guide to computation of income tax salaries 2012

7/31/2019 Guide to Computation of Income Tax Salaries 2012

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Income Tax on Salaries - 1

A GUIDE TO COMPUTATION OF INCOME TAX

ON SALARIES

UNDER THE INCOME TAX ORDINANCE 2001

FOR THE TAX YEAR 2012

TMIRCO CHARTERED ACCOUNTANTS

111-CCA, Defense Housing Authority, Lahore, PakistanPhone:+92-42-35735158, fax: [email protected]


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Introduction

If you are a businessman, entrepreneur or a director of a company and pay salaries

to one or more employees, you are required to deduct tax from the amount paid

(salary) at the time of payment.

This guide will provide you a comprehensive understanding of the provisions and

requirements of the Income Tax Ordinance 2001 governing calculation of tax liability

and ensuring maximum tax savings to your employees, while ensuring you remain

safe from prosecution and penalties.

Before we proceed it is important to understand that employees include all the

people employed by you including temporary and permanent staff and in the case of

the company it also includes its directors. It is also important to understand that a

"Salaried Tax Payer" is a person having salary income in excess of 50% of his/her

Taxable Income.

You are allowed to make adjustments to the tax withheld and allow tax credits and

admissible deductions after obtaining documentary evidence as may be necessary.

You are also required to provide a Certificate of Collection or Deduction of Income

tax from employer to your employees as an evidence of payment of tax to the

Federal Board of Revenue.


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What is salary income?

Income tax is calculated on Gross Salary and all Allowances and Perquisitesexcept those specifically exempted are to be added to salary. Valuation of these

perquisites, allowances & benefits to the employee is done with rule 4 to 7 of theincome tax rules.

House Rent Allowance in cash: the amount by which the house rent allowanceexceeds forty-five per cent of the basic salary / time scale shall be included in hisincome

Valuation of accommodation: The amount exceeding forty-five per cent of thebasic salary /time scale, subject to a maximum of fifteen percent of salary will beincluded in salary.

Where rent free furnished accommodation is provided to the employee, an amountequal to ten percent of his salary over and above the amount determined above.

Where the accommodation is hired by the employee but the rent is payable by theemployer, the amount includable in the salary shall be determined under the basisabove.

Where the accommodation is provided to the employee at a concessional rate, thedifference between the rent actually paid by him and the amount determined to be

includible in an employees salary as per the basis above shall be added to hisincome.

Where any house rent allowance is receivable by the employee in addition to thebenefits referred to above, the whole amount of the allowance shall be added in hisincome.

Conveyance allowance: Where neither any conveyance is provided by theemployer nor any conveyance owned or maintained by the employee is used by himin the performance of the duties and conveyance allowance is receivable by him in

cash, the amount of such allowance exceeding PKR 3600 or the actual expenditureincurred by the employee, which ever is less, shall be included in his income.

Where a motor vehicle is provided by the employer for the use of the employeeexclusively for personal or private purposes, there shall be included in theemployees income an amount equal to

(a) the sum actually expended by the employer on running and maintenance of themotor vehicle (including normal depreciation, where the motor vehicle is owned orthe amount of rental where the motor vehicle is hired by the employer) if the motorvehicle is used by one employee; and


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(b) the sum arrived at by dividing the amount as computed under (a) by the numberof persons entitled to use the motor vehicle if the motor vehicle is used by more thanone employee.

Where any conveyance allowance is receivable by an employee in addition to the

perquisite mentioned above, the whole amount of such allowance plus the amountdetermined in (a) shall be included in his income.

Other employment benefits

The following are also to be included to salary.

i. Any obligation to pay or repay amount owing waived by the employer.ii. Any obligation to repay to any other person is paid by employer.iii. Transfer of any property or services provided by employer to employee.

iv. The services of house keeper, driver, gardener or other domestic assistanceprovided by the employer shall be included in the total salary paid as reducedby any amount recovered by the employer.

v. Fair market value of other benefits or perquisites as reduced by the amountrecovered by the employer

Concessional Loans provided on or after 01.07.2002. to an employee. Differencebetween rate charged and benchmark rate shall be added. Benchmark [1% abovethe rate applicable in immediately preceding tax year] Provided such perquisite areexempted in the hands of employee, in the case of earning of interest is waived bythe employee on his account with the employer for example Provident Fund or anyother Fund etc..

Tax on TaxTax paid by the employer on behalf of the employee on or after 1st July,2002 is to be grossed up to compute the tax liability of the employee.

Employee share scheme Mere right or option to acquire share is not chargeable totax. When shares actually issued the difference between the market value of sharesand amount paid by employee is to be added. If shares are subject to restriction ontransfer, the difference will be added when the restriction ends. If employee disposes

of the shares despite restriction the addition will be made at the time of disposal Ifemployee disposes of the right or option to acquire the shares, gain shall be includedin the salary.

Payment on termination of employment. The employee by notice in writing toCommissioner may opt to be taxed at an average rate of tax for the preceding threeyears.

