Lecture 30 Tax Treatment-- Gratuity & Pension

Salary and its Computation Gratuity All benefits granted by the fund shall be payable only in Pakistan. Approved Gratuity Fund Commissioner of Income Tax may accord approval to any gratuity fund. Condition for Approval Fund established under an irrevocable trust and purposes of gratuity fulfilled.

Salary and its Computation Gratuity Received under Sixth Schedule: In the case of employees covered by approved gratuity under Sixth Schedule: any gratuity received by an employee from a gratuity fund approved by the Commissioner of Income Tax in accordance with the rules contained in Part III of the Sixth Schedule, is fully exempt under clause (13)(ii), Part I of Second Schedule.

Salary and its Computation Exercise-2 on Gratuity: Mr. A, an employee of a private Company, received Rs. 1,000,000 at the time of retirement on , from a gratuity fund approved by the Commissioner of Income Tax under Sixth Schedule. Other information/data for tax year 2007 is given here under: compute taxable income and tax thereon for tax year Continued

Solution of Exercise 2: Tax payer: Mr. ATax year: 2007 Residential Status: ResidentNTN: Computation of taxable income and tax thereon: In Rs Particulars Total incomeExemptTaxable incomeincome Basic salary 360,000Nil360,000 Bonus90,000Nil90,000 Gardener48,000Nil48,000

Particulars Total incomeExemptTaxable incomeincome Total Bf498,000 Gratuity 1,000,000 1,000,000 Nil N-1 Total498,000 Tax payable = 498,000x3.5%=17430 Note-1: Gratuity fund approved by the Commissioner of Income Tax is exempt under Sixth Schedule.

Treatment if Gratuity Approved by Central Board of Revenue In Case Gratuity Approved Under clause (13)(iii), Part I, Second Schedule-CBR approval First gratuity received up to Rs. 200,000 is exempt. Amount exceeding Rs. 200,000/- will be taxable as salary.

Salary and its Computation Treatment of Gratuity not Covered under any other Clause of Part I of 2 nd Schedule: Gratuity received by an employee/family on retirement or death shall be exempt from tax to the extent of the least of the following: a. 50% of amount receivable. or b.Rs. 75,000 Proviso

Salary and its Computation Gratuity However, this exemption is not available in the following cases: i.If gratuity is received outside Pakistan. ii.Received by a director of a company who is not a regular employee of the company. iii.If received by a non resident person iv.If recipient has already received any gratuity from the same or any other employer.

Salary and its Computation Exercise-3 on Gratuity: Mr. A retired on , he received gratuity amounting Rs. 600,000. The gratuity fund was not approved by the authorities stipulated in the ordinance. Explain treatment of gratuity received by the said employee under the provisions of the Ordinance.

Salary and its Computation Solution---Exercise-3 on Gratuity As per clause (13)(iv), Part I of Second Schedule, exemption is available as follows: 50% of Rs. 600,000 received = Rs. 300,000 or Rs.75,000 whichever is less. In this case Rs.75,000 is exempt and balance amount of Rs.225,000 will be taxable.

Salary and its Computation Gratuity--- Points to Remember: Gratuity will be ignored while computing taxable income and tax liability of a deceased person. In case the gratuity is received by legal heirs, where employee dies before retirement the gratuity would be taxable in the hands of legal heirs of the deceased.

Salary and its Computation  Pension Pension is the amount received on account of past services/employment: Tax treatment of Pension oPension Totally Exempt: If received by a citizen of Pakistan under clause (8) part I of second Schedule. Provided  As stated above the recipient should be citizen of Pakistan

Pension Totally Exempt (Contd..)  The recipient must not be working for the same employer for any remuneration.  In case a person receives pension from more than one employer, the exemption shall be available to the higher of the pensions received by him.  Pension Received by Ex-Government Employees and Members of Armed Forces.  Any pension received by employees of federal govt./Provincial Govts. members of Armed Forces of Pakistan or granted under the rules to their families is exempt from tax under clause (9), part I of second Schedule

Pension Clauses (8),(9), (12), (16), (17) Part I of Second Schedule. Clause (8) Any pension received by a citizen of Pakistan from a former employer, other than where the person continues to work for the employer (or an associate of the employer). Provided that where the person receives more than one such pension, the exemption applies only to the higher of the pensions received.

