1. LECTURE 23 Salary Income

2. SALARY AND ITS COMPUTATION Significant points regarding Salary:  Reimbursement of expenditure by the employer. Taxable  Profits in lieu of salary received as:  Consideration for a person’s agreement to enter into an employment relationship  On termination of employment/ Golden handshake payments. Taxable

3. SALARY AND ITS COMPUTATION Provident fund payments, only Employers contribution. Taxable

4. SALARY AND ITS COMPUTATION Motor vehicle As prescribed in IT rules 2002. Services of house keeper, driver, gardener, other domestic servant. Amount provided by employer added back to employee’s salary.

5. SALARY AND ITS COMPUTATION FMV of utilities as reduced by any amount paid by employee. Loan below benchmark rate for tax year 2007 is 9% PA. Add back In case, conessional loan as above used for construction of house or purchase of house. No Add back Obligation of employee waived off by employer. Add back

6. SALARY AND ITS COMPUTATION Any property transferred to employee. FMV of property to be added back Accommodation or housing provided. As prescribed in IT rules 2002

7. SALARY AND ITS COMPUTATION According to Sub Secion14 of Section 13: Bench Mark Rate means rate of 5%PA for tax year 2003 and increase by 1% for succeeding tax years. Services include any facility provided. Utilities include electricity, gas, water, and telephone.

8. SALARY AND ITS COMPUTATION  Employee share schemes (sec 14) Treatment of value of a right or option vested in an employee. Formula: A - B

9. Significant Points regarding Salary (Contd..)  When Commissioner can tax ”salary” on due basis: In certain cases, the Commissioner has been given powers to tax salary on due basis. SALARY AND ITS COMPUTATION

10. Section 110 reads as under: “Salary paid by private companies:  where, in any tax year, salary is paid by a private company to an employee of the company for services rendered by the employee in an earlier tax year and the salary has not been included in the employee’s salary chargeable to tax in that earlier year, the Commissioner may, if there are reasonable grounds to believe that payment of the salary was deferred, include the amount in the employee’s income under the head “Salary” in the earlier year.

11. Leave Salary : This is taxable whenever received or right to receive is exercised by the employee. Leave encashment on retirement falls in this category. The only exemption available is for the members of the Armed Forces of Pakistan, employees of the Federal Government and Provincial Governments. Salary and its Computation

12. Under clause (19), Part I of Second Schedule to the Ordinance any sum representing encashment of leave preparatory to retirement in their case is exempt. Salary in lieu of notice : Taxable Fee and Commission: Taxable Bonus: Taxable Remuneration for extra duties: Taxable Voluntary payments to employees: Taxable

13. Salary and its Computation  Flying Allowance Any amount received as flying allowance by: a) pilots, flight engineers and navigators of Pakistan Armed forces, Pakistani Airline or Civil Aviation Authority; and b) Junior commissioned officers of Pakistan Armed Forces. Shall be taxed @ 2.5% as a separate block of income

14. Salary and its Computation  Deductible Allowance:  The person shall be entitled to a deductible allowance for any Zakat paid by the person in a tax year according to provisions of sec:60,  for the amount of any Workers’ Welfare Fund paid by the person in a tax year under Sec 60-A,  for the amount of any Workers’ Participation Fund paid by the person in a tax year under section 60-B.

15. Salary and its Computation  Tax credits Charitable Donations (Sec 61)  Tax credit allowed in respect of any sum paid or any property given by the person in a tax year as a donation to- a) Any board of education or any university of Pakistan established by, or under, Federal or a Provincial law; b) Any educational institution, hospital or relief fund established or run in Pakistan by federal government or a provincial government or a local authority or; c) any non- profit organization

16. Salary and its Computation Tax credits on charitable donations: cont…  the amount of tax credit shall be computed according to following formula: (A/B) x C Here: A is the amount of tax assessed to the person for the tax year before allowance of any tax credit under this part; B is the person’s taxable income for the tax year; and

17. Salary and its Computation Tax credits on charitable donations: cont… Cis the lesser of a) The total amount of the person’s donations referred o in sub- section (1) in the year, including the fair market value of any property given; or b) Where the person is- i) an individual or association of person, thirty percent of the taxable income of the person for the year; or ii) a company, fifteen percent of the taxable income of the person for the year.

18. Salary and its Computation Tax credits on charitable donations: cont…  Fair market value of any property given as donation shall be determined at the time it is given.  A cash amount paid by a person as donation shall be taken into account only if it was paid by a crossed cheque drawn on a bank.