Introduction
In Pakistan, income from salary is one of the most common sources of taxable income and forms a significant portion of the country’s direct tax base. Whether you’re a public servant, private employee, corporate executive, or contractual worker, understanding how salary income is taxed, what exemptions and deductions are available, and how to remain compliant with FBR rules is essential to avoid penalties and optimize your tax liabilities.
This comprehensive 2025 guide explains everything salaried individuals and employers need to know about salary income taxation in Pakistan, including legal definitions, components of salary, tax slabs, employer responsibilities, exemptions, and filing requirements.
1. What is Salary Income?
As per Section 12 of the Income Tax Ordinance, 2001, “salary” includes any remuneration received by an employee in exchange for services rendered under an employment contract.
Salary Includes:
✅ Basic pay
✅ House rent allowance (HRA)
✅ Conveyance and travel allowance
✅ Cost of living adjustment
✅ Bonus and incentives
✅ Gratuity and pension
✅ Medical allowance and reimbursements
✅ Employer contributions to provident or pension funds
✅ Any other benefit, monetary or non-monetary, received by virtue of employment
2. Legal Framework Governing Salary Taxation
| Law/Regulation | Description |
|---|---|
| Income Tax Ordinance, 2001 | Sections 12–16 govern salary income taxation |
| FBR Income Tax Rules | Define employer obligations and exemptions |
| Finance Act (2024-25) | Updates slabs and exemption thresholds |
3. Tax Year and Residential Status
Tax Year:
In Pakistan, the tax year runs from July 1 to June 30 (e.g., Tax Year 2025 = July 1, 2024 to June 30, 2025).
Resident Individual:
An individual who resides in Pakistan for 183 days or more during a tax year is considered a resident and is taxed on global income.
4. Components of Salary and Their Tax Treatment
| Component | Taxable? | Notes |
|---|---|---|
| Basic Salary | ✅ Yes | Fully taxable |
| House Rent Allowance | ✅ Yes | Exempt up to 45% of basic salary (if not provided residence) |
| Conveyance Allowance | ✅ Yes | Exempt up to Rs. 2,000/month for employees not provided a car |
| Medical Reimbursement | ✅ Yes | Exempt up to 10% of basic salary (if supported by evidence) |
| Bonus | ✅ Yes | Fully taxable |
| Gratuity | ❌/✅ | Exempt up to limits if received from approved fund |
| Provident Fund Contribution | ❌/✅ | Employer’s contribution exempt up to 10% of salary |
| Pension | ❌/✅ | Exempt up to Rs. 75,000/month (as of latest Finance Act) |
| Utility Allowance | ✅ Yes | Fully taxable |
| Leave Encashment | ✅ Yes | Exempt up to certain limits for government employees |
5. Salary Tax Rates for Individuals (2024–2025)
Applicable for salaried individuals under the latest Finance Act, 2024–25:
| Annual Taxable Salary (Rs.) | Applicable Tax Rate |
|---|---|
| Up to 600,000 | 0% |
| 600,001 – 1,200,000 | 2.5% of amount exceeding Rs. 600,000 |
| 1,200,001 – 2,400,000 | Rs. 15,000 + 12.5% of amount exceeding Rs. 1.2M |
| 2,400,001 – 3,600,000 | Rs. 165,000 + 20% of amount exceeding Rs. 2.4M |
| 3,600,001 – 6,000,000 | Rs. 405,000 + 25% of amount exceeding Rs. 3.6M |
| Above 6,000,000 | Rs. 1,005,000 + 35% of amount exceeding Rs. 6M |
Note: The first Rs. 600,000 of annual salary remains exempt for all individuals.
6. Tax Deducted at Source (TDS) by Employer
As per Section 149 of the Income Tax Ordinance, employers are required to:
✅ Deduct tax at source every month based on projected annual salary
✅ Deposit tax via CPR (Computerized Payment Receipt) through IRIS portal
✅ Issue salary certificate (Form 16) to employee by end of tax year
✅ File monthly withholding tax statement on FBR portal
✅ File annual reconciliation of salary withholding by September 30
Failure to comply may result in penalties and disallowance of expense in the employer’s tax return.
7. How to Calculate Tax on Salary: Step-by-Step
Example:
Let’s assume a salaried employee earns Rs. 2,000,000 annually with Rs. 200,000 HRA.
