Salary Flashcards
(34 cards)
Define the term ‘salary’ as it is understood under the Income Tax Ordinance, 2001, and explain its implications for employees regarding the nature of payments they receive from their employment. How does this definition encompass both revenue and capital aspects?
Any amount received by an employee from employment, whether of a revenue or capital nature [Sec. 12(2)].
Explain the taxation process for salary under the Income Tax Ordinance, 2001. Under which specific head is salary taxed, and what is the basis for this taxation? How does this affect the timing of tax liability for employees?
Taxed under the head ‘Salary’ on a receipt (cash) basis [Sec. 12(1)].
Discuss the provisions regarding deductions for expenses incurred by employees in earning their salary income under the Income Tax Ordinance, 2001. Are there any circumstances under which such deductions might be allowed?
No, no deductions are allowed [Sec. 12(4)].
Describe the criteria for being classified as an ‘employee’ under the Income Tax Ordinance, 2001. What categories of individuals fall under this definition, and how does it impact their tax obligations?
Any individual engaged in employment, including directors, public office holders, or those entitled to fixed remuneration [Sec. 2(20), 2(22)].
Define the term ‘employer’ as per the Income Tax Ordinance, 2001. What responsibilities does this classification entail regarding the remuneration of employees?
Any person who engages and remunerates an employee
Explain the general rule for the taxation of salary income under the Income Tax Ordinance, 2001. How does this rule determine the timing of tax liability for employees, and what is the significance of the year in which salary is received?
Salary is taxed in the year it is received, not when it is earned [Sec. 12(1)].
Discuss the exception to the general rule of salary taxation concerning payments made in arrears. What options does an employee have in this situation, and how can it affect their tax rate?
Employee can elect to be taxed at the rates applicable in the year the services were rendered if it results in lower tax
Describe the implications of salary deferral by a private company under the Income Tax Ordinance, 2001. What authority does the Commissioner have in this context, and under what circumstances might deferred salary be included in an employee’s income?
The Commissioner may include the deferred salary in the employee’s income for the earlier year if tax avoidance is suspected
Define allowances in the context of salary as per the Income Tax Ordinance, 2001. What purpose do these allowances serve for employees, and how are they typically structured within an employment agreement?
Amounts given to an employee for a specific purpose.
Describe the concept of perquisites in relation to salary and how they are treated for tax purposes. What types of benefits or facilities might be included, and what are the general rules regarding their taxation?
Benefits or facilities provided to an employee (e.g., accommodation, car), taxable based on specific valuation rules.
Explain the conditions under which certain allowances may be exempt from taxation. Can you provide an example of an allowance that qualifies for exemption and the criteria that must be met?
Yes, for example, medical allowance up to 10% of basic salary if no free medical treatment is provided [Clause 139(b)].
How is the taxable value of accommodation provided by an employer determined? What are the two main methods used for this calculation, and which one is prioritized?
Higher of: Fair market value (FMV) of the accommodation or 45% of the minimum of the time scale of basic salary or basic salary if no time scale [Sec. 13(12), Rule 4].
Describe the method for calculating the taxable value of a motor vehicle that an employer provides. What are the different rates applied based on the vehicle’s usage?
5% of cost/FMV if partly for personal use; 10% of cost/FMV if fully for personal use [Sec. 13(3), Rule 5].
How is the taxable value of an interest-free or concessional loan from an employer calculated? What specific rates or benchmarks are used in this calculation?
Difference between the benchmark rate (10% from 2008) and the actual interest paid by the employee [Sec. 13(7)&(8)].
Explain how the taxable value of utilities such as electricity and gas provided by an employer is assessed. What factors are considered in this valuation?
Fair market value of the utilities minus any payment made by the employee
Under what circumstances is a medical allowance considered exempt from taxation? What specific percentage of the basic salary is applicable, and what condition must be fulfilled?
Up to 10% of basic salary, provided no free medical treatment or hospitalization is given [Clause 139(b)].
Describe the conditions under which free medical treatment or reimbursement is exempt from tax. What are the key factors that determine this exemption?
Free medical treatment or reimbursement is exempt if it meets specific criteria outlined in tax regulations.
Describe the conditions under which an employee can be fully exempt from taxation related to medical expenses provided by their employer. What specific documentation or certifications are required to ensure this exemption is valid?
Fully exempt if provided as per employment terms, hospital/clinic NTN is given, and employer certifies the bills [Clause 139(a)].
Explain the tax implications of granting a right or option under an employee share scheme. Is this grant considered taxable income, and what legal reference supports this conclusion?
No, it is not taxable [Sec. 14].
How is the taxation structured when an employee disposes of a right or option under an employee share scheme? What formula is used to determine the taxable gain from this transaction?
Gain (consideration received minus cost) is taxable under ‘Salary’ [Sec. 14].
Define the circumstances under which shares issued under an employee share scheme become taxable. What is the method for calculating the taxable amount at the time of transfer or disposal?
Taxable when the employee has the free right to transfer or dispose of the shares. The taxable amount is FMV minus any consideration paid
How does the payment of tax on an employee’s salary by the employer affect the overall tax liability of the employee? What specific legal reference outlines this process?
The tax paid by the employer is added to the employee’s salary and taxed accordingly
Describe the option available to employees regarding the taxation of termination payments, such as a golden handshake. What is the specific legal provision that allows this choice?
Employee can elect to be taxed at the average rate of the prior three years
What is the tax treatment for government provident funds in terms of exemptions? Under what legal clause is this exemption defined?
Fully exempt