Salary paid in arrears If arrear results in taxation at higher rate, the employee bynotice in writing to the Commissioner may opt for the amount to be taxed at the ratesapplicable to the year to which the salary relates.


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Flying Allowance Any amount received as flying allowance by Pilots, FlightEngineers and Navigators of Pakistan Armed Forces, Pakistani Airlines or Civil

Aviation Authority and Junior Commissioned Officers of other ranks of PakistanArmed Forces.

Medical Allowance Reimbursement of medical charges or hospitalization chargesor both is exempted from tax if: it is provided for under the terms of employer'semployment agreement. the employee provides NTN of the hospital or clinic andmedical or hospital bills are also certified and attested by the employer.

2. Medical Allowance received in cash is exempt up to 10% of Basic Salary.

Perquisites carrying zero marginal cost

Following perquisites (or any other perquisites notified by CBR) provided byemployers for which they do not have to bear any marginal costs have been

exempted in the hands of employees:

-- Free or concessional passage provided by transporters including airlines toemployees (including members of household and dependents).-- Free or subsidized food provided by hotels and restaurants during duty hours.-- Free or subsidized education provided by educational institutions' to the children ofemployees.-- Free or subsidized medical treatment provided by a hospital or clinic to itsemployees.-- Any other perquisite or benefit for which the employer does not have to bear anymarginal cost as notified by FBR.

Payment of salary through cheques

For the purpose of making payment through crossed cheque or direct transfer of thefunds to the employees bank account the limit is PKR 15,000/- .

Senior citizens

If the taxable income of a taxpayer aged 60 or above on the first day of the tax yearis up to PKR 1,000,000/- his tax liability on such income shall be reduced by 50%

.This clause is equally applicable to a salaried or non-salaried taxpayer.

Admissible Deductions

Salaried persons are allowed to deduct the following payments from their TotalIncome;

Zakat paid to Zakat Fund is allowable deduction Zakat deducted from Profit onDebts is allowable against such Profit on debts only. If Zakat is deductible in

computing Income under any other head of Income, no deduction of Zakat from totalIncome is allowable. Note: Zakat deducted from dividend is allowable.


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Professional fee paid by non-practicing Professionals to retain their ProfessionalQualification

Donation paid to charitable institutions' approved under the Clause 61 of Part I of

2nd Schedule maximum 30% of Taxable Income is allowed to be deducted directlyfrom the total income.

Miscellaneous provisions:

Pension (not working with the same employer in any capacity) Irrespective of age ofretirement is exempt.

A person who retires and rejoins on contract basis or otherwise is taxable.

If a person received more than one pension the exemption will be applicable to thehighest of pension received.

Capital Gains Income from sale of Moradabad certificates, any listed instrument ofredeemable capital, shares of a public company, and the PTC vouchers issued byGovt. of Pakistan shall be taxed as a separate block of income no capital gain taxshall be chargeable on disposal of securities held for a period of more than one year

Provident Fund Accumulated balance due and becoming payable from ProvidentFund to which P.F. Act, 1925 applies or an approved P.F. is exempted.

Gratuity FundExempted if Received by employees of Govt. LA, Statutory body orCorp or Received from approved gratuity fund or Received under any approvedscheme exempted upto PKR. 200,000/-. Gratuity received by other employees isexempted up to 50% or PKR. 75,000/- whichever is less.

Tax credit and withholding tax adjustments

Adjustment of the following with-holding tax is allowed:

i. Tax paid on Telephone / Mobile phoneii. Tax paid on purchase of a Motor Vehicleiii. Tax deducted on Cash withdrawals from bank accounts.

Reduction in tax liability is allowedof 75 % is allowed to Full time teachers andresearchers

Tax credits

A salaries taxpayer is allowed the following tax credits:

i. Tax credit for Charitable Donations to approved Non-Profit Organizations.ii. Tax credit for Investment in Shares


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iii. Tax credit for life insurance premiumiv. Tax credit for Contributions or Premium paid to an Approved Pension Fundsv. Tax credit for Interest paid on Housing Loan for construction / acquisition of

new house

The Admissible adjustment and Tax Credit will be allowed by the employer subject toproduction of relevant evidences by the employee.

Tax rates for the tax year 2012

Income Tax Slab Rates

From Up to Tax Rate %

0 350,000 0

350,001 400,000 1.5

400,001 450,000 2.5

450,001 550,000 3.5

550,001 650,000 4.5

650,001 750,000 6

750,001 900,000 7.5

900,001 1,050,000 9

1,050,001 1,200,000 10

1,200,001 1,450,000 111,450,001 1,700,000 12.5

1,700,001 1,950,000 14

1,950,001 2,250,000 15

2,250,001 2,850,000 16

2,850,001 3,550,000 17.5

3,550,001 4,550,000 18.5

4,550,001 20

Marginal relief

Marginal Relief

Rate % Amount PKR

20 Up to 550,000

30 Up to 1,050,000

40 Up to 2,250,000

50 Up to 4,550,000

60 Up to 4,550,000

guide to computation of income tax salaries 2012

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