Compiled by: Murtaza Quaid

PRACTICE QUESTIONS – SALARY

Question 1. [Taxability on receipt basis] [CAF 6 – ICAP Study Support Material]
Mr. Bilal, a citizen of Pakistan, is working with PMX (Pvt.) Limited as their head of treasury for the last 15
years. He has provided you with the following information for the year ended June 30, 2021.

(i) His salary was Rs. 300,000 per month (inclusive of all allowances) till June 30, 2020, which was
increased to Rs. 400,000 per month effective from 1 July 2020.

(ii) Salary and allowances are deposited into each employee’s bank account on the 8th working day
of the following month.
(iii) On 31 December 2020, Bilal opted for early retirement and final settlement was made on 8
January 2021.

Required: Compute Mr. Bilal’s taxable income for the tax year 2021.

Question 2. [Rent free accommodation] [CAF 6 – ICAP Study Support Material]

Case No 1
(i) Minimum time scale 250,000-25,000-450,000
(ii) Basic salary 140,000 p.m
(iii) Bonus 1,000,000 p.a
Free accommodation whose rental value is Rs 1,000,000

Required: Determine the taxable Income?

Case No 2
(i) Basic Salary 160,000 p.m.
(ii) Accommodation [annual rental value Rs. 1,200,000]
(iii) Bonus 1,200,000 p.a.
(iv) Dearness allowance 30,000 p.m.

Required: Determine taxable income

Case No 3
Mr X, an employee of ABC Ltd. was residing in a rented house at monthly rent of Rs. 50,000/-. On 1st
July 2021 his employer agreed to pay Rs. 25,000/- for his rent and converted it into an accommodation.
All his other emoluments remained same which are as under:

 Basic salary 200,000 p.m

 Bonus 300,000 p.a
 Conveyance allowance 30,000 p.m

What will be his taxable salary?

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Question 3. [Rent free accommodation] [CAF 6 – ICAP Study Support Material]

Mr. A is granted a loan of Rs. 1,500,000 by his employer ABC Ltd on 1 July 2020. The loan is subject to
interest rate of 2% per annum. Compute the amount of perquisite relevant to the interest for the tax
year 2021.

Question 4. [Interest free or concessional loan]

Mr. Nawaz is an employee of Standard Chartered Bank and provided the following information:

(a) Basic salary per month is Rs. 300,000. Other taxable allowance are Rs. 50,000 per month.

(b) Concessional loan of Rs. 2,000,000 is granted by the bank. Out of this loan, Mr. Nawaz purchased a
taxi for Rs. 1,200,000 and was providing taxi services after office hours. His revenue from taxi
services during the year is Rs. 550,000 and petrol and other repair and maintenance expenditures
(including tax depreciation) are Rs. 230,000.

(c) The remaining amount of loan is utilized by Mr. Nawaz in acquisition of a house for his self use.
Required: Calculate taxable income of Mr. Nawaz If:

1. The loan is interest free.

2. The loan is granted at an interest rate of 3%. (Market interest rate is 15%)
3. The loan is granted at an interest rate of 12%. (Market interest rate is 15%)

Question 5. [Employee share scheme]

On 1 August 20X6, Mr. Safdar, an employee of ABC (Private) Limited, was granted an employee stock
option as follow:
1. Under the scheme, he can purchase 15,000 shares options at a price of Rs. 30 per option. The option
is convertible in 1 ordinary share of ABC (Private) Limited at an exercise price of Rs. 120.
2. The shares were required to be purchased within 3 months from the option date.
3. As per the scheme, the Mr. Safdar is bound to hold shares for at least 6 months after which it can be
sold.

4. Mr. Safdar purchased all the options and sold 5,000 options on 15th September 20X6 for Rs. 60 per
options.
5. On 20th October 20X6, he exercised remaining options when the market price of the share is Rs. 190
per shares.

6. The market price of the shares on 21st April 20X7 was Rs. 180 per share.
7. Mr. Safdar sold 8,000 shares for Rs. 220 on 5th June 20X7.
Required: Calculate the amount that would be taxable under the head salary to Mr. Safdar for the tax
year 20X7.

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Question 6. [Employee share scheme] [CAF 6 – ICAP Study Support Material]

Mr. Ahsan has been the Chief Financial Officer of XYZ Limited for the last 5 years. He was offered 5,000
shares on 01 June 2019 by XYZ Limited at a price of $ 1 per share. The market value on that date was $5
per share. The shares were transferrable on completion of one year of service, from the date of issue of
shares.

The market price of the shares as on 01 June 2019 was $8 per share. On 17 September 2020, Mr. Ahsan
sold all shares at $9. He also paid a commission of $10 to the brokerage house.
The relevant exchange rates are as follows:

01 June 2019 $1 = Rs. 100

01 June 2020 $1 = Rs. 101

17 September 2020 $1 = Rs. 102

Required: Calculate the amount to be included in the taxable income of Mr. Ahsan for tax years 2019,
2020 and 2021. Also specify the head of income under which the income would be classified.

