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7/29/2019 151684510 Heads of Income
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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.