HEADS OF INCOME

Salary, Income from house property, Business or Profession , Capital gains; and from Other Sources.

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 five heads. These heads of income have been specified in section 11of the income tax ordinance, 2001.

HEADS OF INCOME INTRODUCTION cont - - 1. 2. 3. 4. 5. Following are the different heads of income: Salary Income from house property Income from business or profession Capital gains; and Income from other sources.

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

MAXIMUM NON TAXABLE LIMIT

Salaried persons: Incase of salaried person no tax shall be charged if the taxable income is up to Rs. 3,50,000/-

1. SALARY
Salary is the first head or source mentioned in the income tax ordinance, 2001.In general sense salary is the remuneration paid by the employer to an employee for the services rendered by him. The word salary has 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.

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.

VALUATION OF SALARY INCOME

In order to determine the taxability of salary income the following terms should clearly understood; Minimum of Time scale of pay: means the grade of basic salary in which a particular employee has been engaged . Example: a B.Com accountant has been employed in the pay scale of Rs. 5,000 -10,000 in this example MTS is Rs. 5,000/- *12 = 60,000

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.

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

VALUATION OF SALARY INCOME cont - - iv. Utility v. Entertainment. vi. Employers contribution to the provident fund.

TAXABILITY OF ACCOMMODATION
A. House rent allowance: if an employer gives his employee accommodation or house rent allowance is cash, the whole amount so received will be taxable.

Example next - - - - slide

House rent allowance example

Mr. Faiz is working in the time scale of 20,000- 30,000. His basic salary at present is Rs. 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

TAXABILITY OF ACCOMMODATION cont -

B. Rent-free Accommodation: If the employer provides a furnished or unfurnished accommodation the following amount will be added in the total/ taxable income of the employee as value of this perquisite: 1. The amount that would have been paid by the employer in case such accommodation was not provided or 2. 45% of the minimum of time scale of the basic salary whichever is higher i.e.(1) or (2)

Example of accommodation facility

Mr. Faiz is working in the time scale of 25,00035,000. 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

 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.

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 : If the employer provides conveyance allowance to his employee, the whole such amount will be taxable.

i.

TAXABILITY OF CONVEYANCE cont

ii. If the employer has provided a conveyance to his employee for purely personal use, 10% of the cost which employer paid for acquiring the motor vehicle will be included in the taxable income of employee.

iii. If the employer has provided a conveyance to be used by the employee both for official & personal use, 5% of the cost which employer paid for acquiring the motor vehicle will be included in the taxable income of employee, every tax year.

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.

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 the employer will be exempt up to 10% of basic salary of employee.

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 value of such benefit or whole amount will be taxable.

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 of persons), overtime, fees, house allowance, conveyance allowance, etc.

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.

INCOME FROM PROPERTY cont - - Important points regarding income from property: In the computation of income from property the following points should be kept in mind: Tax under the head income from house property is payable on the fair market value of rent received or receivable of property consisting of building and lands attached thereto.

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.

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 or occupation 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.

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 property in the tax year in which it was received.

Income from property chargeability cont - - No deduction is allowed out of the fair market rent. If the rent is being received from local govt., local authority, company, non profit organization or a diplomatic mission, it is necessary the payer should deduct the tax & deposit it with the govt. In all other cases tax will be payable by the recipient himself/ herself.

TAX YEAR 2011 - 12

GROSS AMOUNT OF RENT RATE OF TAX Ind. & AOP( association of persons Nil

Companies
5% of the gross amount of rent

Up to Rs. 1,50,000/-

Rs. 5% of the amount 1,50,001/- to exceeding Rs. Rs. 1,50,000/4,00,000/Rs. 4,00,001/- to Rs. 10,00,000/More than 1,000,000/Rs. 12,500/- + 7.5% of the amount exceeding Rs. 4,00,000/Rs. 57,500/- + 10% of the amount exceeding Rs. 1,000,000/-

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/-

BUSINESS INCOME
Business: under section 2(9) business has been defined to include any a. Trade. b. Commerce, c. Manufacture or d. Any adventure or concern in the nature of trade; Commerce or manufacture.

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 sale of goods but also includes the rendering of such services which are helpful in trade, banking, insurance, marketing and transportation.

BUSINESS INCOME cont - - c. Manufacture: it means to work upon something by hand or by machine in order to turn it into something different from what it was before. c. Adventure in the nature of trade: a transaction can be termed as an adventure in the nature of trade, commerce, or manufacture if some elements of trade or business are present there in, it is not necessary for all elements to be present.

BUSINESS INCOME cont - - Deduction-section 22 to 30 The charge under section 18 is not on gross receipts of a business but on its profits. Profits mean net profit i.e. sales minus all chargeable/admissible expenses.

BUSINESS INCOME cont - - 1. 2. 3. 4. 5. 6. 7. 8. The following are examples of deductions. Rent of premises Current repairs Insurance premium. Lease money. Interest borrowed funds. Bonus and commission to employees. Expenditure on scientific research. Expenditure on training of industrial labor.

OPTIONAL RATE OF TAX FOR CERTAIN PERSONS

Under the income tax law some persons involved in 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 are applicable for other businesses or may pay a final tax equal to 0.5% of the turnover.

INCOME FROM OTHER SOURCES

Income under this head is from sources such as: Dividend Royalty Profit on debt Any prize bond or winning from a raffle, lottery, prize on winning a quiz. Prize offered by companies for promotion of sales or cross-word puzzle and Any other taxable income which does not fall under the previously mentioned four heads

1. 2. 3. 4.

5.

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 such income. Zakat paid.

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 and independently at the rate mentioned against each. 1. Dividend on shares from a public or insurance company = 10%

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 or crossword puzzle =20% of any such winning.

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 the income of that year in which disposal took place.

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:
AB=C Details next slide

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.

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.

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 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, no matter when it was purchased the capital gain arising on the sale will be taxed.

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 GAINS

Tax Year More than 6 months less than 12 months Less than 6 months

2011 2012

7.5% of capital gain 8% of capital gain

2013
2014

2015
2016

8.5% gain 9% gain 9.5% gain 10% gain

of capital
of capital

10.0 % of capital gain 10.0% of capital gain 12.5 % of capital gain 15.0% of capital gain

of capital
of capital

17.5 % of capital gain

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 taxable gain the person has received from sale of securities in the same year. Such loss, however, cannot be carried forward to the next year.