Question 7. [Employee share scheme] [Adv. Tax (Mod. F) June 2010, Q4(b), 10 marks]
Mr. Hayat, chief engineer in Mega Limited, had received 6000 shares of the company in July 20X4, under
an employee share scheme. Mr. Hayat had the option to transfer the shares in tax year 20X6 or
thereafter. The market value of shares at the time of issue was Rs. 12 per share. In 20X6 the share
attained a market value of Rs. 20; however, Mr. Hayat sold the shares in May 20X7 when the share price
was Rs. 35 per share.

Required:

(i) With reference to above, briefly explain the relevant provisions of the Income Tax Ordinance,
2001 relating to employee share scheme. (06)
(ii) Compute the amount to be included in the taxable income of Mr. Hayat for each tax year.
(04)

Question 8. [Tax Free Salary] [CAF 6 – ICAP Study Support Material]

The employer of Mr.Usman has undertaken to bear the amount of tax on his salary income of Rs.
2,000,000. Compute tax liability of Mr.Usman for the year. For the sake of simplicity assume that he is
liable to pay tax @ 15% of his taxable income instead of rate mentioned in the first schedule.

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Question 9. [Tax on Tax]

Mr. Imran is a senior manager (accounts) of a K-electric and provided you the following information
pertaining to the tax year 20X7:
1. Basic salary of Rs. 1,2000,000

2. Conveyance allowance of Rs. 150,000 (He incurred Rs. 200,000, being actual expenses in this regard
on account of payment to "Rent a Car" company)

3. House Rent Allowance of Rs. 300,000 (He incurred Rs. 80,000 on account of having a property on
rent)

4. Medical allowance (in accordance with employment agreement) of Rs. 150,000

5. 10,000 units of electricity is also provided at the accommodation of employee at concessional rate.
The details are as follow:
a. Cost to K-electric = Rs. 8 per unit
b. Deducted from salary = Rs. 10 per unit
c. FMV (K-electric price) = Rs. 14 per unit

Tax is to be borne by the K-electric.

Required: Computation of Taxable Income and Tax Liability of Mr. Imran if:
a. Entire tax on Mr. Imran’s salary income is borne by K-electric.

b. 70% of the tax on Mr. Imran’s salary income is borne by K-electric.

c. Rs. 27,000 on account of tax on Mr. Imran’s salary income is borne by K-electric.

Question 10. [Golden Handshake Payment]

Mr. Qudus has a taxable salary income of Rs. 1,600,000 during the Tax Year 20X7. At the end of the year
he opted to retire under a scheme announced by his employer and received Rs. 7,100,000 as a golden
hand shake payment. The taxable incomes and tax liabilities of Mr. Qudus for the three immediately
preceding tax years were as below:

Year Taxable income (Rs.) Tax liability (Rs.)

1 1,350,000 7,500
2 1,800,000 30,000
3 1,550,000 17,500

Required: Compute the tax liability for the current tax year assuming that he opted that:

1. The GHS payment be taxed as a separate block; and

2. The GHS payment be taxed along with other components of salary income.

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Question 11. [Golden Handshake Payment] [CAF 6 – ICAP Study Support Material]
MFD Ltd paid a sum of Rs. 500,000 under the Golden Hand shake scheme to Mr. X in addition to the
taxable salary of Rs. 1,600,000 in the tax year 2021. The past three years assessed tax results of his
assessment are as under:

Year Taxable income (Rs.) Tax liability (Rs.)

2020 1,450,000 159,500
2019 1,200,000 120,000
2018 800,000 60,000

Mr. X is interested to know the options available to him for taxation of Golden Hand shake scheme for
the tax year 2021.

Question 12. [Provident Fund]

Mr. Aamir and Mr. Alamgir are close friends and working in two reputed companies. During the year,
the detail of their income is as under:

Particulars Mr. Aamir Mr. Alamgir

Basic Salary 900,000 2,100,000
Dearness allowance 250,000 800,000
Other allowance and perquisites 380,000 320,000
Employer contribution to recognized provident fund 90,000 210,000
Interest credited to the fund 270,000 1,250,000

Interest rate for the income credited to the Provident Fund is 16% in case of Mr. Aamir and 20% in case
of Mr. Alamgir.

Required: Compute the taxable income of the employees for the year 20X8.

Question 13. [Pension]

Mr. Asif Ali was working with 3 different employers A, B and C at the same time. He retired by way of
early retirement option on 1/7/20X6 from all the employers and thereafter worked for employer C only
on contractual basis. After retirement, he received the following pensions from the three employers.

Employer Pension (per month)

Employer – A 125,000 per month
Employer – B 135,000 per month
Employer – C 120,000 per month

Required: Calculate taxable income of Mr. Asif Ali for tax year 20X7.

