad .salary":

1.

Anysalary received_ dudng thg year. Thg recoipl may be

on accounl of curent saEry,
arrears or advanca [12(1)]; and
2. Valuation ol perquisites, a owances and benlits according lo sections 13 & 14 ot ing
Income Tax Ordinance, 2OO1 and the Income Tax Rules. 2602
,Vols5i
1. Salary incom is chargeable to tax on. the ?eceipt basis,. lt means any salary that is
actuatty received duing the tax year (which may be curronl
safary, arieiiJ df safary
and, advance salary) sha be charged to tax. 'uorma y,
rn" sald.y Is noi iar"o on
accruat basis. Howover. there are two exceptions to this generai
i) lo case of an smploygo of a pivate Umiled Compant the CIR;Grnay;fi-are.
opt he a@rud
basis tor taralion ot salary income it he has re;so;abt groundi
d b"ii"n"
-- - rn"t
payment ot

ii)

2.

satary was deliberatty doterred tor rax

anO

Where the emptoyoe has opl6d that his incom be"uoiAanc;liiOi;

charged io llxon Eccrual baslg.
ti is permjted in a case wh6re rh:, taxpayer has re""iue,i'*rary
fn i"iiliisurring
in the appticarion of highgr rate ot tax in lh6 year or
receipt oi rn,i aireii] ir iizff

An.employg shall not be enti ed to deduct any expendituro

IncurreO by him in

derlving satary incomo. [12(4I

3,

An amount or gerquisito shslt bg treated as receivd by an employeE whether ii is paid

or provided:

i)
ii)

By his employer (including present, past or prospctive)' an associate ol his

employer or a third party on behalt ol his employer; or
To him, to his associate orlo athird party on his bshall. [12(5)]

TAX FBEE SALARY TO EMPLOYEE F2(3)I

Where an employer agrees lo pay the tax liability ot his employoe, then the amount so paad
gmployee
shall be treaied as an-additional benlit to ths employee. The salary income ot lhe
shall be incrased by lhe amounl oJ tax pad by lhe employer.

Erample:6.'l
Ahsan is an employee ol a company and draws an annualsalary of Rs. 750,000. As per
terms ol employmeill his employer has undertaken to pay the amounl of tax on his salary
income. Computo his tax liabilittlor the year assuming that he is liable to pay tax @ l0% ol
his taxable incom6.
N4r.

Answet:

received
Tax paid bythe Employer
Tolaltaxable salari incomo
Salary

Add:

(Rs.75O,OOO @

Rs. 750,000

1O%)

:Z!.000

825!000

Tax compulation
Totaltax liability lor tho year (RS.825,OOO @ 10%)
L6ss: Tax already'' paid (by thd employer on behatf of Mr Ahsan)
Nettax payable
Nole: For the simplicity ot the calcutations a tat raie of 10olo has been applied.

82,500

7!.000

-71@
In order to

compute the actual tax liabilily the rales specitied in ths First Schedule shall bo applied.

Example: 6.2 Compule the exact lax liability ol Mr. Ahsan under the Incoms Tax Ordinance,
200t by using the information ol Example 6 1
Angwer:

Rs. 750,000

Salary received
Add: Tax paid bythe Employer on Rs.750,000
Total taxablg salary income

17.500

702500

Tax computation

75O,OOO
10%
employr
payable

Tax on Rs.
Taxon Rs, 17,500 @
Loss: Tax paid by the
Not tax

17,500

1.750

19'2sO
17.500
1.?50

TAx dN AMouNTs REcEtvED oN TERIIIlNATloN oF EITPLoYMENT 112(2)(e) (iii) & 12(6)l

The amount of any profit in li6u of or in addition to salary (i.s, compensation tor redundancy
or loss ol employmant, golden handshaks payments, tc.) may, at lhe oplion ot lhe
employee, be taxsd in any ol the following ways:

1.

lt may be included in total incoms ol tho smploye lor thg tax year in which it
recetvoo: oa

is

Slnopsit

2.

olTaxes

come Tor - Salary

lncome

[6-117l

lt may be taxed as a sepaials block. The rate of tax applicable to such amount shall
be computed in accordanco with the lollowing tormula:

AIBAO
Whre:

is total tax paid or payable by the employee on his total

lar.ble lncome

lor the lhres precading tax ygars; and

is tho employee's lotal laxable incom for the thre preceding lax years.

Note: In lhe abovs tormula total laxable income has besn useo, which depicts that while
compuling th6 applicabl6 tax rate, income ot the employee lrom all sources taxable
under NTR shall be taken into account.
ExamDle: 6.3
Mr. Hanif has a taxabls salary incoms ol Bs. 750,000 during the tax ysar. Al the end of lhe

ygar he opted to rslire unds a scheme announcd by .his employer and receivsd
Rs.2,500,000 as a golden handshake paymenl. Ths taxablo incomes and tax liabililiss of
Mr. Hanil lor lhe three immediately prceding tax yars wgre as blow:

Yeat

Tlxable income

1.

Bs. 500,000
600,000
700,000

2.

3.

Tax Llablliry

8s.5,000
10,000
15,000

Computs the tax liability tor lh currEnl tax year assuming that he optd that:
Tho golden handshake payment be taxod as a soparate block; and
The golden handshake pdyment be taxed togethEr with salary income.

1.
2.

Answer:

1,

Golden handshake taxabla as a Separate Bock ol Income

Income taxable as per normal rales
lncoms taxable al a special rats (i.e., goldon handshake payment)
Total income for lhe year
Total Tax Liabiliu.
Tax on taxable incomg (Rs. 750,000)
Tax on golden handshake payrnent = Rs. 2,500,000 @ 1.67% [N-11
Total lax liabilily for tho year
N-1 Tax Rate

aNicable

Year
1.
2.
3.
Total:

to Golden Handshake Payments

Tar Llability

Taxable lncome
Bs. 500,000
600,000
700.000
.L800l)00

Averag Rale = Tax of last 3 years

= 30,000

Rs.

