Are you ready to discover how your salary will be taxed in the upcoming year? With the Federal Board of Revenue (FBR) updating the Income Tax Ordinance, 2001 for the tax year 2025-26, employees across Pakistan are seeking clarity on how their earnings will be classified, taxed, and possibly optimized.
What Does Salary Income Include?
Under Section 12 of the Income Tax Ordinance, salary income is defined broadly. It includes not only basic pay but also wages, bonuses, commissions, overtime payments, gratuities, and any additional financial benefits provided by the employer. Allowances for rent, travel, utilities, and education are also considered part of taxable salary unless they are solely and exclusively spent in the performance of official duties.
Interactive Check:
• Do you receive allowances such as housing or travel?
• Were these allowances actually used for your job, or are they part of your regular monthly package?
Understanding this distinction can help you determine whether certain allowances may be exempt or fully taxable.
Employer-Sponsored Benefits
Apart from regular salary, perquisites like free housing, medical facilities, or company-provided vehicles are also included as taxable income if they carry a monetary value. Pension payments and annuities are likewise subject to tax—though individuals above seventy years may enjoy exemptions under certain thresholds.
Employees should note that if their employer pays the tax on their behalf, the amount of tax is added back to their salary to determine the gross taxable amount.
Special Scenarios
The updated Ordinance also covers situations like:
• Golden Handshakes & Termination Benefits: Payments on retirement or termination are included in taxable salary unless they meet exemption criteria.
• Salary in Arrears: If you receive backdated salary payments in one tax year, you may apply to have it taxed according to the rates applicable when the services were rendered—potentially lowering your liability.
Why Should You Care?
Because the FBR has introduced tighter compliance measures, employees should monitor their income statements closely. A miscalculation could mean higher deductions or even penalties. Keeping track of allowances, reimbursements, and retirement benefits ensures that only the correct portion of your salary is taxed.
Interactive Tip:
• Review your employment contract to see what portion of your benefits are allowances versus reimbursements.
• Ask your employer for a year-end salary certificate to cross-check deductions.
What’s New for 2025-26?
The key changes include a more structured definition of taxable benefits and a clear distinction between work-related expenses and personal allowances. Moreover, pensioners crossing the ten-million-rupee mark will face final tax deductions, while retirees above seventy years may qualify for exemptions.
Bottom Line
Your salary in 2025-26 is more than just your monthly pay. It includes perks, bonuses, and even certain reimbursements—making it essential to understand FBR rules to avoid overpaying.
Ready to calculate your tax liability?
Would you like me to create an interactive salary tax calculator for 2025-26 based on the latest FBR updates? Or should I prepare a visual breakdown of taxable vs. exempt allowances? Which one do you prefer? Or both?
(Disclaimer: This article is for informational purposes only and should not be considered legal or financial advice. Tax laws are subject to change, and individual circumstances vary. Employees are advised to consult a professional tax advisor or the Federal Board of Revenue (FBR) for specific guidance.)