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HEADS OF INCOME

Salary, Income from houseproperty, Business or

Profession , Capital gains;

and from Other Sources.

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HEADS OF INCOME

INTRODUCTION

A person may earn and receive income from

different sources during the tax year. For the

purpose of charge of income tax and calculation of

tax payable, the income is classified under fiveheads. These heads of income have been specified in

section 11of the income tax ordinance, 2001.

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HEADS OF INCOME

INTRODUCTION cont - - -

Following are the different heads of

income:

1. Salary

2. Income from house property

3. Income from business or profession

4. Capital gains; and

5. Income from other sources.

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HEADS OF INCOME

INTRODUCTION cont - - -

Once the income has been calculated separately

according to the procedure specified for each head, it

is clubbed together and the assessment of the whole

income is made at the same time and total tax liability

is computed

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MAXIMUM NONTAXABLE LIMIT

Salaried persons: Incase of salaried personno tax shall be charged if the taxable income

is up to Rs. 3,50,000/-

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1. SALARY

Salary is the first head or source mentioned in theincometax ordinance, 2001.In general sense salary

is the remuneration paid by the employer to an

employee for the services rendered by him.

The word salaryhas been used in a broader sense in

the income-tax ordinance. The term salary means any

amount received by an employee from any

employment whether of revenue or capital nature.

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1. SALARY cont - - -

Salary-What it includes The following groups of receipts are included

in the term salary:

Salary and wages

Annuity, pension or gratuity

Fees , commission or allowances

Perquisites

Profits in Lieu of or in addition to salary or

wages.

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VALUATION OF SALARY INCOME

In order to determine the taxability of salary incomethe following terms should clearly understood;

Minimum of Time scale of pay: means the grade ofbasic salary in which a particular employee has been

engaged .Example:a B.Com accountant has been employedin the pay scale of Rs. 5,000 -10,000 in this example

MTS is

Rs. 5,000/- * 12 = 60,000

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VALUATION OF SALARY INCOME

cont - - -

Taxable salary:Any income received by an

employee in a tax year shall be chargeable to tax in

that year under the head salary.

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VALUATION OF SALARY INCOME

cont - - - Basic salary: means the pay and allowances

payable monthly.

But it does not include allowances given for:

i) accommodation

ii) Conveyance

iii) Medical

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VALUATION OF SALARY INCOME

cont - - -

iv. Utility

v. Entertainment.

vi. Employers contribution to the

provident fund.

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TAXABILITY OF

ACCOMMODATION

A. House rent allowance:if an

employer gives his employee

accommodation or house rent allowance

is cash, the whole amount so receivedwill be taxable.

Example next - - - - slide

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House rent allowance example Mr. Faiz is working in the time scale of

20,000- 30,000. His basic salary at present isRs. 24,000/- p.m. during the tax year 2008 he

received from his employer house rent

allowance at the rate of Rs. 10,000/- p.m.

Calculate the taxable income of Mr. Faiz.

Basic Salary@ Rs. 24,000 p.m. x 12

= 2,88,000

House rent allowance@ Rs. 10,000 p.m. x 12= 1,20000

Taxable income from salary

= 4,08,000

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TAXABILITY OF ACCOMMODATION cont -

- -

B. Rent-f ree Accommodation: If the employer provides a furnished orunfurnished accommodation the followingamount will be added in the total/ taxable

income of the employee as value of thisperquisite:

1. The amount that would have been paid bythe employer in case such accommodation

was not provided or2. 45% of the minimum of time scale of the

basic salary whichever is higher i.e.(1) or(2)

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Example of accommodation facility

Mr. Faiz is working in the time scale of 25,000-

35,000. His basic salary at present is Rs. 30,000/-p.m. During the tax year 2008 Mr. Faiz was

provided a rent free accommodation by his

employer annual value of which is Rs.180,000/-.

Calculate the taxable income of Mr. Faiz.

CALCULATION NEXT SLIDE

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Basic Salary@ Rs. 30,000 p.m. x 12 = 3,60,000

Value of accommodation facility:

a. Amount receivable if accommodation was not given

Rs.180,000/-

b. 45% of MTS. Of B.S. - 25,000 x 12 x 45/100 =

1,35000

The higher amount will be taken i.e.

180,000

Total taxable income for Mr. Faiz is 3,60,000 +

180,000 = Rs. 5,40,000/-.

Note: if no time scale is given , the Basic salary should be

taken for computation.

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TAXABILITY OF CONVEYANCE

Sometimes an employer provides the employee

either a conveyance for use or conveyance

allowance is provided.

Determining the value of this facility :

i. If the employer provides conveyance allowance

to his employee, the whole such amount will betaxable.

