Understanding Income from Salary and Employee Benefits

INCOME FROM SALARY INCOME FROM SALARY By: M Luqman Rafiq (Principal: Escribir College) (Consultant at Rafiq & Co.) By: M Luqman Rafiq (Principal: Escribir College) (Consultant at Rafiq & Co.)

Salary means any amount RECEIVED an EMPLOYEE whether of a revenue or capital nature: RECEIVED by EMPLOYMENT, EMPLOYEE from any EMPLOYMENT

EMPLOYEE EMPLOYEE means any individual engaged in employment; EMPLOYER an employee; EMPLOYER means any person who engages and remunerates EMPLOYMENT (a) a directorship or any other office involved in the management of a company; EMPLOYMENT includes includes (b) a position entitling the holder to a fixed or ascertainable remuneration; or (c)the holding or acting in any public office;

69. Receipt treated as having received an amount, benefit, or perquisite if it is (a) actually received (b) applied on behalf of the person instruction of the person or under any law; or (c) made available 69. Receipt of income of income. . A person shall be (a) actually (b) applied received by the person; on behalf of the person, at the made available to the person.

110: Salary Commissioner might include Salary of an earlier tax year in the calculation of Income for that Earlier Year if in his opinion Salary was Deferred 12(7) Salary Received in Arrears: Option for taxpayer to elect salary to be taxed as if it was received in a relevant tax year 110: Salary paid by private companies. paid by private companies. 12(7) Salary Received in Arrears:

1) Remuneration 2) Allowance 3) Perquisites 4) Amounts in addition to Salary 5) Post Employment Benefits 6) Tax 7) Employee Share Scheme 8) Reimbursement of Personal Expenditure Remuneration Allowances Perquisites Amounts in addition to Salary Post Employment Benefits Tax paid on Salary (Tax on Tax Employee Share Scheme Reimbursement of Personal Expenditure 1) 2) 3) 4) 5) 6) 7) 8) paid on Salary (Tax on Tax) )

REMUNERATION REMUNERATION

1) Pay 2) Wages 3) Other remuneration including 1) Leave pay, 2) Payment in lieu of leave, 3) Overtime payment, 4) Bonus, 5) Commission, 6) Fees, 7) Gratuity or 8) Work condition supplements

ALLOWANCES ALLOWANCES

Cost of living, Subsistence, Rent, Utilities Education Entertainment Travel allowance 1) 2) 3) 4) 5) 6) 7) SHALL NOT INCLUDE ANY ALLOWANCE SOLELY EXPENDED IN THE PERFORMANCE OF THE EMPLOYEE S DUTIES OF EMPLOYMENT; SHALL NOT INCLUDE ANY ALLOWANCE SOLELY EXPENDED IN THE PERFORMANCE OF THE EMPLOYEE S DUTIES OF EMPLOYMENT;

PERQUISITES PERQUISITES

General Rule= Employee 1) Motor Vehicle 2) Interest Free Loan 3) Rent Free Accommodation / Housing 4) Amount Waived by Employer 5) Obligations of Employee Settled 6) Property Transferred 7) Domestic Servant 8) Utilities 9) Any other Perquisites General Rule= FMV of Benefit LESS LESS Paid by

1) Motor Vehicle Motor Vehicle 1) (i) Partly for personal and partly for official use 5% of: (a)the cost to the employer for acquiring the motor vehicle; or, (b)the fair market value of the motor vehicle at the commencement of the lease, if the motor vehicle is taken on lease by the employer; 10% of: (a)the cost to the employer for acquiring the motor vehicle; or, (b)the fair market value of the motor vehicle at the commencement of the lease, if the motor vehicle is taken on lease by the employer; and (ii) For personal use only

2) Interest Free Loan Applicable on a loan made, on or after the 1 1st st day of July, 2002 employer to an employee; a) No Profit is payable; or b) Profit on Loan is less than Benchmark Rate (10%); 2) Interest Free Loan day of July, 2002, by an Amount to be included in Salary is 1) Profit on loan computed at the benchmark rate, where no profit on loan is payable by the employee, or 2) Difference B/w Profit on Loan Paid and Profit Computed Using Benchmark Rate Provided further that this sub Provided further that this sub- -section shall not apply to loans not Exceeding five hundred thousand rupees. section shall not apply to loans not Exceeding five hundred thousand rupees.

