‭Chapter 3: Salary‬

T‭ axation‬
‭From the desk of‬‭M. Khalid Petiwala‬

‭Chapter 3‬
‭SALARY‬
‭1.‬ ‭Basic Tax Structure of Salary‬

‭a)‬ ‭Salary is taxable in a tax year on receipt basis.‬

‭b)‬ ‭Receipt has been defined as:‬

o‬ ‭Actually received by the person‬

‭

o‬ A
‭ ‭ pplied‬‭at‬‭the‬‭instruction‬‭of‬‭the‬‭person‬‭or‬‭under‬‭any‬‭law‬‭e.g.‬‭tax‬‭deducted‬‭at‬
‭source and deposited into the Government treasury‬

o‬ M
‭ ‭ ade‬ ‭available‬ ‭to‬ ‭the‬ ‭person‬ ‭e.g.‬ ‭a‬ ‭cheque‬ ‭issued‬ ‭to‬ ‭an‬ ‭employee‬ ‭or‬ ‭a‬
‭benefit in kind is made available to an employee.‬

‭2.‬ D
‭ efinition of salary‬
‭Salary means any amount received by an employee from any employment including:‬

‭(a)‬ P‭ ay,‬ ‭wages,‬ ‭leave‬ ‭pay,‬ ‭leave‬ ‭encashment,‬ ‭overtime,‬ ‭bonus,‬ ‭commission,‬ ‭fee,‬
‭gratuity‬ ‭or‬ ‭work‬ ‭condition‬ ‭supplements‬ ‭such‬ ‭as‬ ‭for‬ ‭unpleasant‬ ‭or‬ ‭dangerous‬
‭working conditions.‬

‭(b)‬ ‭Perquisites.‬

‭(c)‬ A‭ llowances‬‭such‬‭as‬‭conveyance,‬‭rent,‬‭utilities,‬‭entertainment‬‭or‬‭travel‬‭allowance‬
‭excluding any allowance solely expended for office purpose.‬

‭(d)‬ ‭Profits in lieu of salary‬

‭(e)‬ ‭Pension‬

‭(f)‬ ‭Employee share scheme‬

‭1‬
 ‭Chapter 3: Salary‬

‭ .1‬ ‭Perquisites‬
2
‭Allowance‬‭is‬‭a‬‭fixed‬‭amount‬‭irrespective‬‭of‬‭actual‬‭expenditure‬‭whereas‬‭perquisite‬‭is‬‭any‬
‭item‬‭provided‬‭by‬‭the‬‭employer‬‭in‬‭kind‬‭or‬‭cash‬‭reimbursed‬‭for‬‭expenses‬‭incurred‬‭by‬‭the‬
‭employee‬ ‭other‬ ‭than‬‭for‬‭office‬‭purpose‬‭(reimbursement‬‭may‬‭be‬‭subject‬‭to‬‭a‬‭maximum‬
‭limit) including:‬

‭(a)‬ ‭Motor vehicle provided wholly or partly for private use by an employee‬

‭(b)‬ ‭Services of house keeper, driver, gardener or other domestic assistant‬

‭(c)‬ ‭Utilities: gas, water, electricity and telephone‬

‭(d)‬ ‭Any obligation of an employee to the employer is waived by the employer‬

‭(e)‬ ‭Any obligation of an employee to another person is paid by the employer‬

‭(f)‬ ‭Housing or accommodation‬

‭(g)‬ ‭ air‬‭Market‬‭Value‬‭(FMV)‬‭of‬‭any‬‭property‬‭transferred‬‭or‬‭any‬‭service‬‭provided‬
F
‭to‬‭an‬‭employee‬‭as‬‭reduced‬‭by‬‭any‬‭payment‬‭made‬‭by‬‭the‬‭employee‬‭in‬‭this‬
‭respect.‬

‭(h)‬ L‭ oan‬ ‭obtained‬ ‭by‬‭an‬‭employee‬‭from‬‭his‬‭employer‬‭which‬‭is‬‭interest‬‭free‬‭or‬

‭at‬‭a‬‭rate‬‭lower‬‭than‬‭the‬‭benchmark‬‭rate,‬‭the‬‭difference‬‭between‬‭actual‬‭rate‬
‭and the benchmark rate shall be included in his taxable salary.‬

