Lecture 29 Consolidated Exercise & Gratuity

Computation of tax of salaried individual Exercise 11- Consolidated exercise. compute taxable income & tax thereon for tax year 2007 in respect of Mr. Yasir, a salaried individual.----MTS Rs30,000-2,500-50,000 a. Basic salary, Rs. 420,000pa b. Salary received from former employer Rs 200,000 c. Salary received from prospective employer Rs 100,000 d. Tax liability of employee paid by the employer Rs 40,000

Exercise 11- Consolidated exercise- Contd… e. Voluntary payments made by employerRs 80,000 f. Mr. Yasir incurred the expenses during the tax year on account of personal car Rs. 40,000 and on renovation of his house Rs.100,000/- Computation of tax of salaried individual

Exercise 11- Consolidated exercise- Contd… g. Leave pay Rs.20,000 h. Medical allowance Rs.60,000 i. Free hospitalization services Rs.100,000 received under the term of employment j. Extra duty Allowance Rs.15,000 k. Bonuses received Rs.40,000 l. Utilities provided by the employer Rs.30,000 Computation of tax of salaried individual

Exercise 11- Consolidated exercise- Contd… m. T.A /D.A reimbursed on account of official assignmentsRs 40,000 n. Golden handshake payments received Rs 1,600,000 Average rate of tax for last 3 years was 25%, 20%, 15% Computation of tax of salaried individual

Exercise 11- Consolidated exercise- Contd… o. Donation paid by the employee to a charitable institution duly approved by CBR Rs. 40,000 o Deduction of tax at source Rs. 224,000 Computation of tax of salaried individual

Solution to Exercise 11: Tax payer: Mr. YasirTax year: 2007 Residential Status: ResidentNTN: Computation of taxable income and tax thereon: In Rs Particulars Total incomeExemptTaxable incomeincome -Salary 420,000Nil420,000 -Salary from former employer 200,000Nil200,000 Salary and Its Computation

Solution to Exercise 11 :Contd… In Rs Particulars Total incomeExemptTaxable incomeincome -Salary from 100,000Nil100,000 prospective employer -Tax liability paid by employer40,000Nil40,000 - Voluntary 80,000 Nil80,000 payments Salary and Its Computation

Solution to Exercise 11 :Contd… In Rs Particulars Total incomeExemptTaxable incomeincome -Expenses incurred ---- (deductions not admissible to salaried individuals) -Leave pay 20,000 Nil20,000 - Medical allowance 60,000 Nil60,000 (Exemption not allowed since free hospitalization services provided) Salary and Its Computation

Solution to Exercise 11 :Contd… In Rs Particulars Total incomeExemptTaxable incomeincome -Free hospitalization 100,000100,000 Nil - Extra duty allowance 15,000 Nil 15,000 -Bonuses received 40,000 Nil40,000 - Utilities30,000 Nil 30,000 - TA/DA for 40,00040,000 Nil official purpose Salary and Its Computation

Solution to Exercise 11 :Contd… In Rs Particulars Total incomeExemptTaxable incomeincome - Golden handshake amount of Rs 1,600,000 can be taxed rate of tax of last 3 years i.e.; /3=20%--not advisable Total taxable income: 2,605,000 Salary and Its Computation

Solution to Exercise 11 :Contd… Tax liability: Tax rate of 16% percent as given at serial #17 for taxable income exceeding Rs.2,000,000 up to Rs. 3,150,000 Income tax payable: 2,605,000*17%= Rs. 442,850 Computation of tax credit on Donation: A/B*C 442,850/2,605,000*40,000=Rs. 6,800 Income tax payable = 442,850 – 6,800 = 436,050/- (C is2,605,000*30%=781,500. hence C is taken as Rs.40,000) Salary and Its Computation

Solution to Exercise 11 :Contd… Tax Payable= Rs. 436,050 Deduction at source = Rs. 224,000 Tax Payable =Rs. 212,050 Salary and Its Computation

Salary and its Computation Gratuity Purpose: Provision of Gratuity to employees or Undertaking of provision (payment) of gratuity on retirement or On employees becoming incapacitated or On termination of their employment after completion of minimum period of service specified in the regulations of fund or To the widows, children or dependants of such employees on their death.

Salary and its Computation Gratuity Contd… 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: Tax treatment of gratuity is as under: Gratuity pertaining to government employees/ their families: Any gratuity received on retirement/ death by employee of the government, a local authority or a statutory body or corporation or family is wholly exempt from tax under clause 13(i), part I of second schedule.

Salary and its Computation Clause 13, Part I of Second Schedule. (i)In the case of an employee of the Government, a local authority, a statutory body or corporation established by any law for the time being in force, the amount receivable in accordance with the rules and conditions of the employee’s services; (ii)Any amount receivable from any gratuity fund approved by the Commissioner in accordance with the rules in Part III of the Sixth Schedule;

Salary and its Computation Clause 13, Part 1 of Second Schedule. Contd… (iii)In the case of any other employee, the amount not exceeding two hundred thousand rupees receivable under any scheme applicable to all employees of the employer and approved by the Central Board of revenue for the purposes of this sub-clause; and

Salary and its Computation Clause 13, Part I of Second Schedule. Contd… (iv) In the case of any employee to whom *sub-clause (i), (ii) and (iii) do not apply, fifty per cent of the amount receivable or seventy-five thousand rupees, whichever is the less:

Salary and its Computation Clause 13, Part I of Second Schedule. Contd… Provided that nothing in this sub-clause shall apply- (a) To any payment which is not received in Pakistan. (b) To any payment received from a company by a director of such company who is not a regular employee of such company. (c) To any payment received by an employee who is not a resident individual; and to any gratuity received by any employee who has already received any gratuity from the same or any other employer.

Salary and its Computation Exercise 1 on Gratuity: Compute taxable income and tax thereon for tax year 2007 in respect of Mr. A, an employee of Government of the Punjab. Relevant information/data is given below. Salary Rs. 800,000 Gratuity Rs. 1,000,000 Tax deducted at source Rs. 54,000

Solution to Exercise 1: Tax payer: Mr. YasirTax year: 2007 Residential Status: ResidentNTN: Computation of taxable income and tax thereon: In Rs Particulars Total incomeExemptTaxable incomeincome -Salary 800,000Nil800,000 - Gratuity 1,000,000 1,000,000 Nil (N-1) Salary and its Computation

Exercise-1: Contd… Taxable income = Rs. 800,000 Tax rate of 7.50% at serial no 10 for taxable income exceeding Rs 700,000 up to Rs 850,000 shall be applied. 800,000 x 7.5% = Rs.60,000

Exercise-1: Contd… Tax payable = Rs 60,000 Tax deducted at source = Rs 54,000 Tax payable with returnRs 6,000 Note 1: Amount received as gratuity is exempt in this case under clause 13(i), Part I, Second Schedule of the Ordinance. Salary and its Computation