3 3) Rent Free Accommodation: Exemption up to lower of : Fair Market Rent 45 % of MTS or Basic Amount to be included in Salary Basic Salary shall be applicable only when there is no MTS ) Rent Free Accommodation: 400,000 325,000 75,000/ Amount to be included in Salary 75,000/- -

AMOUNTS IN ADDITION TO SALARY AMOUNTS IN ADDITION TO SALARY

1) Joining Allowance 2) Modification to Employment Conditions 3) Termination Payments 4) Withdrawal from Provident Funds (excluding Employees proportion) 5) Payments for Restrictive Covenants 3) Termination Payments

An employee may by notice in writing to the Commissioner, elect for the amount to be taxed at the rate computed in accordance with the following formula, namely: where A/B A/B% % A A is the total tax paid or payable by the employee on the employee s total taxable income for the three preceding tax years; and B B three preceding tax years is the employee s total taxable income for the three preceding tax years.

POST POST EMPLOYMENT BENEFITS EMPLOYMENT BENEFITS

1) Pension 2) Gratuity 3) Provident Funds 4) Annuities

Pension Pension received by the citizen of Pakistan be exempt from tax except where the person continues to work for the same employer or an associate of the employer. Pension 1) 1) citizen of Pakistan from the former employer shall Where a person receives more than one pension, the exemption shall apply to higher of such pensions. Pension received in respect of services rendered by a member of Armed Forces of Pakistan or Federal Government or a Provincial Government is exempt from tax. For a person over 60 years of age, all such pensions are exempt irrespective of the above mentioned conditions (Circular 28 of 1991) For a person over 60 years of age, all such pensions are exempt irrespective of the above mentioned conditions (Circular 28 of 1991)

2) Gratuity Gratuity Type Government employees Gratuity Fund approved by the Commissioner Inland Revenue Gratuity Scheme approved by the Board Unapproved gratuity scheme/fund 2) Gratuity Treatment Fully exempt Fully exempt Exempt up to Rs. 300,000 Exempt up to 75,000 or 50% of the Exemption in respect of unapproved gratuity shall not apply in the following cases: (i) Any payment not received in Pakistan (ii) Any payment received by a director of a company who is not a regular employee of such company (iii) Any payment received by a non-resident (iv) Any gratuity received by an employee who has already received any gratuity from the same or other employer.

TAX ON TAX TAX ON TAX

Where an employer agrees to pay the tax chargeable on an employee s salary, the amount of the employee s income chargeable under the head Salary shall be grossed up by the amount of tax payable by the employer. amount of the employee s income grossed up by the amount of tax payable

EMPLOYEE SHARE SCHEME EMPLOYEE SHARE SCHEME

a) Option / Right Shall not be Chargeable to Tax b) Shares: Unrestricted Include amount in the year the option is exercised and Shares Acquired:: FMV of Shares on date of Issue LESS Unrestricted LESS Consideration for Shares & Share options Restricted Amount shall be chargeable to tax upon the earlier of : a) the time the employee has a free right to transfer the shares; or b) the time the employee disposes of the shares; and Restricted In the above case, use FMV of the earlier of date when Restrict to Transfer Expires / Disposal Date Cost of Share: Consideration given by Employee for Share: Consideration given by Employee for Right / Option XXXX XXXX

SPECIFIC EXEMPTIONS SPECIFIC EXEMPTIONS

Benefits by virtue of Employment [(53A) his employment, namely:- Benefits by virtue of Employment (53A) The following perquisites received by an employee by virtue of (ii) free or subsidized food provided by hotels and restaurants to its employees during duty hours; (iii) free or subsidized education provided by an educational institution to the children of its employees; (iv) free or subsidized medical treatment provided by a hospital or a clinic to its employees; and (v) any other perquisite or benefit for which the employer does not have to bear any marginal cost, as notified by the[Board].]

Medical Allowance (139) of medical treatment or hospitalization or both by an employer or the reimbursement received by the employee of the medical charges or hospital charges or both paid by him, where such provision or reimbursement is in accordance with the terms of employment: Medical Allowance (139) (a) The benefit represented by free provision to the employee Provided that National Tax Number of the hospital or clinic, as the case may be, is given and the employer also certifies and attests the medical or hospital bills to which this clause applies; any medical allowance received by an employee not exceeding ten per cent of the basic salary of the employee if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided for in the terms of employment; or

SEAFARER Any income chargeable under the head Salary received by SEAFARER (a) a Pakistani seafarer, working on Pakistan flag vessels for one hundred and eighty three days or more during a tax year; or (b) a Pakistani seafarer working on a foreign vessel provided that such income is remitted to Pakistan, not later than two months of the relevant [tax year], through normal banking channels. 102. source salary received by a resident individual shall be exempt from tax if the individual has paid foreign income tax in respect of the salary. 102. Foreign source salary of resident individuals. Foreign source salary of resident individuals. (1) Any foreign-

Q/A Session