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Taxation Management ­ FIN 623
VU
MODULE 6
LESSON 6.31
SALARY AND ITS COMPUTATION
PROVIDENT FUND
Types:
 Statutory Provident Fund, governed by the Provident Funds Act, 1925 (GP Fund)
 Recognized Provident Fund (recognized by Commissioner of Income Tax under Part I of Sixth
Schedule).
 Unrecognized Provident Fund
Recognized Provident Fund defined in clause (48) of Section 2 as under:
Means a provident fund recognized by the commissioner in accordance with Part I of Sixth Schedule.
Recognized Provident Fund under Part I of 6th Schedule
CIT may accord recognition, if fund in compliance with requirements as laid down in rule 2.
CIT may withdraw recognition after providing reasonable opportunity to the trustees of the fund of
being heard.
Condition for Approval
 All employees shall be employed in Pakistan or
 Shall be employed by employer whose principal place of business is in Pakistan.
 Contributions by employee in a tax year shall be a definite proportion of his salary.
 Contributions by employer to the Individual account of an employee in a tax year shall not exceed the
contributions made by the employee.
 Fund shall be vested in two or more trustees, or official trustee.
 The accumulated balance due to an employee shall be payable on the day, he ceases to be an employee
of the employer, who is maintaining the Fund.
Tax Treatment:
The following is the tax treatment of different kinds of provident funds:
 Statutory Provident Fund [Wholly exempt] Clause 22.
 Recognized Provident Fund [Partially taxable within limits].This is defined in section 2(48) as a
provident fund which has been recognized by the Commissioner of Income Tax in accordance with
the rules contained in Part I of the Sixth Schedule. Employer's contribution up to 10 per cent of
salary is exempt. Employer's contribution exceeding 10% of `salary' is taxable under rule 3, Part 1
of Sixth Schedule.
Recognized Provident Fund
The accumulated balance due and becoming payable to any employee participating in a recognized
provident fund is fully exempt under clause (23) Part I of Second Schedule.
Provident Fund
Un-recognized provident fund [wholly taxable]
Exercise on Provident Fund
Mr. A received credit of Rs. 50,000 as employer's contribution to recognized provident fund, his salary
during tax year 2007 is given below:
1. Basic salary
Rs.840,000
2. Computer allowance
Rs. 12,000
3. Medical allowance
Rs. 60,000
Compute taxable income and tax thereon for tax year 2007.
Solution:
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
840,000
Nil
840,000
Computer allowance
12,000
Nil
12,000
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Taxation Management ­ FIN 623
VU
Medical allowance
60,000
84,000
Nil
(10% of basic exempt)
Employer's contribution
---
---
---
to SPF Exempt (Note-1)
Taxable Income
852,000
N-1:
Under rule 3 of Part I of Sixth Schedule exemption is available up to 10% of salary and excess amount
shall be taxable. In this case entire amount i.e.; Rs. 50,000 is exempt as it is within prescribed limit of
10% of salary.
N-2:
Taxable income shall be Rs 852,000 and tax can be computed as explained in previous exercise.
Benevolent Grant
Exercise on Benevolent Grant:
Mr. A, a govt. servant retired on 01-05-2007. He received Rs. 600,000 from duly approved benevolent fund.
He received total income amounting Rs. 480,000 under the head salary during tax year 2007.
Compute taxable income and tax thereon in respect of Mr. A for tax year 2007.
Exemption on account of benevolent grant paid from the Benevolent Fund under clause (24) of part 1
of 2nd schedule.
(24) any benevolent grant paid from the Benevolent Fund to the employees or members of their
families in accordance with the provisions of the Central Employee Benevolent Fund and Group
Insurance Act, 1969.
MODULE 7.31
INCOME FROM PROPERTY
Taxation of rental income arising from use and exploitation of immovable property `Income from
Property' includes Rent received or receivable by a person in a tax year other than rent exempt from tax.
Sec 15 (1)
Rent means any income received or receivable by the owner of land or building as consideration for:
Use of land or building
Occupation of land or building
Right to use the land or building
Rent also includes forfeited deposits paid under a contract for the sale of land or building.