‭Benchmark rate is 10%.‬

‭ his‬‭provision‬‭is‬‭not‬‭applicable‬‭where‬‭the‬‭amount‬‭of‬‭loan‬‭does‬‭not‬‭exceed‬
T
‭Rs.1,000,000.‬

‭2.2‬ P
‭ rofits in lieu of salary‬
‭Any amount received as profit in lieu of salary including:‬

‭(a)‬ ‭Provident fund‬

‭(b)‬ ‭ mount‬ ‭on‬ ‭termination‬ ‭of‬ ‭employment,‬ ‭compensation‬ ‭for‬ ‭loss‬ ‭of‬
A
‭employment and golden handshake payment.‬

‭2‬
 ‭ hapter 3: Salary‬
C
‭This‬ ‭amount‬ ‭may‬ ‭be‬ ‭taxable‬ ‭@‬ ‭last‬ ‭3‬ ‭years’‬ ‭average‬ ‭rate‬ ‭of‬ ‭tax‬ ‭at‬ ‭the‬
‭option of taxpayer.‬

I‭ f‬ ‭this‬ ‭option‬ ‭is‬ ‭exercised‬ ‭then‬ ‭the‬ ‭said‬ ‭amount‬ ‭shall‬ ‭become‬ ‭a‬ ‭separate‬
‭block of income on which tax shall be calculated at a rate as under:‬

L‭ ast 3 years’ tax liability‬

‭Last 3 years’ taxable income‬

‭(c)‬ ‭Consideration for an employee’s agreement to:‬

‭‬ e
● ‭ nter into an employment agreement‬
‭●‬ ‭any‬ ‭condition‬ ‭or‬ ‭restriction‬ ‭with‬ ‭reference‬ ‭to‬ ‭past,‬ ‭present‬ ‭or‬ ‭future‬
‭employment‬

‭ uestion on golden handshake scheme‬

Q
‭Mr. M resigned from his employment with A Ltd (AL) with effect from 31.12.20X4.‬

‭He received following amounts in final settlement:‬

-‭ Rs.150,000 as Leave Encashment.‬

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

‭ r.‬ ‭M‬ ‭had‬ ‭received‬ ‭a‬ ‭salary‬ ‭of‬ ‭Rs.350,000‬ ‭per‬ ‭month‬ ‭for‬ ‭a‬ ‭period‬ ‭of‬ ‭6‬ ‭months‬‭up‬‭to‬
M
‭December 20X4.‬

‭His taxable income and tax liability during the preceding 3 tax years were as under:‬

‭ ax Year‬
T ‭ 0X2‬
2 ‭20X3‬ ‭20X4‬
‭Taxable income‬ ‭Rs.‬ ‭2,700,000‬ 3
‭ ,100,000‬ 3‭ ,650,000‬
‭Tax liability‬ ‭ s.‬ ‭472,500‬ 5
R ‭ 42,500‬ 6 ‭ 50,000‬

‭ equired:‬
R
‭As‬‭a‬‭tax‬‭consultant,‬‭advise‬‭Mr.‬‭M‬‭about‬‭the‬‭amount‬‭of‬‭income‬‭tax‬‭payable‬‭by‬‭him‬‭for‬‭the‬
‭tax year 20X5, under the Income Tax Ordinance, 2001.‬

‭ .‬ ‭Employment relationship‬
3
‭An‬ ‭amount‬ ‭or‬ ‭perquisite‬ ‭shall‬ ‭be‬ ‭treated‬ ‭as‬ ‭received‬ ‭by‬ ‭an‬ ‭employee‬ ‭from‬ ‭any‬
‭employment regardless of whether the amount or perquisite is paid or provided –‬

‭3‬
 ‭ hapter 3: Salary‬
C
‭(a)‬ ‭by‬ ‭the‬ ‭employee’s‬ ‭employer,‬ ‭an‬ ‭associate‬ ‭of‬ ‭the‬ ‭employer,‬ ‭or‬ ‭by‬ ‭a‬ ‭third‬
‭party under an arrangement with the employer;‬

