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Taxation Managment

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Taxation Management ­ FIN 623
VU
MODULE 6
LESSON 6.30
SALARY AND ITS COMPUTATION
GRATUITY RECEIVED UNDER SIXTH SCHEDULE
In the case of employees covered by approved gratuity under Sixth Schedule:
Any gratuity received by an employee from a gratuity fund approved by the Commissioner of Income Tax
in accordance with the rules contained in Part III of the Sixth Schedule, is fully exempt under clause (13)(ii),
Part I of Second Schedule.
Exercise-2 on Gratuity:
Mr. A, an employee of a private Company, received Rs. 1,000,000 at the time of retirement on 01-10-2006,
from a gratuity fund approved by the Commissioner of Income Tax under Sixth Schedule.
Other information/data for tax year 2007 is given here under:
1. Basic salary
Rs.360,000
2. Bonus
Rs. 90,000
3. Gardener
Rs. 48,000
Compute taxable income and tax thereon for tax year 2007.
Solution of Exercise 2:
Tax payer: Mr. A
Tax year: 2007
Residential Status: Resident
NTN: 000111
Computation of taxable income and tax thereon:
In Rs
Particulars
Total income
Exempt Income
Taxable Income
Basic Salary
360,000
Nil
360,000
Bonus
90,000
Nil
90,000
Gardener
48,000
Nil
48,000
Gratuity
1,000,000
1,000,000
Nil
Taxable Income
498,000
Tax Liability:
Tax payable = 498,000 x 3.5%=17,430
N-1
Gratuity fund approved by the Commissioner of Income Tax is exempt under Sixth Schedule.
Treatment if Gratuity Approved by Central Board of Revenue
In Case Gratuity Approved Under clause (13)(iii), Part I, Second Schedule-CBR approval
 First gratuity received up to Rs. 200,000 is exempt.
 Amount exceeding Rs. 200,000/- will be taxable as salary.
Treatment of Gratuity not Covered under any other Clause of Part I of 2nd Schedule:
Gratuity received by an employee/family on retirement or death shall be exempt from tax to the extent of
the least of the following:
a.  50% of amount receivable
Or
b. Rs. 75,000
However, this exemption is not available in the following cases:
If gratuity is received outside Pakistan
Received by a director of a company who is not a regular employee of the company
If received by a non resident person
If recipient has already received any gratuity from the same or any other employer
Exercise-3
Mr. A retired on 01.01.2007, he received gratuity amounting Rs. 600,000. The gratuity fund was not
approved by the authorities stipulated in the ordinance. Explain treatment of gratuity received by the said
employee under the provisions of the Ordinance.
Solution:
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Taxation Management ­ FIN 623
VU
As per clause (13)(iv), Part I of Second Schedule, exemption is available as follows:
50% of Rs. 600,000 received = Rs. 300,000 or Rs.75,000, whichever is less.
In this case Rs.75,000 is exempt and balance amount of Rs.225,000 will be taxable.
Gratuity: Points to Remember:
Gratuity will be ignored while computing taxable income and tax liability of a deceased person.
In case the gratuity is received by legal heirs, where employee dies before retirement the gratuity would
be taxable in the hands of legal heirs of the deceased.
Pension
Pension is the amount received on account of past services/employment
Tax treatment of Pension
Pension Totally Exempt
If received by a citizen of Pakistan under clause (8) part I of second Schedule. Provided
As stated above the recipient should be citizen of Pakistan
The recipient must not be working for the same employer for any remuneration.
In case a person receives pension from more than one employer, the exemption shall be available to the
higher of the pensions received by him.
Pension Received by Ex-Government Employees and Members of Armed Forces.
Any pension received by employees of federal govt./Provincial govts. Members of Armed Forces of
Pakistan or granted under the rules to their families is exempt from tax under clause (9), part I of second
Schedule
Clauses (8),(9), (12), (16), (17) Part I of Second Schedule.
Clause (8)
Any pension received by a citizen of Pakistan from a former employer, other than where the person
continues to work for the employer (or an associate of the employer).
Provided that where the person receives more than one such pension, the exemption applies only to the
higher of the pensions received.
Clause (9)
Any Pension:
(i) Received in respect of services rendered by a member of the Armed Forces of Pakistan of Federal
Government or a Provincial Government;
(ii) Granted under the relevant rules to the families and dependents of public servants or members of the
Armed Forces of Pakistan who die during service.
Clause (12)
Any payment in the nature of commutation of pension received from Government or under any pension
scheme approved by the Central Board of Revenue for the purpose of the clause.
Clause (16)
Any income derived by the families and dependents of the "Shaheeds" belonging to Pakistan Armed Forces
from the special family pension, dependents** pension or children's allowance.
Clause (17)
Any income derived by the families and dependents of the "Shaheeds" belonging to the Civil Armed Forces
of Pakistan to whom the provisions of the Joint Services Instruction No. 5/66 would have applied had they
belonged to the Pakistan Armed Forces from any like payment made to them.