5,000
10,000
15.000

30-000

+ Taxablg income ol

1,800,000 X 100

1.67"h

last 3

yea.s X 100

Rs.750,000
2.500.000
3.250.000
17,500

41.750
59.250

ofTaxes

S)nopsir

2.

hrcome Tax

SaLlry

Income

t6-ltgl

Goldn Handshake pdyment Taxabte togetherwith Sslary Income for

the Year
Salary rceived during the year
750,000
Amount received on account of Golden Handshake
2.500.000
Total income taxable uadeilho head .Salarf
3250n00
Total Tax

Liabitv

Tax on Rs. 3,000,000

Tax on Rs. 250,000 @ 22.5%
Total

Note: As the tax

liabitaty

362,500
56.250

4XtZ50
is lesser in a case where lho gotden handahake paymenr |s

lfeatd as a separate block, lhe taxpayer should opt

t-he same.

TAX ON SALARY RECETVED tN ARREARS

I12(7)lj
An employ rhay opt that the amount ot satary received in anears
be taxgd at such ratgs that
would-have ben
if the salary had been paid lo him in th t",, ye"i-in,,"t,"n tn"
.appljc_abte
seMces wer6 rendered. This option may be exercised if the following
condjfionjire f,tffiiierr,
Tho taxpayer has received a salary. in arrears;

1.
2.
3.

This rceipl has be6n included in the total incom forthe yoar in
which il is received: and

This inclusion has resutted in the apphcation ot the higher rals

ol the tax on such
income.

Note:Th option available to the mployee in respect of salary recaived

in arrears or
amounr recetved on termination of employment shall be exercised
in wailing and
lurnished to the commissioner by the due dire ror riring thereirin,
e; i1li;)l

Example: 6.4

satary income o' Rs. 70,ooo per monrh. Durins rhe rax year
lllfl*:.:"^ol:y"9l-laxabt
zrruA
ne was pao a satary for 10 months. The sarary lor remaining
2 monihs was paro
alongwilh tho satary_ot th6 tax year 2008. Delermine the amount of tair"frnJ
oi U" p"yaor"
ror ne tax vsar 2008.

Answer

o@

For the purpose ot unif

on the basi! of the rates app cabte to the Tax year 2014.
Step.l Tax Ltdbltity on Receipt Basls
Tax Year 200A Tax year 2OOB
Totalincome [N-1]
700,000
980,000
Ta)( payable [N-21
15,000
40,500

N-l

Total Incohe
For Tax y6ar 2004
For Tax year 2OOB

N-2

Rs. 70,000 x 10
Rs. 70,000 x 14

700,000
980,000

Tax Li.billty
Tax Year 2004
Tax on Rs. 400,000
Ta( on balance ot Rs.

3OO,OOO @

5%)

15.000

15J00

Stnopsis

ofTar?t

Incone Tax - SolatJ Income

l6-ll9t

T.x Year 2008

Tax on Rs. 750,000
Tax on balance of Rs. 230,000 @ 109"/

17,500

23.000

Step"2 Tax Llablllty on Accrual Basis

Tai

!{1500

Year 2OOA Tax Year 2QOB

840,000
17,500
9.000
26.500

Total Income (Bs.70,000 x 12)

Tax payable:
Tax on Rs. 750,000
Tax on balanco of Bs. 90,000 @ 10%
Total lax for the year

840,000
17,500
9.000

26.500

Stee3
Tax paid (i.e., withheld and deposited by employer)
(Rs. 15,090 + 40,500) -as per step-l

55,500
53.000
2.500

Less: Tax payabte as per step-2 (Bs. 26,500 + 26,500)

Betund lor th6 year

Altemate Trealment
It is p.osumed in ths abovg calculations that the employ. has deducted lax at source
while
mak,ng payment ol salary. As lhe tax dducted has already been depositd in rne
Uovernment treasury, so the retund is determined. lt may happen lhat lhg emplover has not
deducted lhe tax al source. Undr such a situation the tax tiabitjty tor tax year'2068
shatt Oe
detormined as below.
Total lax liabilityior both years on accruat basis (Rs. 26,500 + 26,500)
Less: Tax paid lof the tax year 200A (by employee on cash basis)
Tax payable for tax Vear 2O0B

Rs.53,000
15.000

38.000

PEROUISITES, ALLOWANCES AND BENEFTTS lsection t3 & Rute_3]

Seclion 13oJ the Income Tax Ordinance, 2OOl and Rutg-gthrough Rul9_7 ol the lncome
Tax

002 discuss

the_ provisions regarding

th6 vatuatio; of ditterent p",lu,s,r"",

luJest and othsr benefits for lhg pury)osgs

alowances
ot detemn|ng lhe salary income cha;oeable
lo tax under lhe Income Tax Ordinance,2001.
SERVTCES OF DOMESTTC SERVANTS

F3(5)l

salary paid.by rhe emptoyer to rhg domestic

ot an mptoyee
Ij|:
"t driver, gardoner or olhor domestic servants) servanls
(e.9.. housekeeper,
shall be included in the
saraay Income ot lhe omployee lor lhe tax yoar in which lhs services afo rgndered.
Er6mple: 6.5
Mr. Raza is an otlicer in an autonomous corporalion. He is in pay scale of l
S,OC|O-1,00025,000. During the tax year h6 received Rs. 24O,OO0 as basic s;tjry. furrfter, -tre
was arso
paid tho lollowing amounts:
Dearness allowance
Rs. 18,000
Cost of living allowance
24,000

"liL.iT9ii

1,
2.
3.
4.

Bonus

Commission

20,000
30,000

The Employer ol Mr. Raza has atso provided the se.vjc6s of a drivar and a housekeeper.

Srnopsh of Tarcs

Income Tax

Salary In.ome

t6- r20l

Ths Co.pofation paid Rs. 4,000 p.m. to each ol these eniployees. Compule the laxable
incomo and tax liohility of Mr. Raza.

Anawer:
Taxable lncome

Fs.
240,000

Basic salary
Deamgss allowance
Cost ol living allowance
Bonua
Commission
Salaries of domostic ssrvanls:

Driver

18,000

24,000
20,000
30,000

=
=

(Rs.4,000 x 12)

Housekeeper (Rs.4,000x

12],

Taxablg Income

48,000
48.000

96.000
428-000

Ta, Liability for the yeal

Tax on Rs. 400,000
Tax on balance ol Rs. 28,000 @ 5%
Tolal tax tor the year

1.400
1-400

ulrllTlEs To EiTPLoYEE 113(6)l

Whers the employer has provided any facility lo his employgg in the lom of urlties, lhe
salary income ottho employee shallbs determined as below:
Fair ma|kel value ol the utilities provided
Less: Any amount paid by lhe employee lor ulilitios
IIX

IlX

Ulrnt oa includes ths lollowing Jacilities:

i)
ii)
iii)
iv)

Electricity;
Gas:
Wator; and

Telephone.

