FBR outlines taxable salary, allowances, perquisites, pensions, arrears and employee share schemes under updated tax rules.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the treatment of salary income and employment-related benefits for Tax Year 2027 under the Income Tax Ordinance, 2001.
The FBR has issued the updated Income Tax Ordinance, incorporating amendments up to June 30, 2026, and outlined the payments, allowances, benefits and perquisites that fall under the head “Salary”.
What constitutes salary income
Under Section 12, salary received by an employee during a tax year, other than income exempt from tax, is chargeable under the head “Salary”.
The definition covers both revenue and capital payments received from employment.
Salary includes pay, wages and other remuneration, including:
•Leave pay and payment in lieu of leave
•Overtime payments
•Bonuses and commissions
•Fees
•Gratuity
•Supplements for working conditions
•Employment-related perquisites
Perquisites are included whether or not they can be converted into money.
Allowances treated as salary
Allowances provided by an employer are generally treated as salary. These include allowances for:
•Cost of living
•Subsistence
•Rent
•Utilities
•Education
•Entertainment
•Travel
However, an allowance spent solely in performing employment duties is excluded from salary income.
The FBR has clarified that an allowance paid as part of monthly salary on a fixed basis or as a percentage of salary does not qualify as an allowance solely spent on employment duties.
The same applies where the allowance is not wholly, exclusively, necessarily or actually spent on behalf of the employer.
Employer-paid expenses and employment payments
Expenses incurred by an employee and subsequently paid or reimbursed by the employer are generally included in salary.
An exception applies where the expenditure is incurred on behalf of the employer while the employee is performing employment duties.
The definition of salary also covers profits in lieu of or in addition to salary or wages. These include payments associated with entering into an employment relationship, agreeing to employment conditions or changes to those conditions.
Compensation received upon termination of employment, including redundancy payments and golden handshakes, is also covered.
Amounts received from provident or other funds are included to the extent that they do not represent repayment of an employee’s non-deductible contributions.
Payments received for agreeing to restrictive covenants connected with past, present or future employment are similarly treated as salary.
Pensions and annuities
Pensions, annuities and supplements to pensions or annuities are also included in the definition of salary.
The updated law provides specific rules for pension income.
Where an individual receives more than Rs10 million in pension from a former employer during a tax year, the pension is subject to final tax at the rates specified in the First Schedule.
An individual who has attained the age of 70 years is not charged tax on pension income.
However, pension received by an individual who continues working for a former employer or an associate of that employer remains subject to the applicable salary tax rates.
Employer paying an employee’s tax
Where an employer agrees to pay the tax payable on an employee’s salary, the employee’s income chargeable under the head “Salary” is grossed up by the amount of tax paid by the employer.
The law also provides that no deduction is allowed for expenditure incurred by an employee in deriving income chargeable under the head “Salary”.
Salary and perquisites may be treated as received from employment regardless of whether they are provided by the employer, an associated entity, a third party under an arrangement with the employer, a past or prospective employer, or an associate of the employee.
Special treatment for salary arrears
The law provides specific options for certain termination-related payments and salary arrears.
For qualifying termination payments, an employee may elect to have the payment taxed at a rate calculated using the employee’s tax and taxable income for the preceding three tax years.
Similarly, where salary is paid in arrears and taxation at the time of receipt results in a higher tax liability than would have applied in the year the services were performed, the employee may elect to have the arrears taxed at the rates applicable to that earlier year.
Such elections generally have to be made by the due date for filing the relevant return or employer certificate, subject to any extension granted by the Commissioner.
Perquisites included in taxable salary
Section 13 sets out rules for valuing employment-related perquisites included in salary.
Where an employer provides a motor vehicle wholly or partly for an employee’s private use, the prescribed amount is included in the employee’s taxable salary.
Employer-provided domestic assistance, such as a housekeeper, driver or gardener, is also taxable based on the amount paid for those services, subject to the prescribed reduction.
Utilities provided by an employer are taxable according to their fair market value, after deducting any amount paid by the employee.
The law also contains valuation rules for certain employer loans, waived employee obligations, employer-paid liabilities, and property or services provided by an employer.
Employee share schemes
The FBR has also prescribed rules for employee share schemes.
A right or option to acquire shares granted to an employee under such a scheme is not chargeable to tax at the grant stage.
When the shares are subsequently issued to the employee, their fair market value on the date of issue, less qualifying consideration paid by the employee, is included in salary income, subject to the applicable provisions.
Where shares are subject to restrictions on transfer, taxation may be deferred until the employee obtains an unrestricted right to transfer the shares or disposes of them, whichever occurs earlier.
Broad scope of salary taxation
The updated provisions establish a broad framework for determining taxable salary income for Tax Year 2027.
The rules cover regular remuneration as well as allowances, employment-related payments, perquisites, pensions, employer-paid expenses, loans, utilities, accommodation and employee share schemes.
Employees and employers therefore need to consider the applicable valuation and tax rules when determining salary income and withholding obligations for the tax year.