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Elements of Salary and Perquisites

Meaning of Salary:
Salary means a fixed amount of payment received from employer by an employee for
service rendered. In general, salary means any payments received by an employee for
physical or mental work from the employer for a specific time period.
In INCOME TAX ORDIANCE, 1984 an exclusive definition is given in Section 2(58)
where it is said that salary includes:
a) any wages,
b) any annuity, pension or gratuity,
c) any fees, commissions, allowances, perquisites or profit in lien of in addition
to salary and wages,
d) any advance salary; and
e) any leave encashment.
Section 21 also provides that salary indicates payment to the assesses, whether paid or
not and that any arrear salary not taxed earlier will also be included for computation
of salary.
Chargeability of Salary or Income Subject to Tax under Salary Headings:
There are three conditions under section 21(1) where income shall be chargeable to
income tax under the head Salaries. The three conditions are given bellow :
1. Any salary due from an employer to the assesses in the income year, whether
paid or not.
2. Any salary paid or allowed to employee in the income year, by or on behalf of
an employer though not due or before it become due to him; and
3. Any arrears of salary paid or allowed to him in the income year by or on
behalf of an employer, if not chargeability to income tax for any earlier
income year.

Elements of Salary:
Based on the definition of salary and practical situation elements of salary can be
identified as follows:
1. Basic salary :
Base salary is a fixed amount of money paid to an employee by an employer in
return for work performed. Base salary does not include benefits, bonuses or any
other potential compensation from an employer. Base salary is paid, most
frequently, in a bi-weekly paycheck to an exempt or professional employee.
2. Bonus :
A bonus is an additional compensation given to an employee above his/her normal
wage. A bonus can be used as a reward for achieving specific goals set by the
company, or for dedication to the company.
3. Dearness allowance (e.g. cause of inflation):
The Dearness Allowance (DA) is a cost of living adjustment allowance paid to
Government employees, Public sector employees and pensioners in Pakistan,
Bangladesh and India. Dearness Allowance is calculated as a percentage of a
citizen's basic salary to mitigate the impact of inflation on people.
4. Commission :
Common meaning of commission is the amount of money an employee earns
when they sell something: In addition to his salary, he gets a 1% commission on
each sale.
5. Annuity :
A fixed amount of money that is paid to someone each year and an insurance
policy or an investment that pays someone a fixed amount of money each year.

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6. Pension :
A fixed amount, other than wages, paid at regular intervals to a person or to the
person's surviving dependents in consideration of past services, age, merit,
poverty, injury or loss sustained, etc.
7. Gratuity :
Gratuity is a part of salary that is received by an employee from his/her employer
in gratitude for the services offered by the employee in the company.
8. Compensation (for loss) :
The definition of compensation is something of value given in exchange for
something else. The money a company pays to its employee to do work is an
example of compensation. When a person gets into a car accident and injures
someone, the money he pays to the injured victim for his losses is an example of
compensation.
9. Perquisites (all types of allowances) :
Perquisite may be defined as any casual emolument or benefit attached to an
office or position in addition to salary or wages. In essence, these are usually noncash benefits given by an employer to employees in addition to cash salary or
wages. However, they may include cases where the employer reimburses expenses
or pays for obligations incurred by the employee. Perquisites are also referred to
as extreme benefits.

The Terms about Perquisites:

Perquisites generally mean any casual emoluments or allowances other then the salary
or wages the employee get from employer. Perquisites also known as personal
advantages get from the employer if contracted or not. Mixed reimbursements of
necessary disbursements are not perquisites. The inclusive definition of Perquisites
as per section 2(45) is as under:
Perquisites includesa) The value of rent-free accommodation;
b) The value of any concession in the matter of rent respecting any
accommodation;
c) Any sum payable by the employer, whether directly or indirectly, to effect an
insurance on the life of, or to effect a contract for an annuity for the benefit of,
the assesses or his spouse or any of his dependent child;
d) The value of any benefit provided free of cost or at a concessionary rate; and
e) The sum paid by an employer in respect of any obligation of an employer.
Of the above five items, provisions have been made in Rule 33(B) for (a) and (b)
respecting determination of value for taxation purpose. The item under (c) is specific
and requires no explanation. And for the item (d) and (e) provisions made in Rule 33.
An employee receives the different types of perquisites, which are discussed below1. House rent allowance (HRA):
An employee can received in cash for rent of his house rent allowance or quarter. The
provision for calculating of the amount chargeable to tax are as follows-

Where HRA paid in cash- Sum of HRA exceeding lower of Tk.25000 per
month or 50% of basic salary.

Where rent-free residential accommodation is provided- Lower of Annual

value of the house or 25% of basic salary.

Where confessional rent residential accommodation is provided- Excess of

annual value of the house as computed under the last one over the actual
rent paid by the employee.

2. Conveyance allowance:
An employee may receive cash conveyance allowance or vehicle from his employer.
Provisions for computation of allowance or inclusion in salary for this perquisite are
as follows-

Where conveyance allowance is paid in cash- Conveyance allowance up to

Tk.30000 is exempted. If it exceeds Tk.30000 the exceeding amount will
be added with the salary.

Where a vehicle is provided for office and personal use- An amount of 5%

of the basic salary or 60000 which ever is higher will be added with salary.

3. Medical allowance:
Actual expenditure is exempted. But if the actual expense is less than allowance
received, the difference will be added with salary.
4. Entertainment allowance:
Amount received by the employee in full will be added with salary.
5. Contribution to Recognized Provident Fund (RPF):
In case of RPF an equal amount is contributed by the employee is also given by the
employer. Here the contribution of employers is added with the salary.
7. Balance of Unrecognized Provident Fund:
Amount received by the employee at the end of service will be added with salary to
the extent of employers contribution and interest thereof.

Generally these are the common most useable elements of salary and perquisites .
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