Utilitis may be in th torm of a tree or concessional tacility or a ulility allowance rgcaivabts

in cash. Under both thg cases any benefit provided by an employer to an smployee on
account ol ulililies shall be taxable and included in salary income of th employ.

Erample: 6.6
Furlh6r assume to the example 6.5 thal during lh year lollowing domostic bills of Mr. Raza
wero also paid by his employr:

1.
2.
3.

4.

Telephone
Water
Elechicity

r2,000
6,000
9,600

4.800

Gas

oetormino the taxable incomo and tax liability ol

N,,lr.

32.400

Raza.

Anawgt:
Taxade hcome
Incomo as determined in Example 6.5
Add taxable utilities:

428,000

t6-r2ll

a)
b)
c)
d)

Telephone
Water

12,000
6,000

Electricity
Gas

9,600
4,800

Taxable income

32.400

460t00

Tax Lhbility

Tax on Rs. 400,000

Tax on Rs. 60,400 @ 5%
Total tax for thg year

0
3.020

Lo20

LOAN TO EMPLOYEE (13(7)l

Where a loan is given lo an employse (whether inlerest bearing or olhetuis)
then anv ot the
rolowng rwo amounts shal be added to lho salary income of tho ehployee:
1. The amount ol interesvprofit computgd al the benchmad< ate, if no interosuprolit is
payabl by the gmployeo; or
2, The amount computed al the .berctmark rate,less the actuat amount of interest /
profit paid by an emptoy69, il lower rat is applicable on the
loan.
Nolg6:

a)
b)

The above provision is applicable to loans mado on or after O1-07-2OOA.

This benefit shalt not be taxable if the loan amount is upto Rs. SOO,OOO.

Benchmark rale neans

1. For the lax year-commencing on the first day ot Juty.

2.

of five percent (5%) per annum: and

2OO2 (r.e..

tax yar 2003) , a rale

For the lax years ne)d following tho tax year relerred atlove, the ratg lor gach
succes-stv year taken at one percent (l%) above ihe rate applicable
,or the
tmmotatety precedtng tiax year but not exceeding 10% por annum.
For tax

onwardg it wlll be 10% p.a.

yelr 2013

Erample: 6.7
Take anorher assumption atongwith the dala ol examplg 6.6, i.e,, Mr.
Raza obtainod a toan
or its bw,uuu rrom hts mptoyer on lhe tirst day ol tax yar, which
romaingd unpaid till end
or ue yoar. Uompute taxable income and ta( liability in
each of the tollowing gitu;lrons:
The loan was interest-freo;

1.
2.
3.

The emptoyer charged interest al a rate of 80/6 p.a.; and

The employer charged inlerst @ t5% p.a.

Anawer:
1. lntereat-Free Loan
Incom aS delermined in Exafirie 6.6
Add: Taxable bengfit on account of inlgrest-frge loan
amount x Benchmark Rate (Rs. 600,000 x 106/.)
-'Loan
I axaolo tnmm6

460,400

_9!00q
520410

Sltropsis of Tares

Inaoma Tat - Salary Income

16-t22t

Tax on Rs. 400,000

Tax on Rs. 120,400 @ 5%
Total tax tor the year

2.

0
6.020

_6-020

lnterest Charged @ 8.1

Income as determined in Example 6.6
Add Taxable benelit on accounl of interesl at a lower rate:
Interest at benchma* rate (600,000 x
Less: Inlerest charged by employer (600,000 x
Taxable Income

10%)

8%)

460,400
60,000
12.000

{48.000)

472,400

Tax on Rs. 400,000

Tax on Fs. 72,400 @ 5%
Total tax for the year

3.

3.620

,3620

lnbrest Charged @ 15%

As lh employer has charged the inlerost at a rate, which is higher than the
benchma* ftte lhus nothing will be includd in the income ol Mr. Flaza. His taxable
income and the tax liability shall remain thg same as given in example 6.6, i.e.,

Taxable Incomg
Tolal tax lor tho year (as computd in example 6.6)

46tu40
3-020

lmportanl Note:
The Finance Act,2010, inserted a proviso lo sub-soclion (7) ol seciion '13 which is
roproduced below:

"Provided lhat this sub-section shall nol apply to such benefit arising to an
employs due to waiver of intergst by such employe on his accoont with lh
employsr."
'Note on Clauses" ol the Finance Aci,2010, issued by FBR at the time ol presentation of
Finance Bill, 2010 on this pfoviso describes as blow:
"This amendmant seeks to provide exmption to the benotit arising to an
employee due to the waiver ot his fight ot intrest.'
From the combined study of the proviso and its explanation given by FBR it may bo
conslrued lhal any notional benelit arising lo an employee due to waivor ol his right of
interest on his account with the employer shall be exempt kom lax.
LOAN FROM EMPLOYER USED FOR ACOU|S|TTON OF AN ASSET I13(8)l
Where an employoe has utilized a loan obl,ainod from his employer for lhe acquisition of any
asset or property lhe income of which is chargabls to tax undr any head ol income thon the
arnount of intresl on such loan (whther paid to lhe employe. or / and treatd as pequisitg) shall
be allowed as doduction against incomg lrom such asset. The arnount to bs allowed as doduclion
shall be determined as blow:

1.

Interest-Free Loan or Mark-up upto Bonchmark Rats

An amount equal to the "Benchmark Ratg" shall b allowod as deduction undor any of
the lollowing casesl

Srnopsii

olTotes

a)

Incone

16_1231

Where th6 mployer has not chargEd jnteresl

on lhe toan; or
--

b)

2.

Inco,neTar. Sabry

emptoyer has charggd the intresl but the

intorsst rafe does not
Iv|:le_tfre
exceed
the "Benchmark Bal6"
Interest at a Rate Highsrlhan Benchn.rk
Rate
by the emptoyr
Yl:l"_$.,.il"r":llnlrged
wnot amount paid by the employee

js highor than the "benchmark

rate", the

shall be allow;d as deduction.

