GOVERNMENT OF PAKISTAN REVENUE DIVISION CENTRAL BOARD OF REVENUE ***** No.F.4(1)ITP/2004-SAL Islamabad, July 3, 2004

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1 GOVERNMENT OF PAKISTAN REVENUE DIVISION CENTRAL BOARD OF REVENUE ***** No.F.4(1)ITP/2004-SAL Islamabad, July 3, 2004 Circular No. 15 of 2004 ( Tax) Subject: DEDUCTION OF TAX FROM SALARY FOR THE TAX YEAR COMMENCING ON 1 ST JULY The tax liability of salaried taxpayers where salary constitutes more than 50% of the total income from all sources for the tax year 2005 shall be computed in accordance with the provisions of sections 12, 13 and 14 of Tax 0rdinance, 2001 read with rules 3 to 9 of Tax Rules, The taxpayers would be entitled to the following relief: a. exemption of basic threshold of Rs.100,000; b. reduction in tax liability as provided in clause (1) (1) of Part- III of the Second Schedule to the Tax Ordinance, 2001, as per following schedule: S No. Slab Reduction in Tax liability 1. Where income exceeds Rs.60,000 but 70% does not exceed Rs.80, Where income exceeds Rs. 80,000 but 60% does not exceed Rs.100, Where income exceeds Rs.100,000 50% but does not exceed Rs.150, Where income exceeds Rs. 150,000 40% but does not exceed Rs.200, Where income exceeds Rs.200,000 30% but does not exceed rs,300, Where income exceeds Rs.300,000 20% but does not exceed Rs.500, Where income exceeds Rs.500,000 10% but does not exceed Rs.1,000, Where income exceeds Rs.1,000,000 5% 1

2 c. further reduction of 50% of tax available to the senior citizens aged 65 years or more and earning income upto Rs.300, 000/- under clause (1A) of the said schedule shall also be applicable to salaried persons; and d. additional reduction of 50% in tax liability in case of a full time teacher or researcher employed in a non-profit education or research institution, including Govt. training or research institution, duly recognized by a Board of Education or a university or University Grants Commission under clause (1)(2) of the said schedule. 3. TAXATION OF PERQUISITES AND ALLOWANCES WHERE SALARY INCOME EXCEEDS RS.600,000. The method of valuation of perquisites and benefits under Tax Rules, 2002 with respect to salary income is the same as explained in circular No.12 of 2002 dated August 9, However, in case of salaried taxpayer whose income is Rs.600,000 or more, the house rent allowance received in cash upto 45% of the minimum of the time scale or where there is no time scale upto 45% of basic salary subject to maximum of Rs.270,000 shall not be included in his taxable income. Principles of taxation of other perquisites in case of such taxpayers remain the same. 4. INCREASE IN BASIC THRESHOLD. The basic threshold has been raised to Rs.100,000 w.e.f. tax year The tax slabs have also been revised accordingly. These slabs shall, however, be applicable for tax withholding purposes in respect of salary paid on or after first day of July The revised slabs are as under:- S.No. Taxable income Rate of tax (1) (2) (3) 1. Where taxable income does not exceed Rs.100, Where taxable income exceeds Rs.100,000 but does not exceed Rs.150, Where taxable income exceeds Rs.150,000 but does not exceed Rs.300, Where taxable income exceeds Rs.300,000 but does not exceed Rs.400,000 0% 7.5% of the amount exceeding Rs.100,000. Rs.3,750 plus 12.5% of the amount exceeding Rs.150,000. Rs.22,500 plus 20% of the amount exceeding Rs.300,000. 2

3 5. Where taxable income exceeds Rs.400,000 but does not exceed Rs.700, Where taxable income exceeds Rs.700,000. Rs.42,500 plus 25% of the amount exceeding Rs.400,000. Rs.117,500 plus 35% of the amount exceeding Rs.700, The following examples illustrate the computation of tax of salaried persons for the tax year 2005 and tax shall accordingly be deducted under section 149(1) of the Tax Ordinance, 2001 by the employers w.e.f. July 1, Example 1. Time Scale ( ) Total Exempt Taxable Basic per month Nil House rent allowance Nil Conveyance allowance Nil Spl. Addl. Allowance Nil Over time 4500 Nil 4500 Spl. Relief 15% through Nil Finance Division s OM No.1(4)Imp/ 2003 dated June 30, Ad-hoc Relief 15% through Finance Division s OM No.1(8)Imp/ 2004 dated July 1, Nil TOTAL Tax on Rs.150,000(on the amount exceeding 7.5%. Tax on remaining amount of 12.5% 3,750 17,985 Total Tax 21,735 Less: 30% reduction as per clause (1) of 6,520 Part-III of 2 nd Schedule. Tax payable 15,215 Tax deductible per month. 1,268 3

4 Example 2. Time Scale ( ) Total Exempt Taxable Basic Nil per month Qualification pay 9000 Nil 9000 Senior Post allowance 9600 Nil 9600 Entertainment allowance 5400 Nil 5400 Rent ceiling paid by the employer Rs (Restricted to 15% of salary). Conveyance provided = Nil Nil Nil by the employer (for business use only). Spl. Addl. allowance = Nil Orderly allowance = Nil Spl. Relief allowance = Nil 15% through Finance Division s OM No.1(4)Imp/ 2003 dated June 30, Ad-hoc Relief allowance = Nil 15% through Finance Division s OM No.1(8)Imp/ 2004 dated July 1, Total = Tax on Rs.150,000 (on the amount exceeding 7.5%. = 3,750 Tax on next 12.5% = 18,750 4

