Lecture 24 Salary Income Tax credits and Exemptions

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

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.

Salary and its Computation 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

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

 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 2.5% as a separate block of income.

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.

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.

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

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.

Agenda :  Tax Credit on Investment in shares (sec 62)  Tax Credit on Profit on debt ( sec 64)  Income tax Rules regarding Valuation of Perquisites.  Exemptions under Salary Income. Salary and its Computation

Tax credits: Investment in shares Sec 62:  A person (other then a company) shall be entitled to a tax credit for a tax year in respect of the cost of acquiring in the year new shares offer by a public company listed on a stock exchange in Pakistan where the person is the original allottee of the shares or the shares are acquired from Privatization Commission of Pakistan.  Formula : It is same that is i.e.  (A/B) x C A and B are the same as explained in Sec 61.

Salary and its Computation  Investment in shares Sec 62:cont…. Here C is lesser of: a) The total cost of acquiring the shares referred to in sub- section (1) in the year; b) Ten percent of the person’s (taxable ) income for the year; or c) (two hundred) thousand rupees.  If the person how has availed tax credit in respect of purchase of share and has made a disposal of the said shares within 12 months of the date of acquisition. The amount of tax payable by the person for the tax year in which the share were disposed of shall be increased by the amount of credit allowed.

Salary and its Computation Tax credits:  Profit on debt Sec 64:  A person shall be entitled to a tax credit for a tax year in respect of any profit or share in rent paid by a person in the year on a loan by a schedule bank or non-banking finance institution or advanced by government or the local authority or a statutory body or a public company listed on a registered stock exchange of Pakistan, where the person utilizes the loan for the construction of a new house or the acquisition of a house.

Salary and its Computation Tax credits:  Profit on debt- Sec 64  Formula: (A/B) x C A and B are the same as explained in Sec 61 C is the lesser of : a) The total profit referred to in sub-section(1) paid by the person during the year; b) (forty) percent of the person’s (taxable) income for the year; or c) [five hundred] thousand rupees.

Salary and Its Computation Income Tax Rules, 2002 regarding Salary: Effective from ( Tax Year 2007) Rule 3: valuation of perquisites, allowances and benefits: the benefits provided by the employer to the employee shall be included in the said income in accordance with rules 4 to 7. Rule 4: valuation of accommodation: this shall be taken equal to the amount that would have been paid by the employer in case such an accommodation was not provided.

Income Tax Rules, 2002 regarding Salary  Rule 4 contd..  Proviso provided that the value taken for this purpose shall, in any case, not be less than 45 percent of minimum of time scale or the basic salary where there is no time scale. Salary and Its Computation

Salary and Its Computation Income Tax Rules, 2002 regarding Salary Rule 5: valuation of conveyance (i) partly for personal and partly official use. 5% of: a) the cost to the employer for acquiring the vehicle or, b) the fair market value of vehicle at commencement of the lease, if taken on lease. Conveyance provided for personal use only. 10% of: a) the cost to the employer for acquiring the vehicle or b) the fair market value of vehicle at commencement of the lease, if taken on lease.

Salary and Its Computation Income Tax Rules, 2002 regarding Salary: Rule 6: for the purpose of this part, “employee” includes a director of a company. Rule 7: these rules shall be applicable for the salary income received after thirtieth of June, 2006

Salary and Its Computation Exemptions under the head ‘Salary’  TA/DA exempt under clause 39 of part 1 of second schedule.  Free furnished accommodation provided to the president of Pakistan, provincial governors, and Chiefs of Staff of Pakistan Armed Forces are exempt under clause 51.  Free conveyance and entertainment allowances are fully exempt to the following:  Provincial Governors, the Chiefs of Staff of Pakistan Armed Forces, and Corps Commanders of Pakistan Armed Forces under clause 52.

Salary and Its Computation Exemptions:  Amount received from workers participation fund is exempt under clause 26.  Local traveling allowance to journalists is exempt under clause 40 of part-1 of second schedule.  Tax rebate for teachers and the researchers. Full time teacher or researcher employed in non profit education or research institution including government training and research institution duly recognized by HEC, a Board of education or a University recognized by HEC allowed tax rebate of 75%.