Er6mple: 6.0

fflil#.#i"fl1';ffi"1"i?fi,1'll':s.-t'"

tu'ichased a machine amounrins ro

iri._6rjooobi,iilffi ill,iri,::l]::Lr,re,
"r
Rohan rentsd out the
r"""

119lll

b6sides his own savinss. urrrized a

machingrv aoainst an annual renl of Rs.

2OO,OOO. He sDgnt an
14,400 on fepair a;d manrenance ot the
,91.R":
machinery Dtermine rhe
hrs taxabre income on
or ,ni"nii"i i"i-Jl'ii"n

flli:llil:":""*tJ:*t 'n
1. The loan_kom employea

"".o,nr

"r

is interesl-rreo;

5 it33il3i3fi[i:t3:'itE:::l:tli:i::il??]i;*,
Answer;

Intorest
- No
Inrorest
@ A.h
200,000 2oo,ooo

Interest

OlS%

AnnualBenl
2oo,ooo
Less Allowable Deductions:
Repairs [N-11
l-- fi760 fT4.Ioo
T--Td-rnd
hlerest on toan from Emptoyer
[N.21
toratoeouclions
Taxabls income trom other sources
Notes:
t. While computrng lhe laxable incomo kom olhers sourcos
a deduclion on account ol
repars ot the machinery is allowd.

##ffi
I

'

at rhe

illliJJ$ :'i:*:,"",ffi lli llgf;l

(which
is @ 15%)

::.loured aclualbenchmark ,are (i e., 10% p.a.)

inlerest paid bv the emplovee
is alo*"o u" o"orl,lll{l """e'

WAVER OF AN A"OUNT PAYABLE BY

EMPLOYEE 113(9)l
Any amount waived ot by lhe emolover
oul of the amount payable by the employeg
Incruoeo In the income ol the smDtov;e.
shall be

oBLtcATtoN OF AN

E""ao"aa ,^o

;;

TRANSFER oF

r"E

EMPLOYER tl3(10)l
or an oblisation ot the emplovee
,i-J;il;f"i:.::ionaccounl
n lhe satary income ot the emprovee

Any paFnent by the employer lo anolher

(e g., insurance premiu;

pRopa"r, o"

"r

where an emptoyer tran"ter" tri" proo"rtu

""ou,anuood
oll-oF

carcurared as ber6w

sERVtcEs

ro E

shariudi"J-,iriii'ii""l"!i"#3?,iffi"t;$:

PLOYEE n 3(11)l

"'orov,

the amounr

xxx

Fair market value ol the propeny, elc.

Less: Paymenl made by the employee, if any
Amounl to bo included in ths salary incomE

(Xxx)
XXX

ANY OTHER PEROUISITE 11303)l

The amount calcutated as below shall be included in the income ol the employeo:

XXX

Fair market value ol the perquisite.

Less: Payment made by the mployee, il any.
Amount to bg included in the salary income

(XXX)

XXX

Example: 6.9
tax liability of
Usinq the data avatlable in gxampla 6.6, Computg the taxablg income and
Mr.R-aza, il the lollowing additional informalion is also providod'

1.
2.

The employer has waived ol a loan ol Rs.20'000 recivable fiom lvlr' Raza'

lnsurance premium of Mr. Raza amounting to Rs. 12,000 has boen paid by his
employer; and

3.

A car with fair ma*et valle ol Rs.4OO'OOO has been transferred to Mr' Raza against
Fls.300,000

Anawer
Total Income as dotermined in Exampls 6.6
Add: The value ot bone{its provided to Raza
Waiver of an amount payable by Raza
Insurance premium ol Raza paid by his employer
Fair market value ol tho

1.
2.
3.

Less: Payment made by

car
Baza

460,400
20,000
12,000

400'000
(399BAg)

100.000

Taxabls income

132.000
592^4@

Tat Liability

Tax on Rs.400,000
Tax on bafanco oi Rs. 192,400 @ 51o
Total tax for the Year

9.620
9-620

EMPLOYEE SHARE SCHEME [14]

'Employee Share Schsme' means an agrement or arangement under which a company

issugs shares to tho following persons:

1.
2.
3.

An employe of the comPany:

An gmploye ol an assocaated company; or

The truste ot a trust. Under such a silualion, the trustee may transfer lho shares to
the gmployee ol the company or an employeo of an associated company'

Wher6

company implgmenlg employeo share scheme

it

provides

bengfit

to

its

employees which may be dealt with as lollo$/s.

The value ot any right or oPtion lo acquiro shares (in its6ll) is not chargsable to lax'
The right or option may be given to an employee without receiving any amount for d or

1.
2.

Incom. Tat . Salar! Inconc

Slnopsh of Tat.s

16-t251

the company may recsive some amount in addilion to the considgration rscsivod
agaanst the shares.

3.

The amount to bg included in th salary income ot an employ shallbo computed as

oelow:

issue
shares
any
"Salaq/

Fair market valuo of shares at the datg ol

Considoration given by employe fo.
Amount paid lorth righi or oplion, if
Amounl chargeabls lo tax under

Less:

XXX
XXX

XXX

(xIX)
XXX

Er.mple: 6.10
On 14n August 2OOA, Sindh Limitsd has issued a schem undsr which every employee ol
the company as ontitled to acquire 2,000 ordinary shares ol lhs company. Considering the
following inlormalion, compute lhe amounl to b6 included in "Salary income'ol Mr. Riaz who
is one ol the omployees ol thg company:
Face valu6 of each share
Value of the right
Price lo b paid to the companyfor each share
Markel value of lhe shars

Rs. 10

Rs. 4
Bs. 20
Rs. 35

Also determine ihe valug ol shares in the hands ol Mr Riaz assumino that:
Th company has nol chargsd any amount lor granting lhe right / option to purchase
shares; or

A)
B)

An employeo has to pay Rs. 2 por share as a pric for obtaining the right to purchase
shares

Answer:

Amountto be Included In Srldry hcome

where The Right lo Purchase Sharc is Grcnted Frce ol Cost
Fair Market Value of the shares (2,000 x Rs. 35)
Less: Amount paid lor Purchas of Shares (2,000 x Rs. 20)