Exercise on Pension
Mr. A retired on 01-01-2007 and thereafter joined a private Co.
Other information/data for tax year 2007 is given here under:
1.  Salary
Rs.600,000
2.  Pension
Rs.300,000
Compute taxable income and tax thereon for tax year 2007.
Solution:
In this case taxable income for tax year 2007 will be Rs. 600,000.
Pension from ex-employer is exempt under clause (17), Part I, Second Schedule.
Taxable income = 600,000
Tax payable = 600,000 x 6%= Rs 36,000
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Taxation Management ­ FIN 623
VU
Pension Granted to Injured or Disabled:
Pension granted to a public servant or personnel of Armed Forces on injuries or body disability and to
families and dependents of `Shaheeds' belonging to civil or Pakistan Armed Forces; or public servant or
member of Armed Forces, who dies during service is exempt as provided in part I of Second Schedule.
Any payment in the nature of commutation of pension [Clause (12), Part I, 2nd Schedule] is Exempt from
tax:
Any payment in the nature of commutation of pension received from the government or under any pension
scheme approved by the Central Board of Revenue under clause (12), Part I, Second Schedule is exempt
from tax.
Exercise on Commutation of Pension:
Mr. A, a government servant, retired on 1-12-2006 and received Rs.900,000 as commutation of pension.
Compute taxable income for tax year 2007.
Solution:
Commutation of Pension is exempt under clause (12) Part I of Second Schedule.
Exercise- on lump sum payments received:
Mr. A received Rs. 1,500,000 on opting for Golden Handshake in the tax year 2007. He received total
income amounting Rs. 600,000 as salary during said year. Rate of tax for preceding three tax year was 20%,
15% and 10%. Compute taxable income and tax thereon for tax year 2007.
Solution:
Tax payer can opt to seek approval from CIT to charge lump sum payments received in a tax year at
average tax rate of last three years. In this case average tax rate for last three years comes to 15%. So it is
advisable to opt for charging this amount as per procedure prescribed above.
Computation of Tax:
Salary at normal rate = Rs 600,000 x 6%= 36,000
Lump sum payments= 1,500,000 x 15% = 225,000
If lump sum payments of Rs 1,500,000 had been included in salary income, taxable income would have
been 2,100,000 and that would have been charged at the rate of 25% as shown at serial number 14 for
taxable income exceeding 1,300,000.
Tax liability would have been Rs 2,100,000 x 25% that is Rs 525,000. Hence it is advisable for tax payer to
opt for charging the tax at average rate of last three years.
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Table of Contents:
  1. AN OVERVIEW OF TAXATION
  2. What is Fiscal Policy, Canons of Taxation
  3. Type of Taxes, Taxation Management
  4. BASIC FEATURES OF INCOME TAX
  5. STATUTORY DEFINITIONS
  6. IMPORTANT DEFINITIONS
  7. DETERMINATION OF LEGAL STATUS OF A PERSON
  8. HEADS OF INCOME
  9. Rules to Prevent Double Derivation of Income and Double Deductions
  10. Agricultural Income
  11. Computation of Income, partly Agricultural,
  12. Foreign Government Officials
  13. Exemptions and Tax Concessions
  14. RESIDENTIAL STATUS & TAXATION 1
  15. RESIDENTIAL STATUS & TAXATION 2
  16. Important Points Regarding Income
  17. Geographical Source of Income
  18. Taxation of Foreign-Source Income of Residents
  19. Exercises on Determination of Income 1
  20. Exercises on Determination of Income 2
  21. SALARY AND ITS COMPUTATION
  22. Definition of Salary
  23. Significant points regarding Salary
  24. Tax credits on Charitable Donations
  25. Investment in Shares
  26. SALARY AND ITS COMPUTATION EXERCISES 1
  27. SALARY AND ITS COMPUTATION EXERCISES 2
  28. SALARY AND ITS COMPUTATION EXERCISES 3
  29. Tax treatment of Gratuity
  30. Gratuity Exercise
  31. PROVIDENT FUND
  32. Exemptions on Business income, Treatment of Speculation Business
  33. Deductions Allowed & Not Allowed
  34. Deductions: Special Provisions, Depreciation
  35. Methods of Accounting
  36. Taxation of Resident Company
  37. Taxation of Companies: Exercises
  38. Computation of Capital Gain
  39. Disposals Not Chargeable To Tax
  40. TAX RETURNS & ASSESSMENT OF INCOME UNIVERSAL SELF ASSESSMENT SCHEME
  41. Normal Assessment, USAS, Provisional Assessment, Best Judgment Assessment
  42. ADVANCE TAX COLLECTION & RECOVERY OF TAX PENALTIES & PROSECUTION
  43. What is Value Added Tax (VAT)?
  44. SALES TAX
  45. SALES TAX RETURNS