‭(b)‬ ‭by a past employer or a prospective employer; or‬

‭(c)‬ t‭o‬ ‭the‬ ‭employee‬ ‭or‬ ‭to‬ ‭an‬ ‭associate‬ ‭of‬ ‭the‬ ‭employee‬ ‭or‬ ‭to‬ ‭a‬ ‭third‬ ‭party‬
‭under an agreement with the employee.‬

‭4.‬ ‭Perquisites taxable at notional value‬

‭ .1‬ ‭Valuation of accommodation provided by the employer‬

4
‭The‬ ‭value‬ ‭of‬ ‭accommodation‬ ‭provided‬ ‭by‬ ‭an‬ ‭employer‬ ‭shall‬ ‭be‬ ‭taken‬ ‭as‬ ‭equal‬ ‭to‬ ‭the‬
‭amount‬ ‭that‬ ‭would‬ ‭have‬ ‭been‬ ‭paid‬ ‭by‬ ‭the‬‭employer‬‭in‬‭case‬‭such‬‭accommodation‬‭was‬
‭not provided.‬

‭ he‬ ‭value‬ ‭taken‬ ‭for‬ ‭this‬ ‭purpose‬ ‭shall‬ ‭not‬ ‭be‬ ‭less‬ ‭than‬ ‭45%‬ ‭of‬ ‭minimum‬ ‭of‬ ‭the‬ ‭time‬
T
‭scale (MTS) or the basic salary in the absence of time scale.‬

‭ ote:‬
N
‭House‬‭rent‬‭allowance‬‭is‬‭fully‬‭taxable‬‭and‬‭there‬‭is‬‭no‬‭concept‬‭of‬‭minimum‬‭45%‬‭in‬‭case‬
‭of house rent allowance.‬

‭4.2‬ ‭Valuation for conveyance‬

(‭ a)‬ ‭If‬ ‭a‬ ‭conveyance‬ ‭is‬ ‭provided‬ ‭by‬ ‭an‬ ‭employer,‬ ‭its‬ ‭value‬ ‭to‬ ‭be‬ ‭included‬ ‭in‬ ‭taxable‬
‭income of the employee shall be worked out as under:‬

‭ onveyance provided‬
C ‭ mount to be included in taxable salary‬
A
‭Partly‬‭for‬‭personal‬‭and‬‭partly‬ ‭If purchased by the employer:‬
‭for office use‬ ‭5% of the cost of vehicle to the employer‬

‭In case of leased car:‬

‭ %‬ ‭of‬ ‭FMV‬ ‭of‬ ‭vehicle‬ ‭at‬ ‭the‬ ‭commencement‬ ‭of‬
5
‭the lease.‬

‭Note:‬
‭ MV‬ ‭at‬ ‭the‬ ‭commencement‬ ‭of‬ ‭lease‬ ‭does‬ ‭not‬
F
‭include‬ ‭finance‬ ‭charge‬ ‭and‬ ‭therefore‬ ‭finance‬
‭charge‬ ‭included‬ ‭in‬ ‭the‬ ‭lease‬ ‭transaction‬ ‭is‬ ‭not‬
‭taxable for the employee.‬

‭4‬
 ‭Chapter 3: Salary‬
‭For personal use only‬ ‭10%‬ ‭of‬ ‭the‬ ‭cost‬ ‭of‬ ‭vehicle‬ ‭to‬ ‭the‬ ‭employer‬ ‭or‬
‭10%‬‭of‬‭FMV‬‭of‬‭vehicle‬‭at‬‭the‬‭commencement‬‭of‬
‭the lease.‬

(‭ b)‬‭5%‬‭or‬‭10%‬‭as‬‭above‬‭shall‬‭be‬‭reduced‬‭proportionately‬‭where‬‭the‬‭vehicle‬‭is‬‭provided‬
‭to the employee for a part of the year.‬

(‭ c)‬‭Any‬‭deduction‬‭from‬‭the‬‭salary‬‭of‬‭employee‬‭in‬‭this‬‭respect‬‭shall‬‭be‬‭reduced‬‭from‬‭the‬
‭taxable amount of this perquisite.‬