Al

B\

Taxable as salary income

Wherc Amount is Payable For Acquhing The Right
Fat Markot valug ot the Sha.es (2,000 x Rs. 35)
Less:
Amount paid for purchase ol Shares (2,000 x Rs.
Amount paid lor acquidng the right (2,000 x Rs.
Taxabls as Salary

income

20)
2)

70,000
(40.000)
30^000

70,000
40,000

4,000 g4pgql
26.0@

Co.t ot lho Shrrg

A)

Wherc Right is Acquircd Frce ol Cost

Amount Daid for ourchaae ol shares
Amount taxable as "Salary lncome'
Total cost of shares
Cost per share (70,000 + 2,000)

40,000
30.000

za,lqa
Rs. 35

S)noptis of Tates

8l

Income Tat - Salary

t6- t261

come

Where Some Amount is Fayade for Acquhing the Right

Amounl Daid lor ourchase ot Shares
Amount paid for acquiring th6 right
Amount taxable as "Salary Income"
Total cost ol shares
Cost per share (Rs. 70,000 + 2,000)

40,000
4,000
26.000
70^000

Rs. 35

Notea:

i)

The face value of the shares has no concern with lhe amounl lo be determind
under the Income Tax Ordinanc- lt is the fair ma*et value and the price paid

for acquiring orland sxsrcising the righvoption lo purchase shares,

ii)
4.

which
determins the amountto be included in income ol the employee.
Undg. both options, ths fair market value ol the shares shall be the total cost ol
the shares acquired by an employo.

Whe.e the shares afe issuod with a restriction on iheir transfer thgn no amount shall
be included in an employs's incomo until the earlier ol the date when he has a lree
righl to lransfer the shares or the employeE has actually disposed ot the shares. Under
such a case the amount to be included shall be determinod as below:
Fair market valu6 at time the employeo has free right to transfer or has
actually disposed ol tho shares
Lss: Considemtion given lor shares
XXX
Amount paid for right or option, il any
Amount chargeablg to tax

XXX

XXX

Exrmple:

XXX

6.11

using tho data ol example 6.10, compute th amount to bs included in salary incomo ol
Mr. Riaz if the company has imposed a restriction that the employees will not be entitlod to
dispose ol the shares wilhin one year of ihe issue ol shares, i.o. l4rn August, 2OOB.
Th6 fair ma*et valu on 14-08-2008 is Rs. 37 pr share.
Angwr:

Al
Bl

Wherc Right is given Free ol Cost

Fair market value on 14-08-2008 (2,000 x Rs. 37)
Less: Consideration paid for shares (2,000 x Rs. 20)
Taxable as Salary incomg
Wherc An Amount is Received for Ganting Right
Fair rnalket valuo ol shares on 14-08-2008 (2,000 x Rs. 37 )
Prica paid for right ( 2,000 x Bs, 2)
Consideration lor shares (2,000 x Rs. 20)
Taxable as salary incomg

Less:

74,000
40.000
34-000
74,000
4,000

40.000

44.000
30-000

EEmpl.:6.12
Assume that Mr Ftiaz, with the psrmission ol thg company, disposod ol tho shares on 23d
March 2008, when the lair market prica was Rs.32 pgr Share. Compulo lhs amount lo bo
lrcludgd In salary income of Mr. Riaz by using the data ol Examplg 6.10.

SJnogrit

olTat

Income

Tdr.

Salary

Incorn.

16_1271

Angweri

A)
B)

Wherc Right is Given Free ot Cost

Fat markt vatuo as on 23-03-2OoB
Less: Consideration tor shargs
Taxable as salary income

64,000
40.000

2)
Rs.2O)

z-000
64,000
4,OOO
+O.dOO

Thgiost of the shares lo an mploys shall be calculatd by adding the

i)
[)
tlt)
6.

Bs. 32)

x Rs. 20)

Wherc an Amount is Receivod for Crcnting Right

Fair market value ot Shares on 23-03_2OOB (2,OOO x Bs. 32)
Price paid lor right (2,000 x Rs.
Considoration for shares (2,OOO x
Taxablg as salary income

Less:
_ .
5,

(2,OOO x

(2,OOO

The considration given by an omploy for shares

Amount paid to. obtaining right or option; it any

44.000

20000
following

XXX

Amounl chargoablo to tax under ths h6ad salary (as dotmineal abov),

XXX

xxx
Wher6 an employee, instead of obtaining shares against a ,ight or option,
disDoses o, th6
righl, then an amount calcutated as betoi shal be iicl,rO"a in-nis
Consideration recoived against disposat ol thg right
L6SS| Any cost incurred in respect of lhe righl

""firvinio=,"5i---

XXX
XXX
XXX

Etample:6.13

Compule the amount to bE inclirded in salary jncom of Mr. Biaz if he instead

of exercising
his right to purchase rhe shares stts the right at ttre tair market
;luE ii.!. A"-.
assuming lhal:
Ths right is given frc of cosi: and
Tho company has rcceived Rs.2 forgranting right to purchase
one sharo.

i i"i"n*"i

'l2.

Answer:

1.
2.

Where the Right is Given Free of Cost

Consideration recsived on disposalof tho right (2,OOO x Rs. 4)
Loss: uosl lncursd for obtaining righl
Tatable salary income

8,000
Nil

8.000

lryherc an Amount is Received For Granting Right

Consideratjon rsceivgd on disposatot thg right (2,OOO x Rs. 4)

Less: (iost ncurrod for obtaining right (2,000 x Rs, 2)
raxaDte satary incomo

8,000
4.000

4-000
VALUATION OF ACCOMMODATTON
[ts(12) & Rute4]
Wher an.employer has provided an accommodalion to hig omployeo,
lh valuE of guch
accornmodation Ehall be th6 amount that woutd havo ben p8l;
fiy fire empfoyee if lhe
accommodatlon was not provlded to him. This amount sha
be inctuded in tt .'"l"iv in"or"
ol tho emDlovse.