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TAXABILITY OF CONVEYANCE cont

ii. If the employer has provided a conveyance to

his employee for purely personal use, 10% ofthe cost which employer paid for acquiring themotor vehicle will be included in the taxableincome of employee.

iii. If the employer has provided a conveyance tobe used by the employee both for official &personal use, 5% of the cost which employer

paid for acquiring the motor vehicle will beincluded in the taxable income of employee,every tax year.

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MEDICAL CHARGES, HOSPITAL

CHARGES OR MEDICAL ALLOWANCE

If an employee receives free medical treatment or

hospitalization or both by the employer or receives

re-imbursement of the medical expenses under the

terms of employment whole such benefit will be

exempt from tax.

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MEDICAL CHARGES, HOSPITAL CHARGES

OR MEDICAL ALLOWANCE cont - - -

In case where the above mentioned

facilities are not provided for in the terms of

employment, any medical allowance given by theemployer will be exempt up to 10% of basic salary of

employee.

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UTILITIES ALLOWANCE OF FREE

PROVISION OF UTILITIES

If an employer provides any such benefit or

allowance to his employee for meeting the

charges of gas, water and electricity, the valueof such benefit or whole amount will be taxable.

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CONCLUSION COMPUTATION OF

SALARY INCOME

Certain amounts which are totally

included in the income, are; basic salary,

bonus, commission, entertainment

allowance (except for certain classes ofpersons), overtime, fees, house

allowance, conveyance allowance, etc.

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INCOME FROM PROPERTY

Tax is payable by an assessee on the rent

received or receivable of the property

consisting of buildings and land of which he

is the owner.

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INCOME FROM PROPERTY cont - - -

Important points regarding income fromproperty:In the computation of income from

property the following points should be kept in

mind:

Tax under the head income from house property ispayable on the fair market value of rent received or

receivable of property consisting of building and

lands attached thereto.

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INCOME FROM PROPERTY cont - - -

The house property used by the owner either

for the purpose of his business or for his

residence shall be exempt from tax.

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Income from property chargeability

Rent received or receivable by a person for a tax year(other than rent exempt from tax) is chargeable to tax

in that year.

Rent means any amount received or receivable by the

owner of a building as consideration for the use oroccupation of or the right to use or occupy the land or

building and includes any forfeited deposit paid under

a contract for the sale of land or a building.

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Income from property chargeability

cont - - -

Non-adjustable advance:

Non-adjustable amounts received in relation to

building shall be treated as rent chargeable to tax

under the head Income from propertyin the taxyear in which it was received.

Income from property chargeability

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Income from property chargeability

cont - - -

No deduction is allowed out of the fairmarket rent.

If the rent is being received from local govt.,

local authority, company, non profit

organization or a diplomatic mission, it isnecessary the payer should deduct the tax &

deposit it with the govt.

In all other cases tax will be payable by the

recipient himself/ herself.

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TAX YEAR 2011 - 12GROSS

AMOUNT

OF RENT

RATE OF TAX -

Ind. & AOP(

association of

persons

Up to Rs.

1,50,000/-

Nil

Rs.1,50,001/- to

Rs.

4,00,000/-

5% of the amountexceeding Rs.

1,50,000/-

Rs.

4,00,001/- toRs.

10,00,000/-

Rs. 12,500/- + 7.5%

of the amountexceeding Rs.

4,00,000/-

More than

1,000,000/-

Rs. 57,500/- + 10%

of the amount

exceeding Rs.1,000,000/-

Companies5% of the gross amount of rent

5% of the gross amount of rent

Rs. 20,000 plus 7.5% of the

amount of rent exceeding Rs.400,000/-

Rs. 65,000 plus10% of the

amount of rent exceeding Rs.

1,000,000/-

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BUSINESS INCOME

Business: under section 2(9) business

has been def ined to include any

a. Trade.

b. Commerce,

c. Manufacture or

d. Any adventure or concern in the

nature of trade; Commerce ormanufacture.

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BUSINESS INCOME cont - - -

a. Trade: connotes the idea of buying and selling of

articles to make profit.

b. Commerce: is not confined to purchase or saleof goods but also includes the rendering of such

services which are helpful in trade, banking,

insurance, marketing and transportation.

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BUSINESS INCOME cont - - -

c. Manufacture:it means to work upon somethingby hand or by machine in order to turn it intosomething different from what it was before.

c. Adventure in the nature of trade:a transactioncan be termed as an adventure in the nature oftrade, commerce, or manufacture if someelements of trade or business are present there in,it is not necessary for all elements to be present.

