Income Tax Exemption on Salary

[abbas_chinikham]

Dear All,

I want to know the allowances which are exempted and can help to reduce tax of an employee.

Medical Allowance is exepmted upto 10% of basic salary.

Is there any other allowance which is exempted?? I have heard that there is allowance "Special Duty Allowance" (which can be 20% of basic salary) is exempted. Is it true?

[kamranACA]

Dear,

Only medical allowance is exempt.


Regards,


KAMRAN.

[Hasaan]

well <b>clause 139</b> has the provision of medical allowance as both of u ppl said... this 10% exemption is avaiable only if no other benefit in this regards has been received by employee...
following are the exact wordings

<b>"any medical allowance received by an employee not exceeding ten
per cent of the basic salary of the employee if free medical treatment or
hospitalization or reimbursement of medical or hospitalization charges is not
provided for in the terms of employment;"</b>

there is one allowance, <b>"compensatory allowance" sec 35</b>

<b>"Any income representing compensatory allowance payable to a citizen of
Pakistan locally recruited in Pakistan Mission abroad as does not exceed 75 per
cent of his gross salary."</b>

this too is deductible under salary income...

is k ilawa <b>clause 5 second schedule to IT),2001</b> hai aik....

<b>Any allowance or perquisite paid or allowed as such outside Pakistan by the Government to a citizen of Pakistan for rendering service outside Pakistan.</b>

one should be government employee for this to avail...

Hope this has helped u a bit p...

[kamranACA]

Dear,

You are right. But the issues highlighted by you are very rare case specific. Apart from these there are certain exemption to other payments received by certain class of employees of certain departments.

However, in generality, there is one medical allowance that is exempt. There could be further facets like you have described that what if a person is getting re-imbursement as well as allowance or what if only the re-imbursement is allowed etc. In that scenario situation of taxability is different.

Regards,


KAMRAN.

[Hasaan]

Yes it is bro...
actually i collected all he possibilities which are actually allowances and are eligible for deductions.
no doubt that other than medical allowance, they are very case specific and rare... per hain to sahi )

[kamranACA]

Yes buddy, you are right.

Regards,

KAMRAN

[khalilahmed11]

AOA,
Yes dears only medical allowance is exempt in the salary income,

KHALIL

[abbas_chinikham]

Thanx for all your answere.

Need help again !

I am working in a firm which provide Life & Health Insurance Benefit (OPD Not Included). But still for the sake of tax saving, I still count 10% of basic salary as Medical Allowance. Is this right or against law?

Secondly
What is the treatment of Leave Encashment & Gratuity fund?

I am treating both above as BONUS and add them to employee annual salary. Hence increasing the Tax Slab Rate. Is this rite?

[kamranACA]

Dear,

You can deduct the medical allowance at 10% even if your employer has arranged life/health insurance facility for you. See clause (139) Part I of 2nd schedule to ITO 2001. Medical allownace is not available for exemption only if employer has paid/reimbursed the actual medical treatment expenses as mentioned in the said rule. There is no mentioning of insurance facility.

Leave encashment, to my understanding does not have any exemption and is therefore taxable at the rates applicable to salary.

Contribution by employer to a gratuity fund is not taxable for employee unless it is eventually paid to him. Gratuity is taxable only when it is finally received by the employee. However, there are certain exemption to it as well. For reference see clause (13) part I of 2nd schedule to ITO 2001.

If you don't have ITO 2001 download it from

http//www.fbr.gov.pk/newdt/ITordinance/ITOrdinance2008/ITOrdnance2008.pdf


I hope you will be benefited.

Regards,


KAMRAN.

[abbas_chinikham]

What I have undertood from above comments

The monthly amount which employer contribute to the employee salary is NOT taxable.

After completion of 3 years period, when the employee is eligible for the fund, the amount he will receive is TAXABLE ..

But what will be the tax rate?
This is what I have understood

If the Fund amount is 100,000/- and his previous annual salary on which tax was 300,000/-.

After GF, his annual taxable salary will become 400,000/-.

Is above the right procedure?

[kamranACA]

Dear

Gratuity payment, that is not exempt under second schedule to ITO 2001, will be taxed on the rates applicable to salary.

Regards,


KAMRAN.