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Question 14. [Gratuity Payment]

Mr. Hamid, a citizen of Pakistan was working with Zee (Pvt.) Ltd for last 15 years when he opted for early
retirement on 31 October 20X6. He was due Rs. 5 million as a gratuity under the gratuity scheme of Zee
(Pvt.) Limited. The scheme was not approved by the FBR. Due to cash constraints, the gratuity though
due to Hamid on 31 October 20X6 was not paid to Hamid. 0n 30 April 20X7 at the request of Zee (Pvt.)
Limited, Kee (Pvt.) Ltd- an associated company of Zee (Pvt.) Ltd transferred the equivalent of Rs. 5
million in US Dollars into Hamid's US dollar account in UAE in lieu of gratuity due from Zee (Pvt.) Limited.

Being a tax consultant, you are required to explain the tax implications/taxable income under the
appropriate head in respect of above situation.

Question 15. [CAF 6 Past Paper, Autumn 2010, Q3(c), 6 marks]

Every employer is required to deduct tax from salary paid to the employees.

Required: In the above context,

(i) Explain the term “Employee’s average rate of tax”.

(ii) List the adjustments which the employer should consider while withholding the tax from salary.

Question 16. [CAF 6 Past Paper, Spring 2015, Q3, 6 marks]

Munir resigned from his employment with Ali Industries Limited (AIL) with effect from 31 December
2014. He received following amounts in final settlement:

 Rs. 150,000 as Leave Encashment.

 Rs. 4,000,000 under a Golden Handshake Scheme.

Munir had received a salary of Rs. 350,000 per month for a period of six months upto December 2014.
His taxable income and tax liability during the preceding five tax years were as under:

Required: As a tax consultant, advise Munir about the amount of income tax payable by him for the tax
year 2015, under the Income Tax Ordinance, 2001.

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Question 17. [CAF 6 Past Paper, Autumn 2017, Q3(a), 2 marks]

Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss, under the
correct head of income for tax year 2017, in each of the following cases:

(a) Under an employee share scheme, 30,000 shares of Dawood Limited were issued to Qamar, on
1 August 2013 for Rs. 30 each. According to the scheme, he was not allowed to sell/transfer the
shares before completion of three years from the date of issue. The face value of each share is
Rs. 10 per share. Fair market value of each share on different dates was as follows:

1 August 2013 30 June 2016 31 July 2016

Rs. 40 Rs. 30 Rs. 50

He sold 10,000 shares on 31 May 2017 for Rs. 65 per share.

Question 18. [CAF 6 Past Paper, Spring 2018, Q2(c), 4 marks]

Under the provisions of the Income Tax Ordinance, 2001 compute taxable income or loss under correct
head of income for tax year 20X8, in each of the following cases:
(c) Hasrat has been working as Director HR in Shakir Limited (SL) for many years. During the tax
year 20X8 he received basic salary of Rs. 6 million. SL also contributed Rs. 50,000 per month
towards a recognized provident fund. An equal amount was contributed by Hasrat. Interest
income of Rs. 3,391,000 at the rate of 20% of accumulated balance of the fund was credited to
Hasrat’s account.

Question 19. [CAF 6 Past Paper, Spring 2020, Q5(b), 4 marks]

Sajid retired from Sun Chemicals Limited (SCL) as a marketing manager with effect from 31 December
2019. He received the following amounts in final settlement from SCL:

(i) Leave encashment of Rs. 600,000.

(ii) Rs. 4,000,000 from unapproved provident fund. 50% of this amount was contributed by Sajid.
(iii) Un-approved gratuity of Rs. 2,500,000.

He also acquired the vehicle, provided to him by SCL, at accounting written down value of Rs. 500,000.
The market value of the vehicle at the time of retirement was Rs. 2,000,000.

Required: Under the Income Tax Ordinance, 2001 and Rules made thereunder, discuss the tax
treatment of the above benefits received by Sajid on retirement.

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Question 20. [CAF 6 Past Paper, Spring 2021, Q1(a), 7 marks]

On 31 December 20X1, Dr. Jamal resigned from his employment with General Hospital Limited. In
January 20X2, he received following amounts in final settlement:
 Rs. 600,000 as leave encashment.

 Rs. 8,510,000 from recognised provident fund.

 Rs. 1,300,000 and Rs. 1,700,000 as salary arrears relating to tax year 20W9 and 20X0 respectively.

Dr. Jamal had received a monthly salary of Rs. 500,000 from July 20X1 to December 20X1. His taxable
income and tax liability during the preceding four tax years were as under:

Required: As a tax consultant, advise Dr. Jamal about the amount of income tax payable by him for the
tax year 20X2, under the Income Tax Ordinance, 2001.

Question 21. [CAF 6 Past Paper, Spring 2021, Q4(b)(i), 2 marks]

Briefly explain the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder relating to:

(i) Interest free loan provided by an employer to its employee for marriage of his/her daughter.

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