-
Basic Salary: Rs. 1,800,000
-
HRA: Rs. 200,000
-
If no accommodation provided, exempt up to 45% of basic = Rs. 810,000
-
Rs. 200,000 < Rs. 810,000 ⇒ Entire HRA exempt
-
-
Taxable Salary: Rs. 1,800,000
-
Apply slab:
-
Rs. 15,000 + 12.5% of (1.8M – 1.2M) = Rs. 15,000 + Rs. 75,000 = Rs. 90,000
-
-
Monthly Tax Deduction = Rs. 90,000 / 12 = Rs. 7,500
8. Tax Credits and Allowances for Salaried Individuals
| Section | Credit Type | Limit |
|---|---|---|
| 62 | Investment in listed shares | 15% of taxable income or Rs. 1.5M (whichever is lower) |
| 63 | Pension fund contributions | 20% of taxable income |
| 61 | Charitable donations to approved institutions | Up to 30% of taxable income |
| 64A | Employment creation (for businesses) | Not applicable to employees directly |
9. Benefits for Senior Citizens and Disabled Persons
-
Senior Citizens (60+ years): 50% reduction in tax if taxable income < Rs. 1,000,000
-
Disabled persons: Tax rebate equal to the amount of disability allowance received
-
Must be certified by NADRA or provincial social welfare department
10. Exemptions for Government Employees
| Component | Exemption Status |
|---|---|
| Pension | Exempt up to Rs. 75,000/month (current threshold) |
| Gratuity | Fully exempt if from approved government fund |
| Commuter allowance | Exempt up to Rs. 60,000/year |
| Leave encashment | Exempt up to Rs. 300,000 at retirement |
11. Filing Income Tax Return as a Salaried Person
Steps:
-
Register with FBR on IRIS portal
-
Ensure you are on the Active Taxpayer List (ATL)
-
Collect your salary certificate (Form 16) from employer
-
Declare income under “Salary” head
-
Declare any additional income (rent, freelance, etc.)
-
Submit wealth statement (if required)
-
Claim tax credits/deductions
-
Submit return before September 30
12. Penalties for Non-Compliance
| Offense | Penalty |
|---|---|
| Non-filing of return | Rs. 1,000/month (minimum Rs. 10,000) |
| Incorrect declaration | Penalty + audit + additional tax |
| Employer not deducting tax | Up to 10% of tax not deducted |
| Employer not issuing Form 16 | May lead to disallowance of salary expense |
13. Salary Income and Zakat, WPPF, WWF
-
Zakat: Not deducted from salary by default
-
WWF (Workers Welfare Fund): Applicable if income exceeds Rs. 500,000
-
WPPF (Workers Profit Participation Fund): Employer’s obligation; does not reduce individual liability
14. Digital Salary and Payroll Compliance
-
Salaries must be paid through bank transfer to qualify for deduction
-
Employers use ERP/payroll software to manage tax, EOBI, PESSI, and challans
-
Salaried individuals should download CPRs from IRIS to verify withholding
15. Special Cases
A. Dual Employment
Taxable under aggregate income—tax computed on total salary.
B. Freelance + Salary
Declare freelance income under “Income from Other Sources” along with salary income.
C. Overseas Salary
Taxed only if you are a resident in Pakistan; foreign tax credit may be claimed if tax paid abroad.
16. How Sterling.pk Can Help
At Sterling.pk, we help salaried individuals:
✅ Calculate accurate tax liability on salary
✅ Claim eligible exemptions and tax credits
✅ File income tax returns and wealth statements
✅ Register and stay on Active Taxpayer List (ATL)
✅ Assist employers with payroll and Form 16 issuance
✅ Provide tax advisory for dual-income and overseas professionals
We ensure full FBR compliance and optimized tax outcomes.
17. Frequently Asked Questions (FAQs)
Q1: Do I need to file a tax return if I’m salaried and tax is already deducted?
Yes. Filing is mandatory if your salary exceeds the taxable threshold, even if TDS was made.
Q2: What is Form 16?
A salary certificate issued by your employer showing total salary paid and tax deducted.
Q3: Can I claim refund if excess tax was deducted?
Yes. File return and mention adjustable WHT. Refund will be issued after FBR verification.
Q4: Are bonuses taxable?
Yes, unless explicitly exempted (e.g., government performance bonuses under special notification).
Q5: Can I file return without employer-issued Form 16?
You can file based on payslips and CPRs, but it is strongly recommended to obtain Form 16.
Conclusion
Income from salary is a primary source of taxable income in Pakistan and is subject to specific rules under the Income Tax Ordinance, 2001. As tax laws evolve, salaried individuals must stay informed about deductions, exemptions, and filing obligations to ensure compliance and avoid overpaying taxes.
Whether you’re an employee or an HR/payroll officer, professional help from Sterling.pk can make your salary tax matters simple, legal, and stress-free.
