Taxable Salary

[beyond.spirits]

AoA , if a person's salary is Rs. 20000 which is not taxable. And during the year he receives a bonus of for example Rs. 15000 and lets suppose this bonus is given to him during the month of May-2011 and it makes his total salary for the month of May Rs. 35000. According to my information his salary has become taxable now. He will receive a salary of Rs. 20000 for rest of the year.
The confusion is if we add up salaries of all of 12 months it becomes Rs.255000 which is not taxable according to the slabs provided by the FBR. Should I deduct tax on the salary of single month of that person i-e 35000?. If we look at the salary of this single month his salary is taxable but if we look at the salary of whole year his salary is not taxable. I am confused. Kindly help me out.

[student_of_law]

It seems as you are taking threshhold for tax on salary as Rs.250,000. Just to avoid confusion I will alter your case as follows

Income up to 300,000 is not taxable in tax year 2011 (for which we have to file return yet)

Suppose a person's income is Rs.25,000 for which no tax is payable
He is awarded bonus in May of 30,000

Now his total salary will become 25000 x 12 + 30,000 = 3,30,000

tax rate on 3,30,000 is 0.75% = Rs.2475

S.149 of the Income Tax Ordinance, says that you will deduct tax at the rate applicable to the estimated annual income of the employee. If in your company bonus is mandatory and every employee is expected to get bonus then on the first day of year when you will calculate bonus you will estimate his annual income as Rs.3,30,000 and will deduct tax @ 0.75% on monthly basis.

However, if bonus is not certain or its amount is not certain then obviously you cannot deduct tax as the estimated annual salary is below taxable limit. But s.149(1) (ii & iii) allows employer to make adjustment for any deficiency arising out of previous deductions. hence in this case you will start deducting tax from the day you know that the salary of your employee is taxable.

According to the spirit of s.149, I am of the opinion, that all the tax should not be deductibel in one month rather it should be distributed equally among the remaining months. For example if you are paying bonus in May and you realize at that time that salary has become taxable then you should not deducte whole Rs.2475 in May. You should distribute that amount equally in May and June.

[beyond.spirits]

Thanks brother, there is another question. In our company epmloyees are paid on hourly basis so, there are fluctuations in monthly salary every month. In this case how can I estimate yearly salary? Fluctuations are not very big normally Rs.500 to Rs. 1000.Can I adjust amount of tax during last month of the year by increasing or decreasing amount of tax that is to be deposited?

[student_of_law]

You are right you may adjust in the last month. As earlier told u/s 149 employer is entitled to make adjustment for any deficiency. Further, s.149 speaks of estimated income. So just make a fair estimate of annual at the beginning and start deduction accordingly. Whenever during the year you find your estimate was wrong, as upon awarding of bonus, just change the rate of deduction according to new estimated income.

It is advised that in the interest of employees keep the estimate at lower side. As it is easy to make adjustment in the last month but it is unfair to deposit more for which refund cannot be obtained easily

[beyond.spirits]

And what if someone works with us only for two months. Lets say his salary was Rs. 35000 so his two months pay becomes Rs. 70000.

In another case lets suppose his salary was Rs. 200,000 per month. and his two months salary becomes Rs. 400,000. What should I do in above two cases? Should I deduct taxes or not?

[student_of_law]

In no case any employer is certain that his employee will definitely work for the whole year. The employee deriving salary may resign, become incapable of working, die or be terminated at any time.

We have to presume that he will continue to work for one year and you will estimate his annual income and deduct tax accordingly.

One question remains, of which I don't know the answer, what if we are certain that employee will only work for five months with us at Rs.35000 per month. Should we deduct tax or not? if anyone has read any circular or judgment on this issue?

[beyond.spirits]

thank you very much brother for your kind and supportive attitude. May Allah Bless you.