‭(d) Conveyance allowance is fully taxable.‬

‭ xample‬
E
‭Mr.‬ ‭Akmal‬‭is‬‭working‬‭as‬‭a‬‭senior‬‭engineer‬‭in‬‭a‬‭local‬‭company.‬‭The‬‭information‬‭relevant‬
‭to his employment for the tax year 20X8 is as under:‬

‭(i)‬ ‭Basic salary per month Rs.120,000.‬

‭(ii)‬ ‭Rent free accommodation provided by the company.‬

‭(iii)‬‭Car‬ ‭provided‬ ‭by‬ ‭the‬ ‭company‬ ‭on‬ ‭1.2.20X8‬ ‭for‬ ‭office‬ ‭and‬ ‭personal‬‭use.‬‭Cost‬‭of‬
‭the car is Rs.2,000,000.‬

‭(iv)‬‭Rs.3,000‬ ‭per‬ ‭month‬ ‭is‬ ‭being‬ ‭deducted‬ ‭from‬ ‭his‬ ‭salary‬ ‭on‬ ‭account‬ ‭of‬ ‭company‬
‭maintained car.‬

‭You are required to compute the taxable income of Mr. Akmal for the tax year 20X8.‬

‭Solution:‬‭Rs.2,114,096‬

‭5.‬ ‭Salary – Exemptions under Part I, 2‬‭nd‬ ‭Schedule‬

‭ .1‬ ‭Pension‬
5
‭Pension is fully exempt irrespective of age limit subject to two conditions:‬

o‬ I‭ f‬ ‭an‬ ‭employee‬ ‭works‬ ‭for‬ ‭the‬ ‭same‬ ‭employer‬ ‭or‬ ‭any‬ ‭of‬ ‭its‬ ‭associates‬ ‭after‬
‭
‭retirement then pension shall be taxable.‬

o‬ I‭ f‬ ‭a‬‭person‬‭receives‬‭more‬‭than‬‭one‬‭pension‬‭then‬‭exemption‬‭shall‬‭apply‬‭only‬‭to‬
‭
‭the higher of such pensions received.‬

‭5‬
 ‭ hapter 3: Salary‬
C
‭These‬‭two‬‭conditions‬‭are‬‭not‬‭applicable‬‭for‬‭a‬‭person‬‭over‬‭60‬‭years‬‭of‬‭age‬‭[FBR’s‬‭Circular‬
‭28 of 1991].‬

‭5.2‬ ‭Gratuity‬

‭i) Government employees‬ ‭Fully exempt‬

‭ii) Approved Gratuity Fund‬ ‭Fully exempt‬

‭iii) Approved Gratuity Scheme‬ ‭Exempt up to Rs.300,000‬

‭iv) Unapproved Gratuity‬ ‭ xempt‬ ‭up‬ ‭to‬ ‭Rs.75,000‬ ‭or‬ ‭50%‬ ‭of‬
E
‭amount receivable whichever is lower.‬

‭Exemption in case of unapproved gratuity shall not apply in the following cases:‬

‭▪‬ ‭Any gratuity which is not received in Pakistan‬

‭▪‬ ‭Any‬‭gratuity‬‭received‬‭by‬‭a‬‭director‬‭of‬‭a‬‭company‬‭who‬‭is‬‭not‬‭a‬‭regular‬‭employee‬
‭of such company‬

‭▪‬ ‭Any gratuity received by a non-resident‬

‭▪‬ ‭Any‬‭gratuity‬‭received‬‭by‬‭an‬‭employee‬‭who‬‭has‬‭already‬‭received‬‭any‬‭gratuity‬‭from‬
‭the same or any other employer.‬

‭ .3‬ ‭Certain perquisites without marginal cost to the‬‭employer‬

5
‭Value of the following perquisites received by an employee is exempt:‬

‭i.‬ ‭Free‬ ‭or‬ ‭subsidized‬ ‭food‬ ‭provided‬ ‭by‬ ‭hotels‬ ‭and‬ ‭restaurants‬ ‭to‬ ‭its‬ ‭employees‬
‭ uring duty hours;‬
d

‭ii.‬ ‭Free‬ ‭or‬ ‭subsidized‬ ‭education‬ ‭provided‬ ‭by‬ ‭an‬ ‭educational‬ ‭institution‬ ‭to‬ ‭the‬
c‭ hildren of its employees.‬