Where a building leased out together with Plant & Machinery, it is not income from property' but `income
from other sources' Sec. 15(3).
Rent to be in line with Fair Market Rent. Where the rent received or receivable by a person is less than the
fair market rent for the property; the person shall be treated as having derived the fair market rent for the
period, the property is let on rent in the tax year.
Where utilities provided by any person are included in rent, such amount shall be chargeable to tax under
the head income from other sources and not under the head income from property.
Exemptions available under property income:
Any income of a trust or welfare institution from housing property clause (58)(1) as provided in sub clause
(2) and (3) of clause (58). The said clauses are reproduced below:
(2) A trust administered under a scheme approved by the Federal Government in this behalf and
established in Pakistan exclusively for the purposes of carrying out such activities as are for the benefit
and welfare of-
i.
Ex-servicemen and serving personnel, including civilian employees of the Armed Forces, and their
dependents; or
ii.
Ex- employees and serving personnel of the Federal Government or a Provincial Government and
their dependents, where the said trust is administered by a committee nominated by the Federal
Government or , as the case may be, a Provincial Government.
(3) A trust or welfare institution [or non- profit organization] approved by [Regional Commissioner of
Income Tax] for the purposes of this sub-clause.
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Taxation Management ­ FIN 623
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Exemptions available under Clause (59) of part 1 of 2
nd schedule on income from property held
under trust or other legal obligations for religious or charitable purpose.
Certain deductions were allowable/ permissible under sec 17 up to tax year 2006. Section 17 stands omitted
by Finance Act, 2006. Hence no deductions are permissible from 1st July 2006.
Sec 15 (7) the provisions of sub section (1) Section 15 shall not apply in respect of a Tax Payer who:
i.
is an individual or association of persons;
ii.
Derives income chargeable to tax under this section not exceeding Rs. 150,000 in a tax year; and
iii.
Does not derive taxable income under any other head.
However, Fair Market Rent not applicable when lessee chargeable to tax under the head `Salary Income'.
The rent received shall not be chargeable to tax in respect of a tax payer who ­
Is an individual or association of persons;
Derives income chargeable to tax under this section not exceeding Rs. 150,000/- in a tax year; and
Does not derive taxable income under any other head.
Treatment of Non-Adjustable Amounts Received in Relation to Buildings
These amounts shall be treated as rent and chargeable to tax under the head "income from property". These
amounts are spread over a period of 10 years, It is adjustable as Rent.
ILLUSTRATION
Say non-adjustable advance rent received Rs.120,000.
Amount adjustable shall be 120,000/10 = Rs.12,000 Rs12,000 shall be adjustable for ten years.
Admissible Deductions before tax year 2007
 Allowance for Repair-----1/5 of total Rent in a tax year. It is a statutory allowance.
 Insurance Expenses (Payment of Premium)
 Taxes, charges, property tax
 Ground rent paid or payable by the person.
 Interest (Mark-up, Profit) paid on money borrowed for the property.
 Rent sharing by House Building Finance Corporation.
 Rent collection charges, actually incurred--- (not to exceed 6% of total rent receivable for the tax year.
 Legal expenses in connection with the relevant property.
 Unpaid rent (irrecoverable rent).
 Any expenditure allowed to a person under this head as deduction, shall not be allowed as expense
under any other `Head of income'.
Treatment of Income from Property under Sec 155:
(1)  [Every] prescribed person making a payment in full or part (including a payment by way of
advance) to any person on account of rent of immovable property) including rent of furniture and
fixtures, and amounts for services relating to such property) shall deduct tax from the gross amount of
rent paid at the rate specified in the First Schedule (5% of gross rent paid).
(2)  The tax deducted under sub-section (1) shall be a final tax on the income from property.
(3)  In this section, "prescribed person" means--
i.
The Federal Government;
ii.
A Provincial Government;
iii.
Local authority;
iv.
A company;
v.
A non-profit organization;
vi.