Pension Clauses (8),(9), (12), (16), (17) Part I of Second Schedule. Contd… Clause (9) Any Pension– (i) Received in respect of services rendered by a member of the Armed Forces of Pakistan of Federal Government or a Provincial Government; (ii) Granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service.

Pension Clauses (8),(9), (12), (16), (17) Part I of Second Schedule. Contd… Clause (12) Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Central Board of Revenue for the purpose of the clause.

Pension Clauses (8),(9), (12), (16), (17) Part I of Second Schedule. Contd… Clause (16) Any income derived by the families and dependents of the “Shaheeds” belonging to Pakistan Armed Forces from the special family pension, dependents** pension or children’s allowance.

Pension Clauses (8),(9), (12), (16), (17) Part I of Second Schedule. Contd… Clause (17) Any income derived by the families and dependents of the “Shaheeds” belonging to the Civil Armed Forces of Pakistan to whom the provisions of the Joint Services Instruction No. 5/66 would have applied had they belonged to the Pakistan Armed Forces from any like payment made to them.

Salary and its Computation Pension -- (Contd..) Exercise: Mr. A retired on and thereafter joined a private Co. Other information/data for tax year 2007 is given here under: compute taxable income and tax thereon for tax year 2007.

Salary and its Computation--- Pension Exercise cont… 1. Salary Rs.600, Pension Rs.300,000 Solution: In this case taxable income for tax year 2007 will be Rs. 600,000. Pension from ex-employer is exempt under clause (17), Part I, Second Schedule.

Solution Contd… Taxable Income = 600,000 Tax payable = 600,000 x 6%= Rs 36,000 Salary and its Computation--- Pension

Salary and its Computation  Pension granted to injured or disabled: Pension granted to a public servant or personnel of Armed Forces on injuries or body disability and to families and dependents of ‘Shaheeds’ belonging to civil or Pakistan Armed Forces; or public servant or member of Armed Forces, who dies during service is exempt as provided in part I of Second Schedule.

Salary and its Computation Any payment in the nature of commutation of pension [Clause (12), Part I, 2 nd Schedule]---is Exempt from tax: Any payment in the nature of commutation of pension received from the government or under any pension scheme approved by the Central Board of Revenue under clause (12), Part I, Second Schedule is exempt from tax.

Salary and its Computation Exercise on Commutation of Pension: Mr. A, a government servant, retired on and received Rs.900,000 as commutation of pension. Compute taxable income for tax year Commutation of Pension is exempt under clause (12) Part I of Second Schedule.

Salary and its Computation Exercise - on lump sum payments received: Mr. A received Rs. 1,500,000 on opting for Golden Handshake in the tax year He received total income amounting Rs. 600,000 as salary during said year. Rate of tax for preceding three tax year was 20%. 15% and 10%. Compute taxable income and tax thereon for tax year 2007.

Solution Tax payer can opt to seek approval from CIT to charge lump sum payments received in a tax year at average tax rate of last three years. In this case average tax rate for last three years comes to 15%. So it is advisable to opt for charging this amount as per procedure prescribed above.  Computation of Tax: Salary at normal rate=Rs.600,000x6%= 36,000 Lump sum payments= 1,500,000x15% = 225,000 Salary and its Computation

Solution: Contd…. if lump sum payments of Rs 1,500,000 had been included in salary income, taxable income would have been 2,100,000 and that would have been charged at the rate of 25% as shown at serial number 14 for taxable income exceeding 1,300,000. Tax liability would have been Rs. 2,100,000x25% that is Rs 525,000. hence it is advisable for tax payer to opt for charging the tax at average rate of last three years. Salary and its Computation