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BUSINESS INCOME cont - - -

Deduction-section 22 to 30

The charge undersection 18is not on gross

receipts of a business but on its profits. Profits

mean net profit i.e. sales minus all

chargeable/admissible expenses.

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BUSINESS INCOME cont - - -

The following are examples of deductions.

1. Rent of premises

2. Current repairs

3. Insurance premium.4. Lease money.

5. Interest borrowed funds.

6. Bonus and commission to employees.

7. Expenditure on scientific research.

8. Expenditure on training of industrial labor.

OPTIONAL RATE OF TAX FOR CERTAIN

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OPTIONAL RATE OF TAX FOR CERTAIN

PERSONS

Under the income tax law some persons involvedin retail business have been given an option to

pay tax at a certain percentage of turnover.

This option is available only to the retailers being

individuals or associations of persons, whose

turnover is not more than Rs.50,00,000 for the

tax year.

They may opt for normal tax rates as areapplicable for other businesses or may pay a final

tax equal to 0.5%of the turnover.

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INCOME FROM OTHER SOURCES

I ncome under this head is from sources

such as:

1. Dividend

2. Royalty

3. Profit on debt

4. Any prize bond or winning from a raffle,

lottery, prize on winning a quiz. Prize offered

by companies for promotion of sales orcross-word puzzle and

5. Any other taxable income which does not fall

under the previously mentioned four heads

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INCOME FROM OTHER

SOURCES cont - - -

Deduction Allowed-Section40

In computing the income from other sources

the following allowances are made:

Any expenditure incurred for earning suchincome.

Zakat paid.

CO O O

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INCOME FROM OTHER

SOURCES cont - - -

Separate block of income :

The following incomes although they are

income from other sources, are not included in

the total income but taxed separately andindependently at the rate mentioned against

each.

1. Dividend on shares from a public or insurance

company =10%

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Separate block of income cont - - -

2. Other dividends = 10%

3. Royalty payment to non-resident =

15%

4. Profit or interest on bank deposits=10%

5. Prize on prize bond =10%

6. Winnings from a raffle, lottery orcrossword puzzle =20%of any such

winning.

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INCOME FROM CAPITAL GAINS

Capital gain.means any gain arising from

the disposal of capital asset. Such an

income shall be chargeable under the head

capital gain and shall be deemed to be theincome of that year in which disposal took

place.

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COMPUTATION OF CAPITAL GAIN

Disposal of capital Asset within twelve

Months

Where the capital gain has arisen as a

result of disposal of capital asset within

twelve months from the date of their

acquisition in the hands of the persons,

then apply the following formulas:

A B = C Details next slide

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Disposal of capital Asset within twelve

Months

AB = C

A: Is the consideration received

by the person on disposal of asset, B: is the cost of the assets, and

C: is the capital gain.

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COMPUTATION OF CAPITAL GAIN

Where the capital assets become the

property of the person:

1. Gift

2. inheritance

3. A distribution of assets on dissolution of an

association of persons; or

4. On distribution of assets on liquidation of a

company; The fair market value of the asset, on the date

of its transfer or acquisition by the person shall

be treated to be the cost the asset.

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Disposal of capital Asset after twelve

Months

Where the capital gain has arisen as a

result of disposal of capital asset after

twelve months from the date of their

acquisition apply the following formula:

C *

C is the amount of gain

CAPITAL GAIN ON DISPOSAL OF

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CAPITAL GAIN ON DISPOSAL OF

SECURITIES

Security here means

share of a public company,

voucher of Pakistan telecommunication

corporation,

Modarba certificate,

Note Capital gains on sale of all these was

exempt up to 30th June 2010.

If a security is sold on or after 1st

July 2010, nomatter when it was purchased the capital gain

arising on the sale will be taxed.

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TAXATION ON SECURITIES

If the holding period of a security is one year

or more any capital gain on its sale is exempt

from tax.

If the holding period of a security is six

months or more but less than twelve months

capital gain arising will be treated as a

separated block of income and taxed as per

given schedule next slide

TAXATION SCHEDULE FOR CAPITAL

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GAINS

Tax Year More than 6 months

less than 12 months

Less than 6 months

2011 7.5% of capital

gain

10.0 % of capital

gain

2012 8% of capital

gain

10.0% of capital

gain

2013 8.5% of capital

gain

12.5 % of capital

gain

2014 9% of capital

gain

15.0% of capital

gain

2015 9.5% of capital

gain

17.5 % of capital

gain

2016 10% of capital

gain

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EFFECTS OF FACING LOSS ON

DISPOSAL OF SECURITIES

Where a person sustains a loss on

disposal of securities in tax year such

loss shall be reduced from the taxablegain the person has received from sale of

securities in the same year. Such loss,

however, cannot be carried forward to

the next year.