"

S!flopsL\ of

Tarcs

Incone Tat

'

Solary

Income

16'128)

(45%) ol the minimum ol

However, lhe value shall not b laken less than lorty-live percent
is not Providd'
ifre iime icaL of tfre Oasic salary (MTS) or the basic salary it the time scale
of
accommodation
on
accorlnt
income
in
salary
to
bo
included
value
*otJ"
thg
i"-ott
"i by an employer shall be an amounl which is higher of lhe following amounts:
providsd

l.
2,

Fair markst rent of the accommodation; or

Fortyjive percent (45%) of MTS or basic salary-

Hous Rent Allowance @ 30"6

Whero as Per terms ol emPlownent

uifo*"n""

an mployee \/ould b entitled to.a house ront

admissible at the rate ol 30% had h not been provided with the

nol b loss lhan

;ccommodation, tho value taken for accommodatlon provided lo him shall
in salary tncome
includod
lo
be
th
amounl
30% ol MTS or thg basic salary Under this cas
will be higher oJ the lollowing amounts:

1.
2.

Fair market rent ol the accommodation; or

30% ot the MTS or ths basic salarr.

SELF.HIRING OF A PROPERTY
(ie,.house' llat or
Whers an employee or his spouse is lhe owner ot any such building
provloeo me same
has
the
and
mployor
gven
on rent lo the employer
aoartmont) that ia
then il will
rent-fre
accommodation'
lor
a
his
entitlement
aqainst
oiirolno rd t'"
below
"rnplov"e
is
discussed
The
same
Tax
Law
lncome
the
hav do-lold etleit u;der

'1.

Propedy Income
Receipt ol rent ot building is chargable to lax under ths head- "lncome lrom
eroperty'. nny rent receiv;d by the mployee or his spouss shall be a property
income of ihe recipient and be treatd accordingly.
Salary Income
The building is provided by ths mployer to his employee as a. renl-lree
accommodaiion. li will b a perquisite and will b included in tho 'salary income'ol
the employee as per Income Tax Rules

2.

VALUATION OF CONVEYANCE 113(3) & Rule'si

in
Whgre an employer has provided a conveyance lo an employee, the valu lo be includod
grvsn
per
Dolow:
ths tabie
salary income ol tho employeg shall be delermlned as
S. No.
1

Amount to be Included In Salaty

Only lor private use ot the 1ool" of thg cost to th employer lor acquiring the
motor vehicl or lhe fat market value of the vehiclo at
employgo.
the commencemenl ol l6ase, if it is taken on leasg.
Use of Motot vehlcle

Partly for private uso of 5% ol lh cost to ihe omployer for acquiring the motor
the employee and Padly vehicle or ths fair markl value ot th vehicle al lhe
lor otficial use.

Not.:

commencoment of l0a9e, it it is taken on lease.

For the purposss of Bule-3 through Rul-s tho

time working director ol a company. [Rule'6]

tm "omployse" inclldes

SJnopsir

I ncome Tat . Sala') Incomc

olTates

IGr29l

EXEMPTIONS

Exemptions kom tax and tax concessions or rgbatss in tax liability avaitable to a sahried
taxpayer are spcifiqd in va ous seclions ol thE Income Tax Ordinance aa woll as ill lhe
Second Schedulo. All rElvanl legal provisions are discussed in the chaptea "Exemptions
and Concssions'. For details, the reader may relerthe relovanl parl ot thal chapler.

R!.

COMPUTATION OF TAXABLE SALARY INCOME

Basic salary

XXX
XXX
XXX
XXX
XXX
XXX

Deamess allowance
Cosl ol living allowance (COLA)

Oversoas allowance [N-91

Bonus

Rs.

Commission

Lea\ encashmenl [N-1]

Owrtims
Water
Eleckicity

XXX
XXX
XXX
XXX

Telephon6

xxx

Gas

Compensatory allowance

Less: Exempt

(up to 75ol" of the gross salary)

Tax on salary paid bythe mployer (in cass ot tax.free salary)

xxx
xxx

Receipls on lermination ol employment (e.9., golden handshake payrnent) 0&21

Salary received in arrears [N.31
Se bes ot domestic ssrvanls (e.9., housekeoper, ddver, etc.)
Intsrest lree loan [N-41
Waiver ol an amount payable by employee
Obligation ol an employee paid by employer
Translgr ol property or provision ol services to employee:
Fai market value of properly or services

XXX
XXX
XXX

xxx
XXX
XXX
XXX

xxx

Less: Pa,fint made bythe employee, if any

XXX
House rent allowance
Rnt-kee accommodation-HighEr of FMR or 45olo (or 30o/.) of MTS or basic salary
Conveyance allowance

xxx

Value ot Convayance F+Sl

Leave tare assistance (LFA)

XXX

LavE encashment [N-1 1l

Medical allowance [N-l

0l

XXX

xxx
xxx

[N{l
XXX
XXX

Iicomc Tat - SabD Intome

Slnoptii otTaxes
Entrlainment

allowancg

16- r301

XXX

purposes

XXx

Lsss: Amount xpended for otficial

Employsis conlribulion !o providenl fund:
Totally exempt
Govemment providenl lund
providonl
Unrocognizd
fund
No tax
Becognlzod providnt
XXX
Less: Exempt up to lesser ol 10% ol th salary or Rs. 100,000 [N-4
eru6i on providont fund:
Totally exompt
Govrnment provideni lund
No lax teatment
Unrecognizd provident lund
.. Recognizod provident
XXX
Loss: Exempl (Higherol1/3d ot salary or amount calculatd @ 16%)
Reclpt ol accumulated balanco ol provident lund
Govornmonl providont lund
Tolally exsmpt
Rscognized provident lund
Totally
provident
Unrscognizsd
lund
Prolit in lieu ol or in addition to
Gratuily or commutation of pehsion received lrom.
Govemmnl (Fderal, Provincialor Local) .. Totally exemit
Fund approved by ClFl-- Toially exempt
Approvgd superannuaiion lund - Tolally
Gratuity scheme approved by
XXX

tund

'

treahnt

f(lnd

Exompt
Any olhor case
Less:

Bs.

XXX

XXX

XXX

etc.

Benelll undsr Employeo Sharo Option

Tobl

tlxlbl...lrry

incom.

?@,9@

XXX
XXX

XXX

XXX

Le39: Exompt (Lessor ol Rs. 75,000 or 50% ol amount

Penslon - only onE pension with higher amount is oxompl
Any oiher benlitg, allowances,

XXX

exempt
[N-81
galary

exempt
Board

xxx

received)Xxx

Schomo

XXX
XXX
XXX
XXX

III

NOTES:

N-l
N-2

In cas ol govo.nmont employees it will bo exempt lrom tax.

