Lecture 30

Tax Treatment--
Gratuity & Pension
Salary and its Computation
Gratuity
• 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.
Salary and its Computation
Gratuity Received under Sixth
Schedule:
In the case of employees covered by
approved gratuity under Sixth
Schedule: any gratuity received by an
employee from a gratuity fund approved by
the Commissioner of Income Tax in
accordance with the rules contained in Part
III of the Sixth Schedule, is fully exempt
under clause (13)(ii), Part I of Second
Schedule.
Salary and its Computation

Exercise-2 on Gratuity:
Mr. A, an employee of a private Company,
received Rs. 1,000,000 at the time of
retirement on 01-10- 2006, from a gratuity
fund approved by the Commissioner of Income
Tax under Sixth Schedule.
Other information/data for tax year 2007 is given
here under: compute taxable income and tax
thereon for tax year 2007----Continued
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 Taxable
income income
Basic salary 360,000 Nil 360,000
Bonus 90,000 Nil 90,000
Gardener 48,000 Nil 48,000
Particulars Total income Exempt Taxable
income income
Total Bf 498,000
Gratuity 1,000,000 1,000,000 Nil
N-1
Total 498,000

Tax payable = 498,000x3.5%=17430

Note-1:
Gratuity fund approved by the Commissioner of Income Tax is
exempt under Sixth Schedule.
Treatment if Gratuity Approved by Central
Board of Revenue

In Case Gratuity Approved Under clause

(13)(iii), Part I, Second Schedule-CBR approval
•First gratuity received up to Rs. 200,000 is
exempt.
•Amount exceeding Rs. 200,000/- will be taxable
as salary.
Salary and its Computation
Treatment of Gratuity not Covered under any
other Clause of Part I of 2nd Schedule:
Gratuity received by an employee/family on
retirement or death shall be exempt from tax
to the extent of the least of the following:
a. 50% of amount receivable.
or
b. Rs. 75,000
Proviso
Salary and its Computation
Gratuity
However, this exemption is not available in the
following cases:
i. If gratuity is received outside Pakistan.
ii. Received by a director of a company who is
not a regular employee of the company.
iii. If received by a non resident person
iv. If recipient has already received any gratuity
from the same or any other employer.
Salary and its Computation
Exercise-3 on Gratuity:
Mr. A retired on 01.01.2007, he received gratuity
amounting Rs. 600,000. The gratuity fund was not
approved by the authorities stipulated in the
ordinance. Explain treatment of gratuity received
by the said employee under the provisions of the
Ordinance.
Salary and its Computation
Solution---Exercise-3 on Gratuity
As per clause (13)(iv), Part I of Second
Schedule, exemption is available as follows:
50% of Rs. 600,000 received = Rs. 300,000 or
Rs.75,000
whichever is less.
In this case Rs.75,000 is exempt and balance
amount of Rs.225,000 will be taxable.
Salary and its Computation

Gratuity--- Points to Remember:

• Gratuity will be ignored while computing
taxable income and tax liability of a
deceased person.
• In case the gratuity is received by legal
heirs, where employee dies before
retirement the gratuity would be taxable in
the hands of legal heirs of the deceased.
Salary and its Computation
Pension
Pension is the amount received on account of
past services/employment:
• Tax treatment of Pension
o Pension Totally Exempt:
If received by a citizen of Pakistan under clause (8)
part I of second Schedule. Provided
 As stated above the recipient should be citizen of
Pakistan
 Pension Totally Exempt (Contd..)
 The recipient must not be working for the same
employer for any remuneration .
 In case a person receives pension from more than
one employer, the exemption shall be available to
the higher of the pensions received by him.
 Pension Received by Ex-Government Employees
and Members of Armed Forces.
Any pension received by employees of federal
govt./Provincial Govts. members of Armed Forces
of Pakistan or granted under the rules to their
families is exempt from tax under clause (9), part
I of second Schedule
Pension
Clauses (8),(9), (12), (16), (17) Part I of
Second Schedule.
Clause (8)
Any pension received by a citizen of
Pakistan from a former employer, other than
where the person continues to work for the
employer (or an associate of the employer).
Provided that where the person receives
more than one such pension, the exemption
applies only to the higher of the pensions
received.
Pension
Clauses (8),(9), (12), (16), (17) Part I of
Second Schedule. Contd…
Clause (9)
Any Pension–
(i) Received in respect of services rendered by
a member of the Armed Forces of Pakistan of
Federal Government or a Provincial
Government;
(ii) Granted under the relevant rules to the
families and dependents of public servants or
members of the Armed Forces of Pakistan who
die during service.
Pension
Clauses (8),(9), (12), (16), (17) Part I of
Second Schedule. Contd…
Clause (12)
Any payment in the nature of commutation of
pension received from Government or under
any pension scheme approved by the
Central Board of Revenue for the purpose of
the clause.
Pension
Clauses (8),(9), (12), (16), (17) Part I of
Second Schedule. Contd…
Clause (16)
Any income derived by the families and
dependents of the “Shaheeds” belonging to
Pakistan Armed Forces from the special
family pension, dependents** pension or
children’s allowance.
Pension
Clauses (8),(9), (12), (16), (17) Part I of
Second Schedule. Contd…
Clause (17)
Any income derived by the families and
dependents of the “Shaheeds” belonging to
the Civil Armed Forces of Pakistan to whom
the provisions of the Joint Services Instruction
No. 5/66 would have applied had they
belonged to the Pakistan Armed Forces from
any like payment made to them.
Salary and its Computation

Pension -- (Contd..)
Exercise:
Mr. A retired on 01-01-2007 and thereafter
joined a private Co.
Other information/data for tax year 2007 is
given here under: compute taxable income and
tax thereon for tax year 2007.
 Salary and its Computation---
Pension

Exercise cont…
1. Salary Rs.600,000
2. Pension Rs.300,000
Solution:
In this case taxable income for tax year 2007 will
be Rs. 600,000.
Pension from ex-employer is exempt under clause
(17), Part I, Second Schedule.
 Salary and its Computation---
Pension
Solution Contd…
Taxable Income = 600,000
Tax payable = 600,000 x 6%= Rs 36,000
Salary and its Computation
Pension granted to injured or disabled:
Pension granted to a public servant or personnel of
Armed Forces on injuries or body disability and to
families and dependents of ‘Shaheeds’ belonging to
civil or Pakistan Armed Forces; or public servant or
member of Armed Forces, who dies during service is
exempt as provided in part I of Second Schedule.
Salary and its Computation

Any payment in the nature of commutation of

pension [Clause (12), Part I, 2nd Schedule]---is
Exempt from tax:
Any payment in the nature of commutation of
pension received from the government or under any
pension scheme approved by the Central Board of
Revenue under clause (12), Part I, Second Schedule
is exempt from tax.
 Salary and its Computation

Exercise on Commutation of Pension:

Mr. A, a government servant, retired on 1-12-2006
and received Rs.900,000 as commutation of pension.
Compute taxable income for tax year 2007.
Commutation of Pension is exempt under clause
(12) Part I of Second Schedule.
Salary and its Computation
Exercise- on
lump sum payments received:

Mr. A received Rs. 1,500,000 on opting for Golden

Handshake in the tax year 2007. He received total
income amounting Rs. 600,000 as salary during
said year. Rate of tax for preceding three tax year
was 20%. 15% and 10%.
Compute taxable income and tax thereon for tax
year 2007.
Salary and its Computation

 Solution
Tax payer can opt to seek approval from CIT to
charge lump sum payments received in a tax year at
average tax rate of last three years. In this case
average tax rate for last three years comes to 15%.
So it is advisable to opt for charging this amount as
per procedure prescribed above.
 Computation of Tax:

• Salary at normal rate=Rs.600,000x6%= 36,000

Lump sum payments= 1,500,000x15% = 225,000

Salary and its Computation

 Solution: Contd….
if lump sum payments of Rs 1,500,000 had
been included in salary income, taxable income
would have been 2,100,000 and that would
have been charged at the rate of 25% as shown
at serial number 14 for taxable income
exceeding 1,300,000.
Tax liability would have been Rs.
2,100,000x25% that is Rs 525,000. hence it is
advisable for tax payer to opt for charging the
tax at average rate of last three years.