Are you a salaried person and often wonder why income tax is deducted from your salary before it reaches your bank account? This system is known as tax deduction at source, and it is governed by Section 149 of the Income Tax Ordinance, 2001.
Below is an interactive, easy-to-understand guide explaining why the Federal Board of Revenue (FBR) collects salary tax at source and how it works.
💼 What Is Salary Tax Deduction at Source?
Salary tax deduction at source means that your employer deducts income tax from your monthly salary and deposits it directly with the FBR on your behalf.
📌 This ensures regular tax collection, reduces evasion, and simplifies compliance for salaried individuals.
📜 Legal Basis: Section 149 Explained
Under Section 149(1):
• Every employer paying salary must deduct tax at the time of payment
• The deduction is made at the employee’s average tax rate
• Rates are applied as per Division I, Part I of the First Schedule
The calculation is based on:
✔ Estimated annual salary income
✔ Applicable tax slabs
✔ Tax under Section 4AB (super tax), if applicable
✔ Adjustments for:
• Tax already withheld under other heads
• Eligible tax credits under Sections 61 and 63
🧮 How Is the Average Tax Rate Calculated?
The law uses a simple formula:
Average Tax Rate = A ÷ B
Where:
• A = Total tax payable on estimated annual salary
• B = Estimated annual salary + tax under Section 4AB
This average rate is applied to each salary payment to ensure even tax deduction throughout the year.
👴 Special Rule for Pension Income
Under Section 149(1A):
• Pension paid to a former employee below 70 years
• If annual pension income exceeds Rs10 million
• Tax is deducted only on the amount exceeding Rs10 million
Adjustments for tax credits and prior deductions also apply here.
🧑💼 Directors’ and Board Meeting Fees
Under Section 149(3):
• Payments such as:
o Directorship fees
o Board meeting attendance fees
• Are subject to 20% tax deduction on gross amount
📌 This tax is adjustable, meaning it can be adjusted against final tax liability.
🎯 Why FBR Uses This System
✔ Ensures timely and consistent revenue collection
✔ Minimizes non-compliance and under-reporting
✔ Reduces the tax filing burden on salaried individuals
✔ Helps employees avoid large lump-sum tax payments at year-end
🔍 What Salaried Persons Should Do
• Review monthly salary slips for correct tax deduction
• Share documentary proof of tax credits and other deductions with employer
• File annual income tax return to reconcile withheld tax
• Claim refunds, if excess tax has been deducted
📌 Final Takeaway
Salary tax deduction at source is not an extra burden—it is a structured and legally mandated mechanism to ensure fair and smooth tax collection. Understanding Section 149 helps salaried individuals track deductions and manage their annual tax position effectively.
Disclaimer: This article is for informational purposes only and does not constitute legal or tax advice. Salaried individuals should consult a qualified tax professional for advice specific to their circumstances.