Table of Contents
- What Is Salary Income? (Section 12, ITO 2001)
- What’s Included in Your Salary?
- Income Tax Rates on Salary — Tax Year 2026
- Key Exemptions for Salaried Employees
- How to Calculate Your Salary Tax (Step-by-Step)
- Documents Required to File Your Return
- Filing Deadline & Process
- Real-Life Example
- How Trusty Consulting Can Help
Introduction
If you earn a monthly salary in Pakistan, you are taxable under the head “Salary” as defined in the Income Tax Ordinance, 2001. Every tax year, FBR (Federal Board of Revenue) expects eligible salaried employees to file their income tax returns and for Tax Year 2026 (July 1, 2025 to June 30, 2026), the rates have been updated through the Finance Act, 2025.
1. What Is Salary Income? (Section 12, ITO 2001)
Under Section 12 of the Income Tax Ordinance, 2001, the law is clear:
“Any salary received by an employee in a tax year, other than salary that is exempt from tax under this Ordinance, shall be chargeable to tax under the head ‘Salary’.”
In other words if you get paid for working, it is taxable.
Who Counts as an Employee?
The Ordinance takes a very broad view. An amount is treated as salary whether it is paid by:
- Your current employer
- A past or prospective employer
- A third party under an arrangement with your employer
- Paid directly to you or to your associate
2. What’s Included in Your Salary?
Section 12(2) defines salary broadly. It includes:
- Basic pay, wages, leave pay, overtime, bonus, commission, and fees
- Perquisites — whether convertible to money or not (e.g., company car, housing)
- Allowances — cost of living, rent, utilities, education, entertainment, or travel allowance (except allowances wholly and exclusively spent in performing your job duties)
- Reimbursed personal expenditures paid by your employer
- Profits in lieu of salary, including:
- Payments on joining (signing bonuses)
- Payments on changes to employment terms
- Golden handshake or termination payments
- Provident fund payouts (above your own contributions)
- Pension or annuity received from a former employer
- Accommodation or housing provided by the employer
- Utilities (electricity, gas, water) paid by your employer
Important: If your employer agrees to pay your tax on your behalf, your salary is grossed up by that tax amount for calculation purposes. (Section 12(3))
3. Income Tax Rates on Salary — Tax Year 2026
The following table applies specifically to salaried individuals where salary income exceeds 75% of total taxable income — which covers the majority of employees in Pakistan. These rates were updated by the Finance Act, 2025 and are effective for Tax Year 2026.
(First Schedule, Division I, Part I, Clause 2 — Income Tax Ordinance 2001)
| S# | Taxable Income (Annual) | Rate of Tax |
|---|---|---|
| 1 | Up to Rs. 600,000 | 0% — No tax |
| 2 | Rs. 600,001 – Rs. 1,200,000 | 1% of amount exceeding Rs. 600,000 |
| 3 | Rs. 1,200,001 – Rs. 2,200,000 | Rs. 6,000 + 11% of amount exceeding Rs. 1,200,000 |
| 4 | Rs. 2,200,001 – Rs. 3,200,000 | Rs. 116,000 + 23% of amount exceeding Rs. 2,200,000 |
| 5 | Rs. 3,200,001 – Rs. 4,100,000 | Rs. 346,000 + 30% of amount exceeding Rs. 3,200,000 |
| 6 | Above Rs. 4,100,000 | Rs. 616,000 + 35% of amount exceeding Rs. 4,100,000 |
💡 Quick Tip: A monthly salary of Rs. 50,000 means annual income of Rs. 600,000 which falls in the zero-tax slab. You only begin paying tax from Rs. 600,001 onwards.
Not sure how much you owe? Use the Trusty Consulting Salary Tax Calculator to get your instant estimate.
