Taxation of Salaries and Wages in Pakistan

Taxation on salaries and wages in Pakistan is regulated under the Income Tax Ordinance, 2001. All individuals receiving salary income are taxed progressively depending on their annual earnings. Employers are also required to deduct and deposit tax at source, making compliance important for both employers and employees. This article explains the entire salary tax framework in Pakistan including rates, exemptions, perquisites, rebates, and filing requirements for the current tax year.

Definition of Salary under the Income Tax Ordinance
As per Section 12 of the Income Tax Ordinance, 2001, the following elements are included in the definition of salary:

• Wages and basic pay

• Any annuity or pension

• Gratuity and leave encashment

• Fees, commissions, bonuses, or other remuneration

• Perquisites or benefits, whether convertible to money or not

• Employer’s contributions to provident funds, pension schemes, or approved superannuation funds

This definition ensures that both monetary and non-monetary benefits received by employees are covered under the tax framework.

Taxable and Non-Taxable Components of Salary
The salary structure often contains both taxable and exempt elements. Here’s how they are treated:

Taxable components include:

• Basic salary

• House rent allowance (unless exempted)

• Bonuses and commissions

• Special allowances

• Utility allowance

• Perquisites

Exempt or partially exempt components include:

• Medical allowance (up to 10% of basic salary, subject to actual expenses)

• Conveyance allowance (up to Rs. 2,400 per month)

• Leave encashment at retirement (as per limits)

• Gratuity (fully or partially exempt depending on the nature of employer)

• Provident fund contributions (up to certain limits)

Tax Year and Return Filing Requirement
Pakistan’s tax year starts from July 1 and ends on June 30. Taxpayers must file income tax returns by September 30 (individuals), along with a wealth statement if their income exceeds Rs. 600,000 annually or if they meet certain asset thresholds. Filing is done through the FBR’s online IRIS portal.

Salary Tax Slabs for Tax Year 2025
For salaried individuals, the following tax slabs are applicable:

These progressive rates ensure higher tax for high-income earners while offering relief to low-income individuals.

Employer’s Obligation under Section 149
Employers are designated as “withholding agents” under Section 149 and must:

• Estimate annual taxable income of employees

• Deduct tax every month

• Deposit it to the government treasury by 15th of the next month

• Provide salary slips and withholding tax certificates

• File monthly and annual withholding statements (via IRIS)

Failure to comply can result in penalties and default surcharges.

Tax Credits Available to Salaried Individuals
Salaried individuals can claim several tax credits to reduce their tax liability:

• Investment in Life Insurance, Mutual Funds, VPS (Section 62): Limited to 20% of taxable income or Rs. 2 million

• Charitable Donations (Section 61): Up to 30% of taxable income to approved institutions

• Zakat Paid (Section 60): Fully deductible if paid to a registered body

Rebate for Teachers and Researchers
As per Clause 2 of Part III of the Second Schedule, full-time teachers and researchers are entitled to a 25% reduction in their tax liability, provided they are not in administrative roles.

Double Taxation Relief on Foreign Salary
If a resident Pakistani earns salary from abroad, they may be eligible for tax credit under:

• Unilateral Relief (Section 103): Where no double taxation treaty exists

• Bilateral Relief: Under DTAAs (Double Taxation Avoidance Agreements)

In both cases, the individual must provide proof of foreign tax paid to claim a credit against Pakistan tax liability.

Tax on Perquisites and Benefits in Kind
The law considers many non-cash benefits as part of taxable salary. Common examples include:

Accommodation provided by employer:

• Taxable at 45% of basic salary or fair rental value (whichever is lower), unless rent is paid by the employee

Company vehicle:

• 10% of cost (exclusive use), 5% (shared use)

Utilities and reimbursements:

• Fully taxable unless exempted by law

Loans at concessional rates:

• The difference between market rate and concessional rate is considered taxable

Medical reimbursements:

• Exempt if paid directly to the hospital and supported by vouchers

Tax Computation Example for Salaried Employee
Assume a person earns Rs. 2,400,000 annually

Calculation:

• First Rs. 600,000: 0%

• Next Rs. 600,000: 2.5% = Rs. 15,000

• Next Rs. 1,200,000: 12.5% = Rs. 150,000
  Total tax payable: Rs. 165,000
  Monthly deduction: Rs. 13,750

IRIS Portal and Online Return Filing
FBR’s IRIS system is used for tax registration and return filing. Salaried individuals must:

1. Register on IRIS

2. Declare salary income under “Income from Salary”

3. Claim deductions, credits, and exemptions

4. Submit wealth statement and reconciliation

5. File by September 30

Penalties for Non-Compliance
Failure to file returns or declare income can lead to:

• Rs. 1,000 per day penalty (up to Rs. 50,000)

• Ineligibility for active taxpayer list (ATL)

• Penalty for failure to file wealth statement (Rs. 100,000)

• Audit and recovery proceedings

Benefits of Being on Active Taxpayer List (ATL)
Salaried individuals who file on time are included in the ATL, which offers:

• Lower withholding tax on bank transactions and property

• Eligibility for refunds and exemptions

• Proof of compliance for visa and financial purposes

Salary Tax Planning Tips

1. Maintain complete record of salary slips and Form 16

2. Keep receipts of medical and educational expenses

3. Contribute to VPS or retirement schemes

4. Make donations to tax-approved charities

5. Ensure timely return filing and claim all eligible credits

Taxation of Government Employees vs. Private Sector
Both government and private sector employees are taxed under the same slabs. However:

• Pension received by retired government employees is fully exempt

• Government servants may receive additional allowances (e.g., uniform allowance, utility allowance) which may be exempt or partially taxable based on notifications

Frequently Asked Questions

Q. Who is responsible for deducting salary tax?
A. The employer is legally bound to deduct tax at source each month and deposit it to the FBR.

Q. What if my employer doesn’t deduct tax?
A. You are still required to pay the due tax while filing your return. The employer may be penalized for non-compliance.

Q. Do I need to file tax if my employer deducts it?
A. Yes, filing a return is mandatory if your salary exceeds Rs. 600,000 or if you meet other filing thresholds.

Q. Is there any exemption for pension or gratuity?
A. Pension is fully exempt for government employees. Gratuity is partially or fully exempt based on rules.

Q. Can I claim deductions for children’s education?
A. Yes, under Section 62, if tuition fee is paid for up to 2 children, you may be eligible for a tax credit.

Q. Do I need to file a wealth statement?
A. Yes, if your income exceeds Rs. 1 million or you hold specific assets like cars, plots, or investments.

Conclusion
Taxation of salaries and wages in Pakistan is structured to be equitable and progressive. It’s critical for both employers and employees to understand the rules, slab rates, filing obligations, and available tax planning strategies. Compliance ensures not only peace of mind but also access to financial and civic benefits associated with being an active taxpayer.