‭5.4‬ ‭Medical‬

‭6‬
 ‭Chapter 3: Salary‬
‭a)‬ M
‭ edical facility or‬
‭reimbursement of medical‬
‭expenses:‬

o‬‭In‬ ‭accordance‬ ‭with‬ F

‭ ‭ ully‬ ‭exempt‬ ‭if‬ ‭National‬ ‭Tax‬ ‭Number‬ ‭(NTN)‬ ‭of‬
‭terms of employment‬ ‭medical‬ ‭practitioner‬ ‭and‬ ‭employer’s‬ ‭attestation‬ ‭are‬
‭available.‬

o‬‭Not‬ ‭in‬ ‭accordance‬‭with‬ T

‭ ‭ axable‬
‭terms of employment‬
‭Note:‬
‭In case of an individual, CNIC shall be used as NTN.‬

‭b)‬ ‭
o‬‭Medical allowance‬ ‭Exempt up to 10% of basic salary.‬

‭ owever,‬ ‭medical‬‭allowance‬‭is‬‭fully‬‭taxable‬‭if‬‭it‬‭is‬‭in‬
H
‭addition‬ ‭to‬ ‭medical‬ ‭facility‬ ‭or‬ ‭reimbursement‬ ‭in‬
‭accordance with terms of employment.‬

‭ edical‬ ‭allowance‬ ‭+‬ ‭medical‬ ‭facility‬ ‭or‬

M
‭reimbursement‬ ‭in‬ ‭accordance‬ ‭with‬ ‭terms‬ ‭of‬
‭employment:‬
‭Medical allowance is fully taxable‬

‭ edical‬‭facility‬‭or‬‭reimbursement‬‭is‬‭exempt‬‭if‬‭NTN‬‭of‬
M
‭medical‬ ‭practitioner‬ ‭and‬ ‭employer’s‬ ‭attestation‬ ‭are‬
‭available‬

I‭ f‬ ‭NTN‬ ‭of‬ ‭medical‬ ‭practitioner‬ ‭or‬ ‭employer’s‬

‭attestation‬ ‭is‬‭not‬‭available‬‭then‬‭both‬‭the‬‭figures‬‭are‬
‭fully taxable.‬

‭6.‬ ‭Provident Fund (PF)‬

‭ .1‬ ‭Unrecognized PF‬

6
‭Employee’s‬ ‭contribution‬ ‭to‬ ‭PF‬ ‭is‬ ‭a‬ ‭part‬ ‭and‬ ‭parcel‬ ‭of‬ ‭salary‬ ‭received‬‭by‬‭the‬‭employee‬
‭and therefore not separately taxable in the name of PF.‬

‭ mployer’s‬ ‭yearly‬ ‭contribution‬ ‭and‬ ‭yearly‬ ‭interest‬ ‭are‬ ‭taxable‬ ‭when‬ ‭received‬ ‭by‬ ‭the‬
E
‭employee.‬

‭7‬
 ‭Chapter 3: Salary‬

‭ .2‬ ‭Recognized PF‬

6
‭Employee’s‬ ‭contribution‬ ‭to‬ ‭PF‬ ‭is‬ ‭a‬ ‭part‬ ‭and‬ ‭parcel‬ ‭of‬ ‭salary‬ ‭received‬‭by‬‭the‬‭employee‬
‭and therefore not separately taxable in the name of PF.‬

‭Accumulated balance is not taxable when received by the employee.‬

‭ owever,‬ ‭there‬ ‭are‬ ‭limits‬‭on‬‭Employer’s‬‭yearly‬‭contribution‬‭and‬‭yearly‬‭interest‬‭credited‬

H
‭to‬‭PF‬‭balance.‬‭If‬‭the‬‭amounts‬‭are‬‭in‬‭excess‬‭of‬‭the‬‭limits‬‭then‬‭the‬‭excess‬‭shall‬‭be‬‭taxable‬
‭on yearly basis.‬

