PROVIDENT FUND

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Taxation Management FIN 623

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

Taxation Management FIN 623

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-

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.

Taxation Management FIN 623

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:

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--

The Federal Government;

ii.

A Provincial Government;

iii.

Local authority;

iv.

A company;

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

Taxation Management FIN 623

· 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

Nil

Taxation Management FIN 623

Note-1

Gratuity

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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