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Taxation Management ­ FIN 623
VU
MODULE 6
LESSON 6.29
SALARY AND ITS COMPUTATION
GRATUITY
Purpose:
 Provision of Gratuity to employees or
 Undertaking of provision (payment) of gratuity on retirement or
 On employees becoming incapacitated or
 On termination of their employment after completion of minimum period of service specified in
the regulations of fund or to the widows, children or dependants of such employees on their death
 All benefits granted by the fund shall be payable only in Pakistan
Approved Gratuity Fund
 Commissioner of Income Tax may accord approval to any gratuity fund.
Condition for Approval
 Fund established under an irrevocable trust and purposes of gratuity fulfilled.
Tax treatment of Gratuity is as under:
 Gratuity pertaining to government employees/ their families:
Any gratuity received on retirement/ death by employee of the government, a local authority or a
statutory body or corporation or family is wholly exempt from tax under clause 13(i), part I of
second schedule.
Clause 13, Part I of Second Schedule
(i)
In the case of an employee of the Government, a local authority, a statutory body or corporation
established by any law for the time being in force, the amount receivable in accordance with the
rules and conditions of the employee's services;
(ii)
Any amount receivable from any gratuity fund approved by the Commissioner in accordance with
the rules in Part III of the Sixth Schedule;
(iii)
In the case of any other employee, the amount not exceeding two hundred thousand rupees
receivable under any scheme applicable to all employees of the employer and approved by the
Central Board of revenue for the purposes of this sub-clause; and
(iv)
In the case of any employee to whom *sub-clause (i), (ii) and (iii) do not apply, fifty per cent of the
amount receivable or seventy-five thousand rupees, whichever is the less:
Provided that nothing in this sub-clause shall apply:
(a) To any payment which is not received in Pakistan.
(b) To any payment received from a company by a director of such company who is not a regular
employee of such company.
(c) To any payment received by an employee who is not a resident individual; and to any gratuity
received by any employee who has already received any gratuity from the same or any other
employer.
Exercise-1 on Gratuity:
Compute taxable income and tax thereon for tax year 2007 in respect of Mr. A, an employee of
Government of the Punjab.
Relevant information/data is given below.
Salary
Rs. 800,000
Gratuity
Rs. 1,000,000
Tax deducted at source
Rs. 54,000
Solution to Exercise 1:
Tax payer: Mr. Yasir
Tax year: 2007
Residential Status: Resident
NTN: 000111
Computation of taxable income and tax thereon:
In Rs
Particulars
Total income
Exempt Income
Taxable Income
Salary
800,000
Nil
800,000
Gratuity
1,000,000
1,000,000
Nil
Refer (Note-1)
49
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Taxation Management ­ FIN 623
VU
Taxable Income
800,000
Tax liability:
Tax rate of 7.50 is at serial no 10 for taxable income exceeding Rs 700,000 up to Rs 850,000 shall be
applied.
800,000 x 7.5% = Rs.60,000
Tax payable =
Rs 60,000
Tax deducted at source =
Rs 54,000
Tax payable with return
Rs 6,000
N-1:
Amount received as gratuity is exempt in this case under clause 13(i), Part I, Second Schedule of the
Ordinance.
50
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