INCOME TAX RULES

Under Income Tax Ordinance 2001. The Income of a person is categorized into five
groups, which are called Heads of Income as follows.

1. Income from Salary (Section 12)

2. Income from Property (Section 15)
3. Income from Business or Profession (Section 18)
4. Capital Gains (Section 37)
5. Income from other Sources (Section 39)

Income from Salary (Section 12)

This head includes

A. Salary
B. Allowances and Benefits

SALARY
Salary is the sum of the six items.
a. Basic Salary
b. Dearness Allowance
c. Cost of living allowance
d. Overseas Allowance
e. Bonus
f. Commission

BPS-17

12,000-1,000-27,000

Minimum Time Scale Increment Total Salary

Year MTS Basic Salary

1 12,000 12,000
2 12,000 13,000
3 12,000 14,000

Example # 1

Calculate Salary of Mr. Nasir working in the Pay Scale 15000-2000-45000.

Basic Salary 25000 P.M.

Bonus 12000
Dearness Allowance 800
Commission 2 month of Basic Salary

Income from Salary Sec 12

Basic Salary 300,000

(25,000 x 12)
Bonus 12,000
Dearness Allowance 800
Commission 50,000
(25,000 x 2)
Salary 362,800

Allowances & Benefits

Rule#1
Accommodation Allowance
Fully Taxable

Rule#2
Accommodation facility provided by employer.
AVA or 45% of MTS/Basic Salary
Whichever is higher is taxable

Example#2
Calculate total income of Mr. Israr working in the Pay Scale 9,000-2,000-35,000.

Basic Salary 13,000 P.M.

Bonus 60,000
Accommodation facility provided by employer 20,000 P.M. will be paid to
employee of this accommodation was not provided to him.

Income from Salary Sec 12

Basic Salary 156,000

(13,000 x 12)
Bonus 60,000
Salary 216,000
Accommodation Facility 240,000
AVA or 45% of MTS/BS
W.E.H.
(20,000 x 12)= 240,000
(156,000 x 45%)= 48,600
W.E.H.
Total Income 456,000

NOTE#1

AVA means Annual Value of Accommodation.

It is an annual value which will be paid to employee if this facility is not provided to him.

NOTE#1
If AVA is not given in problem then straight 45% of MTS/Basic Salary is taxable.

Rule#3
Conveyance Allowance
Fully Taxable
Rule#4
Conveyance facility provided by employer for personal used
10% of Cost of Vehicle is taxable.
Rule#5
Conveyance facility provided by employer for personal and for business used.
5% of cost of vehicle is taxable.
Note for Rule#4 and 5
If Vehicle is on lease then ignore installment amount.
Rule#6
Leave fare Assistance (LFA)
Fully Exempt
If the person is working in transport business then LFA is exempt otherwise taxable.
Rule#7
Gratuity
a) Gratuity received from Government.
Fully Exempt

b) Gratuity received from private organization which is approved by Commission of

Income Tax is also fully exempt.

c) Gratuity received from a private organization which is approved by FBR. Then it

is exempt up to Rs.200,000.

d) In other cases then Rs. 75000 or 50% of Gratuity whichever is less exempt.

Rule#8
 Entertainment
a) Entertainment Facility provided by employer is fully exempt.

b) Entertainment Expenses paid by employee, or reimbursed from employer or also

exempt.

c) Entertainment allowance is fully taxable.

Rule#9
Medical
a) Medical Facility provided by employer is fully exempt.
b) Medical Expense paid by employee and or reimbursed from employer are also
exempt.
c) If Medical allowance is received then it is exempt up to 10% of Basic Salary.

Rule#10
Lunch Facility
Fully Taxable

Rule#11
Subsidize lunch facility
Fully Exempt

Rule#12
Obligation of employee paid by employer
Fully Taxable
Examples are as follows.
a) Loan of employee paid by employer
b) Employee’s children education expenses paid by employer.
c) Utility bill of employee paid by employer
d) Domestic servant salary paid by employer.
Rule#13
Loan from employer
Amount calculated in the following manner is taxable if positive.

Loan x 11% -- 500,000 x 7%

7% which is actually paying

11% Benchmark rat (11%) fixed

 R% rate of interest which is paying

500,000 x 11% -- 500,000 x 7%

55,000-- 35,000 = 20,000 Taxable

Rule#14
Utilities Allowance

Allowance given by employer to employee for meeting the expenses of gas, water,
electricity, telephone and petrol for generator.

Fully Taxable

Rule#15
Utilities facilities provided by employer fro his own resources

Fully Exempt

Rule#16
Special Allowance

It is an allowance given by employer to employee for meeting the expenses incurred

during official duties.

Example
TA/DA, Uniform Allowance,

Fully Exempt

(Ignore actual expenses)

Rule#17
Special Additional Allowance
Special relief Allowance
It is fully exempt for Government Employee and it is fully taxable for private employee.

Rule#18
Special Pay (official People)
Fully Taxable

Rule#19
Efficient Honorarium
Fully Taxable

Rule#20
M. Phil and P.hd allowance

Fully Taxable

Rule#21
Adhoc relief

Fully Taxable

Rule#22
Free lodging & boarding facilities.

Fully Exempt

Rule#23
Computer Allowance

Fully Taxable

Rule#24
Employee Children educational expenses paid by employer.

Fully Taxable

Rule#25
Employee children educational facility in employer own institution.

Fully Exempt

Rule#26
Fee of refresher course paid by employer.

Fully Exempt

Rule#27
Qualification pay

Fully Taxable

Rule#28
Overtime Payment received

Fully Taxable

Rule#29
Senior Post Allowance
 Orderly Allowance
Fully Taxable

Rule#30
Leave Encashment

Fully Taxable

Rule#31
Encashment of leave preparatory to retirement (LPR)

Fully Taxable

Rule#32
Provident Fund
1. Government Provident Fund (GPF)
2. Recognized Provident Fund (RPF)
3. Unrecognized Provident Fund (UPF)

Items GPF RPF URPF

Employee Already included in Already included in Already included in Basic
Contribution Basis Salary Basic Salary Salary

Employer Fully Exempt Exempt up to 10% of Fully Exempt

Contribution Basic Salary

Interest Credited Fully Exempt Exempt up to 16% or Fully Exempt

1/3rd of Basic Salary,
whichever is less
Accumulated Fully Exempt Fully Exempt Total employer contribution
Balance & Total employee
contribution are fully
taxable