✅ CORRECTED — Special Rule: Pension Income (Section 12(2A), Finance Act 2025)
Pension received under an employment is covered under Section 12(2)(f) and is, by default, taxable as salary. However, Section 12(2A) inserted by the Finance Act, 2025 — introduces three specific scenarios with different tax treatments:
Scenario 1 — Pension from a Former Employer (Person Below Age 70):
Tax treatment follows the proviso to Clause (2), Division I, Part I of the First Schedule, which provides a separate, reduced pension-specific rate table:
| S# | Pension Received (Annual) | Rate of Tax |
|---|---|---|
| 1 | Up to Rs. 10,000,000 (Rs. 10 million) | 0% — Fully exempt |
| 2 | Above Rs. 10,000,000 | 5% of the amount exceeding Rs. 10 million (treated as Final Tax) |
⚠️ Important: The 5% on the excess above Rs. 10 million is a final tax — meaning no further tax is applicable on that pension income. The employer/payer is responsible for deducting this at source under Section 149(1A), inserted by Finance Act, 2025.
Scenario 2 — Individual Aged 70 Years or Above:
An individual who has attained the age of 70 years shall not be charged to tax on pension income at all — regardless of the amount received.
Scenario 3 — If You Continue Working for the Same Employer:
If a person receives pension while continuing to work for the same former employer (or its associate), the pension does not benefit from the special rate table. Instead, it is taxed at the normal salary rates under Clause (1) or (2) of Division I, as applicable.
💡 Summary for most retirees: If you are below 70 years of age and your total pension from a former employer stays within Rs. 10 million per year, you pay zero tax on it. Above that threshold, only 5% on the excess applies — as a final tax. Age 70+? Pension is fully tax-free.
4. Key Exemptions for Salaried Employees
The Second Schedule, Part I of the Income Tax Ordinance lists important exemptions that reduce your taxable salary. Here are the most relevant ones:
Medical Allowance & Medical Treatment (Second Schedule, Part I, Clause 139)
Under Clause 139, the tax treatment of medical benefits depends on what your employer actually provides. There are two distinct rules — and only one applies at a time:
Rule A — Free Medical Treatment / Hospitalization (In-Kind or Reimbursement):
Fully exempt provided all three conditions are met:
- It is provided or reimbursed in accordance with the terms of employment
- The NTN (National Tax Number) of the hospital or clinic is provided
- The employer certifies and attests the medical or hospital bills
Rule B — Cash Medical Allowance (No Free Treatment Provided):
A cash medical allowance is exempt only up to 10% of basic salary but this applies strictly only when:
- Free medical treatment, hospitalization, or reimbursement of such charges is not already provided under your terms of employment
⚠️ Critical Point: You cannot claim both exemptions at the same time. If your employer provides free treatment or reimburses hospital bills under your contract, Rule A applies and the separate cash allowance becomes fully taxable. If no such facility exists in your employment terms, only then does Rule B (10% of basic salary) apply.
Other Key Exemptions for Salaried Individuals
- Commutation of Pension (Government): Any payment received as commutation of pension from the Government or from a Board-approved pension scheme is exempt under Clause 12 of the Second Schedule.
- Pension for Families of Deceased Public Servants: Pension granted to families and dependents of public servants or Armed Forces personnel who die during service is fully exempt.
- Provident Fund (Approved/Recognized): The accumulated balance due and payable upon leaving employment from a recognized provident fund is excluded from total income. However, employer contributions exceeding 1/10th of salary or Rs. 150,000 (whichever is lower) are treated as taxable income in that year.
- Workers Participation Fund: Amounts received from the Workers Participation Fund established under the Companies Profits Act, 1968 are exempt.
- Benevolent Fund Grants: Payments from the Benevolent Fund to employees or their families under the Central Employees Benevolent Fund Act, 1969 are exempt.
- Approved Superannuation Fund: Payment on death of a beneficiary, in lieu of or in commutation of annuity, or as refund of contributions on death exempt.
- Subsidized Perquisites (Specific Sectors):
- Free or subsidized food provided by hotels and restaurants to employees during duty hours
- Free or subsidized education by educational institutions to employees’ children
- Free or subsidized medical treatment by hospitals or clinics to their own employees
- Government Allowances Abroad: Any allowance or perquisite paid outside Pakistan by the Government to a Pakistani citizen rendering service abroad is exempt.