5 Tax on next 20% = 20,000 Tax on remaining amount of 25% = 23,472 Total Tax = 65,972 Less: 20% reduction as per clause (1) of Part-III of 2 nd Schedule. = 13,194 Tax payable = 52,778 Tax deductible per month. = 4,398 Example 3. Time Scale ( ) Total Exempt Taxable Basic 27,005 per month Nil Qualification pay 9000 Nil 9000 Entertainment allowance 5400 Nil 5400 Un-furnished accommodation provided by the employer with plot area of 1000 Sq.Yd. at Islamabad (addition restricted to 15% of the basic salary). Conveyance provided by the employer Spl. Addl. Allowance Nil Orderly allowance Total Tax on Rs.150,000 (on the amount exceeding 7.5%. 3,750 Tax on next 12.5% 18,750 Tax on next 20% 20,000 5

6 Tax on remaining amount of 3,367 25% Total Tax 45,867 Less: 20% reduction as per clause (1) of Part-III of 2 nd Schedule. 9,173 Tax payable 36,694 Tax deductible per month. 3, Following examples illustrate the determination of threshold of Rs.600,000:- Example 1. Time Scale ( ) Total Exempt Taxable Basic = Nil per month Conveyance provided by = 3600 Nil 3600 employer partly for private (as per use. Rule 6C) Spl. Addl. Allowance = Nil Sr. Post Allowance = Nil Entertainment Allowance = 9600 Nil 9600 Orderly Allowance = Nil Spl. Relief allowance = Nil 15% through Finance Division s OM No.1(4)Imp/ 2003 dated June 30, Ad-hoc Relief allowance = Nil 15% through Finance Division s OM No.1(8)Imp/ 2004 dated July 1, Total =

7 The Salary chargeable to tax determined after allowing admissible exemptions in the above example is less than Rs.600,000. Hence the taxpayer would be entitled to valuation of perquisites as per rule 3 8 for aforesaid treatment. Example 2. Time Scale ( ) Total Exempt Taxable Basic = Nil per month. Furnished accommodation provided by the employer = Nil (15% + 10% of basic salary, as per rule 5A & 5B) Conveyance provided by = 3600 Nil 3600 employer partly for private use. Entertainment Allowance = 9600 Nil 9600 Concessional loan of = Nil Rs.2.0 million 2% per annum (Bench mark rate 7% Diff: i.e. 7-2 = 5%) Total = Nil

8 Since salary chargeable to tax determined after allowing admissible exemptions exceeds Rs.599,999, valuation of perquisites and benefits shall be made as per rule 9 of the Tax Rules, 2002, which is as under:- Time Scale ( ) Total Exempt Taxable Basic = Nil per month Furnished accommodation provided by the employer = NIL with land area of 1000 Sq yards, Rule 9(1)(a). Add. 15% of Rs.270,000 under rule 9(1)(b) = conveyance provided by = employer partly for private use. Cost of vehicle 1 million (assumed) Rule 9(5)(b). Entertainment Allowance = 9600 Nil 9600 Concessional loan of = Nil Rs.2.0 million 2% per annum (Bench mark rate 7% for tax year 2005 Diff: i.e. 7-2 = 5%) Total = Nil Tax on Rs.150,000 (on the amount exceeding 7.5%. = 3,750 Tax on next 12.5% = 18,750 8

9 Tax on next 20% = 20,000 Tax on next 25% = 75,000 Tax on remaining 35% = 102,585 Total Tax = 220,085 Less: 10% reduction as per clause (1) of Part-III of 2 nd Schedule. = 22,008 Tax payable = 198,077 Tax deductible per month. = 16,506 Example 3. Taxation of income of Rs.600,000 or more where house rent allowance is paid in cash. Time Scale ( ,000) Total Exempt Taxable Basic = Nil per month. House rent allowance = , received in cash [@ 45% as per rule 9(2)] conveyance provided by = employer partly for private use. Cost of vehicle 1 million (assumed) Rule 9(5)(b). 9

10 Entertainment Allowance = 9600 Nil 9600 Concessional loan of = Nil Rs.2.0 million 2% per annum (Bench mark rate 7% for tax year 2005 Diff: i.e. 7-2 = 5%) Total = Tax on Rs.150,000 (on the amount exceeding 7.5%. = 3,750 Tax on next 12.5% = 18,750 Tax on next 20% = 20,000 Tax on next 25% = 75,000 Tax on remaining 35% = 50,260 Total Tax = 167,760 Less: 10% reduction as per clause (1) of Part-III of 2 nd Schedule. = 16,776 Tax payable = 150,984 Tax deductible per month. = 12,582 (Abdul Hamid) Secretary (IT Policy) Ph:

An Update on Taxability of Salary

An Update on Taxability of Salary Under the Income Tax Ordinance, 2001 & Income Tax Rules, 2002 (Applicable w.e.f. July 1, 2009) Email: info@tag.com.pk URL: www.tag.com.pk 173-W, Block 2, P.E.C.H.S., Karachi