‭ imit on employer’s yearly contribution:‬

L
‭Limit on Employer’s yearly contribution is the lower of:‬

-‭ ‬ ‭ s.150,000; or‬
R
‭-‬ ‭10% of (Basic + Dearness Allowance [DA])‬

‭ imit on yearly interest credited to PF balance:‬

L
‭Limits on Yearly interest credited to PF balance is the lower of:‬

-‭ ‬ 1‭ 6% interest rate on accumulated balance; or‬

‭-‬ ‭1/3‬‭rd‬ ‭of (Basic + DA)‬

‭ xample:‬
E
‭Basic salary Rs.960,000‬
‭Dearness allowance Rs.96,000‬
‭Bonus Rs.300,000‬
‭Employer’s contribution to the recognized PF Rs.120,000‬
‭Interest credited to PF account Rs.432,000 @ 18% of accumulated balance‬

‭ nswer:‬
A
‭Basic salary‬ ‭960,000‬

‭Dearness allowance‬ ‭96,000‬

‭Bonus‬ ‭300,000‬

‭ mployer’s contribution to RPF‬

E ‭120,000‬
‭Less: Rs.150,000 or 10% of Basic + DA‬
‭whichever is lower‬ ‭105,600‬ ‭14,400‬

‭8‬
 ‭Chapter 3: Salary‬
I‭ nterest credited @ 18%‬ ‭432,000‬
‭Less: Interest @ 16%‬ ‭384,000‬
‭or 1/3‬‭rd‬ ‭of basic + DA‬ ‭352,000‬
‭whichever is lower‬ ‭352,000‬ ‭ 0,000‬
8
‭Taxable salary‬ ‭1,450,400‬

‭7. EMPLOYEE SHARE SCHEME (also called Stock Option Scheme)‬

‭ .1‬ ‭Definition and general concept‬

7
‭A‬‭company‬‭being‬‭an‬‭employer‬‭may‬‭issue‬‭shares‬‭of‬‭the‬‭company‬‭to‬‭its‬‭employees‬‭free‬‭of‬
‭charge as an employment benefit.‬

‭ owever,‬‭a‬‭company‬‭may‬‭charge‬‭an‬‭amount‬‭(called‬‭exercise‬‭price)‬‭against‬‭the‬‭issue‬‭of‬
H
‭option‬ ‭and‬ ‭/‬ ‭or‬ ‭shares‬ ‭which‬ ‭is‬ ‭less‬ ‭than‬ ‭Fair‬ ‭Market‬ ‭Value‬ ‭(FMV)‬ ‭and‬ ‭therefore‬ ‭an‬
‭employment benefit arises.‬

‭ .2‬ ‭Right or option to acquire shares‬

7
‭Right‬‭or‬‭option‬‭to‬‭acquire‬‭shares‬‭is‬‭taxable‬‭only‬‭where‬‭the‬‭employee‬‭disposes‬‭the‬‭option‬
‭in‬‭which‬‭case‬‭gain‬‭is‬‭taxable‬‭in‬‭the‬‭year‬‭of‬‭disposal‬‭of‬‭option‬‭under‬‭the‬‭head‬‭salary‬‭as‬
‭consideration received i.e. sale proceed less cost of right or option.‬

‭ .3‬ ‭Issue of shares‬

7
‭Shares‬‭may‬‭be‬‭issued‬‭to‬‭employees‬‭without‬‭any‬‭restriction‬‭on‬‭transfer‬‭or‬‭it‬‭may‬‭be‬‭with‬
‭restriction on transfer.‬

‭Taxability of an amount under the head salary is as under:‬

I‭ ssue without any restriction‬ I‭ ssue with restriction on transfer‬

‭Taxable in the year of issue of shares‬ ‭Taxable‬ ‭in‬ ‭the‬ ‭year‬ ‭in‬ ‭which‬ ‭the‬
‭employee‬ ‭has‬ ‭a‬ ‭free‬ ‭right‬ ‭to‬ ‭transfer‬
‭the shares‬

‭ axable‬‭at‬‭FMV‬‭at‬‭the‬‭date‬‭of‬‭issue‬‭of‬
T ‭ axable‬‭at‬‭FMV‬‭at‬‭the‬‭date‬‭at‬‭which‬‭the‬
T
‭shares‬‭less‬‭any‬‭consideration‬‭given‬‭by‬ ‭employee‬ ‭has‬ ‭a‬ ‭free‬ ‭right‬ ‭to‬ ‭transfer‬
‭the‬ ‭employee‬ ‭for‬ ‭shares‬ ‭/‬ ‭option‬ ‭or‬ ‭the‬ ‭shares‬ ‭less‬ ‭any‬‭consideration‬‭given‬
‭right‬ ‭by‬ ‭the‬ ‭employee‬ ‭for‬ ‭shares‬ ‭/‬‭option‬‭or‬
‭right‬

