Karachi, August 26, 2024 – The Federal Board of Revenue (FBR) has issued a detailed explanation regarding the taxable salary income for the tax year 2024-25, according to the Income Tax Ordinance, 2001, updated until June 30, 2024.
This clarification by the FBR provides important guidance for employees and employers about the components of salary that are subject to tax under the head “Salary.”
Defining Salary Under Section 12
the FBR said that according to Section 12 of the Income Tax Ordinance, 2001, any salary received by an employee in a tax year, excluding salary exempt from tax under this Ordinance, shall be chargeable to tax under the head “Salary.” The definition of salary includes various forms of remuneration, allowances, and other payments made by an employer to an employee.
The FBR specifies that salary encompasses:
1. Basic Pay and Wages: This includes basic salary, wages, and other remuneration such as leave pay, payment in lieu of leave, overtime payments, bonuses, commissions, fees, gratuities, and work condition supplements (e.g., for unpleasant or hazardous working conditions).
2. Perquisites: These are benefits provided by an employer that may or may not be convertible to money.
3. Allowances: Any allowances provided by an employer, including cost of living, subsistence, rent, utilities, education, entertainment, or travel allowances, fall under the taxable category. However, allowances solely expended in the performance of the employee’s duties are exempt. Notably, allowances paid as a fixed amount or as a percentage of salary or those not entirely spent on behalf of the employer are not considered exempt.
4. Reimbursements: Any expenses incurred by an employee but reimbursed by the employer, other than those on behalf of the employer in performing duties, are taxable.
5. Profits in Lieu of Salary: This includes any payments received as consideration for entering or changing an employment agreement, termination payments, compensation for redundancy or loss of employment, payments from provident or other funds not as repayments of employee contributions, and amounts received for restrictive covenants regarding past, present, or future employment.
6. Pensions and Annuities: These, along with any supplements to them, are considered part of the salary.
7. Other Taxable Items: Any amount chargeable under the head “Salary” as per section 14 is included.
Additional Provisions and Employer Contributions
The FBR also clarified that if an employer agrees to pay the tax chargeable on an employee’s salary, the employee’s income under the head “Salary” shall be grossed up by the amount of tax payable by the employer. Furthermore, no deductions are allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary.”
For tax purposes, any amount or perquisite received by an employee is treated as income from employment, regardless of whether it is provided by the current employer, a past or prospective employer, or a third party under an agreement with the employer or the employee.
Election for Tax Rates and Arrear Payments
Employees receiving payments related to termination, such as redundancy compensation or golden handshake payments, may elect for these amounts to be taxed at a specific rate calculated based on the total tax paid over the previous three years. Similarly, employees receiving salary in arrears that results in higher tax rates than if the salary had been paid in the year services were rendered can opt to have the amount taxed at the rates applicable for the relevant service year.
Such elections must be made by the due date for filing the employee’s return of income or employer certificate for the tax year in which the amount was received, or by a later date as allowed by the Commissioner.
Conclusion
This comprehensive explanation by the FBR is aimed at ensuring clarity and compliance among taxpayers, particularly employees and employers, concerning taxable salary components for the tax year 2024-25. Taxpayers are encouraged to review these guidelines carefully to understand their obligations and to seek professional advice if needed to comply with the updated tax laws.