A diplomatic mission of a foreign state; or
vii.
Any other person notified by the CBR for the purpose of this section.
The Rate of Tax on Property Income under section 15, 5% of the gross amount of rent is chargeable to tax.
Exercise-1
Compute taxable income of Mr. A, an individual in the light of following data/ information, relevant to tax
year 2006.
 Mr. A let out a building to M/S XYZ and received rent amounting Rs 1,600,000 during the tax year.
 M/S XYZ also paid amount of Rs 800,000 as non-adjustable advance.
 Mr. A spent Rs 60,000 on account of repairs of said building.
 Insurance premium paid by Mr. A Rs 40,000
 Property tax in lieu of said property paid Rs 50,000
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Taxation Management ­ FIN 623
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 Property tax paid in lieu of house owned and occupied by Mr. A Rs 20,000
 Salary paid to employees hired for the purpose of rent collection Rs 120,000
 Fee paid to a law firm Rs 50,000
 Mr. A entered into a sale agreement with Mr. Y on account of sale of a building at a price of Rs 2
million and received Rs 200,000 as an advance. Mr. Y failed to make the balance payment, hence
advance forfeited.
 Mr. A had constructed the said property after availing loan from a commercial bank and paid mark-up
amounting Rs 40,000 during the tax year.
Solution of Exercise 1
Tax payer: Mr. A
Tax year: 2006
Residential Status: Resident
NTN: 000111
Computation of taxable income and tax thereon:
In Rs.
Particulars
Total income
Exempt Income
Taxable Income
Rental Income
1,600,000
Nil
1,600,000
Non adjustable advance
80,000
Nil
80,000
N-1
Forfeited deposit
200,000
Nil
200,000
Gross Total
1,880,000
Particulars
Total income
Deductions
Taxable Income
Gross income B/F
1,880,000
----
----
Repairs N2
----
136,000
----
Insurance Premium
----
40,000
----
Property tax
----
50,000
----
Property tax of self-
----
----
----
occupied House N-3
Rent Collection N-4
----
112,800
----
Legal charges
----
50,000
----
Mark-up paid
----
40,000
----
Total
668,800
1,211,200
Taxable income is:
Rs. 1,211,200
Tax thereon:
Rs. 1,211,200 x 5%= 60560
N-1:
Non adjustable advance is spread over ten years.
N-2:
Repairs allowed as statutory allowance@ 1/5th of gross rental.
N-3:
Expenditures allowed in respect of building that is generating rental income.
N-4:
Rent Collection charges not to exceed 6% of gross rental income.
N-5:
Forfeited amount on account of cancellation of sale agreement of building shall be treated as rental income.
Exercise 2:
Compute taxable income and tax thereon in respect of Mr. A for tax year 2007. Relevant information / data
is given here under:
Rental income from shop Rs 120,000
Mr. A is an employee of a federal government and received gratuity, Rs.900,000 on retirement.
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
Rental Income
120,000
120,000
Nil
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Taxation Management ­ FIN 623
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Note-1
Gratuity
900,000
900,000
Nil
Taxable Income
Nil
N-1:
Rent received under the head income from property shall be exempt, if following condition are met;
Person receiving rent under this head is an individual or AOP.
Income under this head for a tax year does not exceed Rs 150,000
The person does not derive taxable income from any other head of income.
Exercise 3:
Compute taxable income and tax thereon in respect of Mr. A for tax year 2007 from the following
information / data.
Rental income from building
Rs 450,000
Non- adjustable advance received
Rs 200,000
Solution of Exercise 3
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
Rental Income
450,000
Nil
450,000
Note-1
Non adjustable advance
---
---
20,000
(Note-1)
Taxable Income
470,000
Under the head "Income from Property" tax is payable at the rate of 5% of gross amount of rent received.
Hence tax payable = 470,000 x 5% = Rs 23,500
N-1:
Non adjustable amount received by the owner of the building from the tenant shall be treated as rent
chargeable to tax under the head "Income from Property" in the tax year in which it was received and
following 9 tax years in equal proportion. Sec16.
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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