Theso amounts may bo included in the salary income lor tho tax yea. in whlch it lE
rccoaved or inay be treatod as a separats block and charged to lax al lhg Everago
rale tax based on lhreo immsdiately prceding tax yar8,

N.9 -whlch
Al tho option ol the taxpayor salary in arraar may b Includod in the tax yaar In
ll lg rgcoived or in lh tax year in which serv,ces wor6 renderad,

Slnopsis

ofTaxes

N-4

An amount equal to benchmark rate (i.., t0e/5 p.a.) shall be treatd aa Income.
Whre lhe interesl chargsd by the mploysr is lessEr than the bsrrhma* rat, the
differenca shall bs trsatsd as incom, Further. this bnefit wlll b taxablo It ihe ban

Income Tar . Salary Incom.

16l3ll

amount 9xceods Rs. 500,000.

N-5
N-6

The value of the convoyance to b9 included in salary incom of an emplolr shall

be determined accofding lo the principles laid down In Bules
Ths rvholo amounl expgnded by employsr on LFA i9 includod ln Salafy incomg ol an
6mployeg.

1+7

"Slhry" for

provldent purposes means

f|

actual drawo bgElc aa|8fy plu8 thg

deamaas allowanco.

N.E
N-e

Only the employr's contrlbuiion and Interest theron 8hall b3 laxable In tho yeaf ol
recgtpl,

Any allowancos and perqulsites paid by the Govgmmenl to a Paklstanl, tcndaring

sorvicg oulside Paklstan ara exempt kom tax.

N.10

lvledical allowance is oxompt up to l0% ot baslo 8rlary it no oher medlcel lsolllty

provided by lhe employor.

N-11

Encashmont of all types of leaves ls xmpt tl roceh/od by privet tctor dnplofbcs,

However, sncashmshi ot'bavg8 p.gperelory to re0rmgnf (commooly known a8
LPR) roceivod by govrnmenl employo6s 8hallbc axlmpt lro.n i8x.

'

18

lncon. Tat - Providen! Fund

Synopsi ol Tates

t7 -r321

CHAPTER-7

PROVIDENT FUND
DEFINITION

The provident fund is a Jund created by an employor tor the luturs welfare and benefits ol his
omployees. lJnder this scheme a certain percehlage of an smployee's salary is deducled
every monlh. Generally, lhe employei also contribules an equalamount. Contributjon of both
lhe employer and lho employee is handed over lo a fund known as Providont Fund. Th

amount

is invested in

securities and lhe income generatsd from

lhe investment

is

proporlionalely credited lo the employees' accolnls. Upon retirgment lotal amount standing
to the credit ol an employee is paid to him. Thglinal payment ropresents the followings

1.
2.
3.

The employee's conlribution.

The mploye/s contribution.
The interest on both contributions.

RECOGNTZED pROVtDENT FUND [2(48)]

Flecognized provident tund means a provdenl fund, which has been recognized by the
Commissioner ol Incomo Tax in accordance wilh the rules, contained in Part-l ol the Sixth
Schedule.
RECOGNITION OF THE PROVIDENT FUNO
lRule 1 ol the Sixth Schedule & Bulo 91 ol the Income Tax Rules, 2002]

'Recognition

of the provident fund' is granted or u/ilhdrawn by the Commissioner. The

application shall be submined through lhe Deputy Commissioner of lhe area:

1.
2.

In which th6 accounts of lhe fund are kept; or

lt lhe accounts are kept oulside Pakislan, in which the local head quariers of the
employer ar situated.

The application lor recognilion ol the provident tund shall bo made by the emp|oyer
mainlaining lhe tund, sought to be rocognazed.

The application shall conlain the following informalion and be accompanied by the tollowing
oocumenls:
Name and particulars ol thg gmployer togther wilh ihe nature of the business and
pincipal place ol the business.

1.

2.

Names of the employees subscribing the funds:

i)
ii)
3.

In Pakistan: and

Outside Pakistan.

The address ol the place where the accounts of lhe lund are being kept or shall be
kept.

Slnopsis

4
5
6.
7.

olTaxes

Incone

Tax

- pmviden!

Fund

I7

-1331

rf the- rund arready exisrs then a copy of the raresl

barance sheet or the rund and the
detail of lhe inveslments made.

A verirication that afl particurarg decrared and documents submitted

are lrue and
corecl.
Original and a copy ol the trusl de6o.
The Rules of ths tund.

CONDITIONS FOR APPROVAL

lRulo 2 ot parl-t ot Sixth Schedutel
ln ordg-r lo receive or relain recognition, a provident
lund shall satisly the condilions soectlrcd
in the Sixth schedule or rhe lnco;e Tax iuts,
2002. These conditi6nllr"

iii, i"r[,iiig",

All omployees sha[ be Emoloved in pakistan or by an employo.

whose princrpal
place
pakistan.
of businoss is in

The^ C_ommissionor

2.
3.

may recognize a tund manlained by an employer whose

pnnopat place of business is oulsid pakistan.
ir rr," ot"i nrru"i
_ '- iiir-_pLy"""
- ""'""
outside pakislan does not exceed 1O7o ol the totalemolou"""
The emptoyer shall also deduct evry month a definito proportion
ol the satarv
'* *', or the
employees and credit to the employees' individuaf
accoi,niln rtreiunj.-

The employer shall also contribute an amounl, which

should nol xceed the amount
contributed by an emptoyee.
The Commissioner may relax the above provtsion
in case of:
An employe whose salary does nol exceod Rs.
500/- per monthi and
Credil to the individual accounts ot the emptoyees on
account of periodical
bonuses or olher contribution of a contingont n;ture.

i)
ii)

The employe/s contribution shall ba creditd. to

the individual employ6e,s accounl
marntained in th6 provident fund at lgasi once
n a year.
5.

The employer shall nol be enlifled io rccover

any sum trom the fund.
However, he may recover tho amounl ol his contribulion
and interost lhereon undr
the tollowing situations:

i)
ii)

Termination of th servjces ol an employee

due lo misconduct.

