Medical Allowance Exemption in Salary Tax — What Most Pakistanis Don’t Know
Most salaried employees in Pakistan are paying more income tax than legally required. The reason? Their employer’s HR department isn’t correctly applying the medical allowance exemption under the Income Tax Ordinance 2001.
What Is the Medical Allowance Exemption?
Under Clause 139, Part I, Second Schedule of the Income Tax Ordinance 2001, medical allowance up to 10% of basic salary is fully exempt from income tax. This means if your salary package includes a medical allowance component, that amount is NOT taxable.
Legal Reference: Income Tax Ordinance 2001, Second Schedule, Part I, Clause 139 (as amended by Finance Act 2025)
The Formula That Changes Everything
Most people assume their entire salary is taxable. It isn’t.
The Correct Formula
| Component | Calculation |
|---|---|
| Gross Salary | Your total monthly compensation |
| Divide by | 1.1 |
| Basic Taxable Salary | This is what actually gets taxed |
| Medical Exempt Amount | Gross Salary − Basic Taxable Salary |
Real Example
| Detail | Amount |
|---|---|
| Gross Monthly Salary | Rs. 110,000 |
| Basic (Net Taxable) | Rs. 110,000 ÷ 1.1 = Rs. 100,000 |
| Medical Exempt Amount | Rs. 110,000 − Rs. 100,000 = Rs. 10,000 |
| Tax Applied On | Rs. 100,000 only |
Only Rs. 100,000 is subject to income tax — not Rs. 110,000.
How Much Can You Actually Save?
Real-World Example: Employee with Rs. 150,000 Monthly Salary
| Scenario | Calculation | Annual Tax | Monthly Tax |
|---|---|---|---|
| WITHOUT Exemption (Wrong) | Rs. 150,000 × 12 = Rs. 1,800,000 | Rs. 72,000 | Rs. 6,000 |
| WITH Exemption (Correct) | Rs. 136,364 × 12 = Rs. 1,636,364 | Rs. 54,000 | Rs. 4,500 |
| YOUR SAVING | — | Rs. 18,000/year | Rs. 1,500/month |
That’s Rs. 18,000 per year you should be keeping — legally.
Why Do Employers Get This Wrong?
- Outdated payroll software — Systems apply tax on full gross salary without separating medical components
- Untrained HR departments — No knowledge of Second Schedule provisions; default to total salary taxation
- Employee unawareness — Most don’t know to request the correct calculation
How to Verify Your Tax Is Calculated Correctly
Request your Monthly Salary Tax Computation Sheet from HR. It should clearly show:
✓ Gross salary
✓ Less: Medical allowance exemption (10% of basic)
✓ Net taxable salary
✓ Annual taxable income
✓ Applicable tax slab and rate
✓ Monthly tax deduction
If your sheet doesn’t show a medical exemption deduction and you receive a medical allowance, your tax is being over-deducted.
Use Our Free Salary Tax Calculator
Our Salary Tax Calculator 2025-26 automatically applies the correct medical allowance exemption using the ÷ 1.1 formula.
Just enter your gross monthly salary — the calculator handles everything.
👉 Visit: tconsultingpk.com/salary-tax-calculator-2025-26-pakistan-trusty-consulting
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