‭9‬
 ‭ hapter 3: Salary‬
C
‭7.4‬ ‭Gain‬ ‭on‬ ‭shares‬ ‭subsequently‬ ‭disposed‬ ‭off‬ ‭falls‬‭under‬‭the‬‭head‬‭capital‬‭gain‬‭and‬
‭for‬‭this‬‭purpose‬‭cost‬‭of‬‭shares‬‭shall‬‭be‬‭the‬‭total‬‭of‬‭consideration‬‭given‬‭by‬‭the‬‭employee‬
‭for shares / option or right and the amount taxed under the head salary in this respect.‬

‭ uestion:‬
Q
‭Mr.‬ ‭A‬ ‭got‬ ‭an‬‭option‬‭of‬‭500‬‭shares‬‭under‬‭Employee‬‭Share‬‭Scheme‬‭(ESS)‬‭from‬‭a‬‭private‬
‭company.‬‭He‬‭paid‬‭Rs.3‬‭per‬‭share‬‭for‬‭the‬‭option‬‭and‬‭is‬‭required‬‭to‬‭pay‬‭Rs.7‬‭per‬‭share‬‭at‬
‭the time of exercise of option.‬

‭ e‬‭exercised‬‭option‬‭by‬‭paying‬‭Rs.3,500‬‭for‬‭500‬‭shares‬‭to‬‭the‬‭company‬‭when‬‭the‬‭FMV‬‭of‬
H
‭shares was Rs.33 per share.‬

‭Subsequently, he disposed off the shares for Rs.39 per share‬

‭Solution:‬

‭ uestion on salary income with rebates:‬

Q
‭Calculate‬‭taxable‬‭income‬‭and‬‭tax‬‭payable‬‭by‬‭Mr.‬‭Z‬‭from‬‭the‬‭following‬‭information‬‭related‬
‭to the tax year 20X8:‬

‭i.‬ ‭Basic salary Rs.1,440,000‬

‭ii.‬ ‭Dearness allowance Rs.144,000‬

‭iii.‬ ‭ ccommodation‬‭facility‬‭provided‬‭by‬‭the‬‭employer‬‭has‬‭been‬‭availed‬‭by‬‭Mr.‬‭Z‬‭(fair‬
A
‭market‬‭rent‬‭Rs.540,000).‬‭House‬‭rent‬‭allowance‬‭in‬‭cash‬‭is‬‭otherwise‬‭available‬‭@‬
‭40% of the basic salary if an employee does not avail accommodation facility.‬

‭iv.‬ ‭Bonus Rs.240,000‬

‭v.‬ ‭Conveyance allowance Rs.144,000‬

‭10‬
 ‭ hapter 3: Salary‬
C
‭vi.‬ ‭Leave‬‭fare‬‭assistance‬‭(LFA)‬‭Rs.204,000‬‭with‬‭reference‬‭to‬‭a‬‭10‬‭days‬‭leave‬‭availed‬
‭by‬ ‭Mr.‬ ‭Z.‬‭This‬‭amount‬‭represents‬‭cash‬‭allowance.‬‭He‬‭visited‬‭Islamabad‬‭with‬‭his‬
‭family.‬

‭vii.‬ ‭Lunch allowance paid by the company Rs.108,000‬

‭viii.‬ ‭Overtime‬ ‭as‬‭a‬‭special‬‭case‬‭paid‬‭to‬‭Mr.‬‭Z‬‭Rs.69,000‬‭though‬‭not‬‭payable‬‭to‬‭other‬

‭ mployees.‬
e

‭ix.‬ ‭Encashment against unavailed leave paid to Mr. Z Rs.97,500‬

‭x.‬ ‭ e‬‭received‬‭medical‬‭allowance‬‭of‬‭Rs.135,000.‬‭He‬‭also‬‭received‬‭reimbursement‬‭of‬
H
‭medical‬ ‭expenses‬ ‭of‬ ‭Rs.195,000‬ ‭as‬ ‭per‬ ‭policy‬ ‭for‬ ‭which‬‭he‬‭has‬‭proper‬‭receipts‬
‭with NTN of the medical practitioners.‬