Volunlarity .gsignation trcm service before th6

expiry of th6 term of srvice

specitied in the Fund Bgulalions.

Note:

Undet this case the emptoyer shall not be em led Io re4ovet

any sum
emptoyee has lett the emptoynEnt due to the i -heatth

reason,
6.
7.
d.

if

tha

or oner Lnavoiaaiii

The fund shall b vgstgd in at least tlvo lrustees.

The trust shall not be revoked without the consent
of all the beneliciarigs.
The accumulated balance shall b payable to
an employee on the day h ceases to
oe an emobvee_

sr{aoDsh

olTotes

Income Tot

I7 -t341

Provident Fund

EFFECTIVE DATE FOR RECOGNITION lBule 92(4)]

Unlesg otherwiss s9cilied by lhs Commissioner, an order recognizing a provident lund shall

be eltective from the last day ot ths month in which the applicalion is submitted. Upon a
roquest ol ths employsr, lhe concerned Tax Authority may specify ths last day ol any latr
month in lhe sams financlal yar as sllgctlvo dato of lhe rcognltion
APPEAL AGAINST NON.RECOGNITION OR WITHORAWAL OF RECOGNITION
lRule 12 ot tho 6th SchEdule and Bule 94 ol the Rulsl
An employsr oblectlng an ordor ol ths Commissioner may appeal to the Foderal Board ot
Rvsnue, The order may be regarding disallowing tho recognilion ot the provident fund or
withdrawing iho rcognition alrady accorded. The appeal may be lilsd by fuffilling the
following conditions:

1.
2.

The appeal shall be filed within sixty (60) days ol th orders. The Board may oxlond
the tiling period.
Tho appal shall be liled in the Form specilied in Rule 94 ol lho Incoms Tax Rulos,

2002.

3.

Filing fee of Bs.

evidence lo tho

1OO

shall be paid and a copy ol the treasury challan be attached as

paymenl.

'

'

TAXATION OF PROVIOENT FUNO

For taxation th6 provident fund is categorized into ihe lollowing lhree calegories:

1.
2.
3.

Govsrnmenl orovident fund.

Rocognized provident lund.
Unrcognized provident fund.

Ths provisions relatng lo the taxability ol lhe contributions made by the employee and the
gmployer, credit ol intrsst and rc6ipt ot accumulated balance al the time ol lermination of
service are tabulated heraundr:
Evnl

Govemment PF

Recognized PF

lJnrecognized PF

Employe6's
C,onlribution.

No Treatmenl

No Treatment

No Treatment

Exempt

Exempl lesser ol 1/10'n

(onelenlh) ol th salary
or Rs. 100,000. Any

Employer's
Contribution.

No

t.eatment

al

lhis

at

this

stag9.

excess amount is taxable,

Intre9t
Creditod during
$e year.

Exsmpt

Exempl upto highor ol

No

1/3rd of the salary or the

introsl
amounl

slage.

of

calculatgd at tho rate ol

'16% (See Note No. 2)

ireatment

Income

Paymenl

ol

Exempl

TaJr

- Proyi.Lnl FuNl
Exempt

t7,r351
Totally exmpt it th fund
formed under tho

is

Accumulaled

Providnt Fund Act,

1925. Othrwise, only

Balance.

the

employt's
contribulion and interesl
thereon is taxable in the
year of rcipl.

Noigai

1,
2,

Ther6 will bs no ta( trealment for tho employee,s contribuiion towards the providnt
fund as ho has contributed this amount out ol his salary which has akady b6en
includsd in thg taxablE income.
Rulo 3(b) of Part-l ol Sixth Schedule specifies that .intrest creditsd on the batanco
to th credit of an emptoyee in so lar as it exceeds one third ot the salarv of the
smployee or is allowod at a rale excseding such rato as may be fixed by tnE feOerat
Gove.nment in this behatf shall b6lrsated to have been recelveC by the omptoyeo in
that yoar and sia be included in thg total income lor that year and shall be ti;bb to
incomo tax'. (Notification No. SRO-1097(|)/84, dated 27-12-.t984 spocities the rate
as 16%.)
From tho paragraph quoted above it is nol clear that either the tower or ths hioher of
'll3rd ot salary or the amount catcutated
@ 16% be allowed as Exemption.
It is a gsnerally accepted rule that where a provision can be inlerurld in more than
one way, the interprolation thafiavours th taxpayor shall prevail.
The principle lhat the benofit of ambiguity shoutd be given to th taxpayr has ben
decided in various l6gal cases. Somebf the cases ardquoted bslow: '

i)
ii)

iii)
iv)

Dreamland Clnema, Muttan V CIT Lahors. lLahor High Coun]

Searle pakisian (private) Limitod V Govrnmsnt of pakistan. lsindh Hjgh

Coudl
Mohran Associates Lirnited V CtT Karachi. [Suprem6 Court of pakistan]
Rijaz (Privats) Limired V W6a[h Tax Ofiicor, Lahore llahor High Coud]

By applying the atove rul6, thg highr ol 1/3rd of salary of amount of inrrst

calculatod @ 1670 shajl b6 iaken as exempt to the taxpayer. The exceding amount,
it any, sha bo inctuded in lhe totiat income and chargedio tax in the year in which it
is crodited.

3.

F9r lhe purpose

ol

provjdent fund the term

,sahrf

inctudss only damess

allowance. Allother allowances and perquisites aro xcluded.

Sfn,'.tit

olTotat

lrrtomeTar- Provitt tufund

[? -1361

TREATXEiIT OF ACCU'IULATED BALANCE ON WITHDRAWAL OF RECOGNITION

lRul-1011
lf th Commissionor withdraws lho recognition trom a rscognized provident fund, lhe amount
of accumulated balance shall b{, t.ealed as pr followinga:

Blhnc! !t lhe

End ol the Fl.lanchl Yar Prioa to

th.

Date ol Wlthdrawal

Thal pa.l of the total accumulated balancs receivsd by an mployee which is equal
to lh balance at the nd ol the tinancial vear o.ior to the datE of withdrawal of
recognilion 6 taksn as tax free.

2.
.

ngmllnlng Accrrmulald Balanc.

Any amount roceivod by an gmployss ovsr and abovs lhg amount as in
No. I above shall be taxable in lhe sam wav as in case ol an unrecoanized
orovidonl fund.