‭xi.‬ ‭He‬ ‭received‬ ‭Rs.2,400,000‬ ‭as‬ ‭inheritance‬ ‭out‬ ‭of‬ ‭a‬ ‭civil‬ ‭court‬ ‭in‬ ‭a‬ ‭case‬ ‭filed‬ ‭10‬
y‭ ears ago.‬

‭xii.‬ ‭Tax deducted by the employer Rs.436,000‬

‭Answer to Illustration:‬
‭Mr. Z‬
‭ ax year 20X8‬
T
‭ omputation of taxable income and tax liability‬
C
‭SALARY‬
‭Basic salary‬ ‭1,440,000‬
‭Dearness allowance‬ ‭144,000‬
‭Accommodation: 45% of basic salary‬ ‭648,000‬
‭Bonus‬ ‭240,000‬
‭Conveyance allowance‬ ‭144,000‬
‭LFA: cash allowance‬ ‭204,000‬
‭Lunch allowance‬ ‭108,000‬
‭Overtime‬ ‭69,000‬
‭Leave encashment‬ ‭97,500‬
‭Medical allowance‬ ‭135,000‬

‭11‬
 ‭ hapter 3: Salary‬
C
‭Reimbursement of medical expenses‬ ‭195,000‬ ‭ xempt‬
e
‭Taxable income‬ ‭3,229,500‬

‭ ax liability (Salaried Case)‬

T
‭Tax on Rs.3,200,000‬ ‭430,000‬
‭Tax on Rs.29,500 @ Rs.30%‬ ‭8,850‬
‭Tax liability‬ ‭438,850‬
‭Less: Tax deducted by the employer‬ ‭436,000‬
‭Tax payable with return of income‬ ‭2,850‬

‭Note:‬‭Amount received through inheritance is capital‬‭receipt and therefore not taxable.‬

‭ nswer to Question on golden handshake scheme‬

A
‭Mr. M has two options as under:‬

‭1.‬ T‭ he‬ ‭amount‬ ‭of‬ ‭golden‬ ‭handshake‬ ‭is‬ ‭taxable‬ ‭in‬ ‭the‬ ‭current‬ ‭tax‬ ‭year‬ ‭at‬ ‭normal‬
‭slab rate along with other salary items of the current tax year; and‬

‭2.‬ T‭ he‬ ‭amount‬‭of‬‭golden‬‭handshake‬‭is‬‭not‬‭included‬‭in‬‭taxable‬‭income‬‭and‬‭taxable‬

‭as a separate block of income at the last 3 years’ average rate of tax.‬

‭Whichever is beneficial for him.‬

‭ onthly salary 350,000 x 6‬

M ‭2,100,000‬
‭Leave encashment‬ ‭150,000‬
‭Taxable salary excluding golden handshake‬ ‭2,250,000‬

‭12‬
 ‭Chapter 3: Salary‬
‭ olden handshake‬
G ‭ ,000,000‬
4
‭Taxable salary including golden handshake‬ ‭6,250,000‬

‭ orking of tax under option 1 (Salaried Case):‬

W
‭Income tax on Rs.6,250,000‬
‭Tax on Rs.4,100,000‬ ‭700,000‬
‭Tax on Rs.2,150,000 @ 35%‬ ‭752,500‬
‭Total tax liability‬ ‭1,452,500‬

‭ orking of tax under option 2 (Salaried Case):‬

W
‭Income tax on Rs.2,250,000‬
‭Tax on Rs.2,200,000‬ ‭180,000‬
‭Tax on Rs.50,000 @ 25%‬ ‭12,500‬

‭Tax on golden handshake‬

‭472,500 + 542,500 + 650,000‬‭x 4,000,000‬
‭2,700,000 + 3,100,000 + 3,650,000‬ ‭ 04,762‬
7
‭Total tax liability‬ ‭897,262‬

‭Result:‬‭Option 2 is beneficial for Mr. M‬

‭13‬