5. How to Calculate Your Salary Tax (Step-by-Step)
Follow these steps to calculate your income tax on salary for Tax Year 2026:
- Add up your total annual salary — include basic pay, bonuses, overtime, and all cash allowances.
- Add the value of taxable perquisites — company car, housing, utilities as computed under Section 13.
- Subtract exempt items — medical allowance up to 10% of basic (if Rule B applies), provident fund employer contributions within the prescribed limit, etc.
- This gives you your Taxable Income.
- Apply the applicable tax slab from the table in Section 3 above.
- Deduct any tax already withheld by your employer (Withholding Tax under Section 149).
- The remaining amount is your tax payable — or a refund, if excess was withheld.
💡 Skip the manual calculation — use the Trusty Consulting Salary Tax Calculator to get your accurate tax figure in seconds.
6. Documents Required to File Your Return
Under Section 118(2A), salaried individuals with salary income of Rs. 500,000 or more must file electronically. Here are the documents you need to prepare:
| Document | Purpose |
|---|---|
| CNIC | Primary identity for NTN registration |
| Salary Slips / Pay Stubs | Proof of monthly income and deductions |
| Employer’s Certificate | Confirming annual salary and tax deducted at source |
| Proof of Tax Deduction / Payment | Showing withholding tax under Section 149 |
| Wealth Statement | Mandatory alongside return under Section 116 |
| Foreign Income & Assets Statement | Required under Section 116A, if applicable |
| Bank Statements | Supporting income and expense details |
| NTN (National Tax Number) | Register via FBR IRIS Portal |
| Medical Bill Receipts | If claiming exemption under Clause 139 (with hospital NTN) |
| Provident Fund Statement | If applicable, for fund contribution details |
7. Filing Deadline & Process
Due Date: The return of income for a salaried individual must be filed on or before 30th September following the end of the tax year.
- Tax Year 2026 ends 30 June 2026 → Deadline: 30 September 2026
Mode of Filing: Filing must be done electronically via the FBR IRIS Portal.
Who Is Required to File?
Under Section 114 of the Income Tax Ordinance, a return of income is required from any person who:
- Has taxable income exceeding the basic exemption threshold (currently Rs. 600,000 for salary)
- Holds a National Tax Number (NTN) or is otherwise required to be registered
- Has been issued a notice by the Commissioner to file
Furthermore, Section 118(2A) specifically provides that where salary income for the tax year is Rs. 500,000 or more, the return must be filed electronically — along with proof of tax deduction and the wealth statement required under Section 116.
⚠️ Note: The Rs. 500,000 threshold under Section 118(2A) governs the mode of filing (mandatory electronic). However, the obligation to file itself arises under the broader criteria of Section 114. Therefore, even if your salary is slightly below this figure, you may still be required to file depending on your complete income picture and registration status. When in doubt, consult a qualified tax professional.
📋 Quick Filing Checklist:
- ✅ Register on FBR IRIS Portal and obtain NTN
- ✅ Gather all salary slips and employer certificate
- ✅ Prepare your Wealth Statement (Section 116)
- ✅ Include proof of tax deducted at source by employer
- ✅ Submit by 30 September 2026
8. Real-Life Example
Ahmed works as an IT professional in Lahore. His annual salary package is:
- Basic Salary: Rs. 1,800,000
- Medical Allowance: Rs. 120,000
- Bonus: Rs. 200,000
- Company Car (taxable value as prescribed): Rs. 80,000
Step 1 – Total Gross Income: Rs. 1,800,000 + Rs. 120,000 + Rs. 200,000 + Rs. 80,000 = Rs. 2,200,000
Step 2 – Less Exemptions: Medical allowance — 10% of basic salary = Rs. 180,000. However, Ahmed only received Rs. 120,000, and his employer does not provide free treatment. Therefore, the full Rs. 120,000 is exempt under Rule B of Clause 139.
Step 3 – Taxable Income: Rs. 2,200,000 – Rs. 120,000 = Rs. 2,080,000
Step 4 – Tax Calculation (Slab 3):
Rs. 6,000 + 11% × (Rs. 2,080,000 – Rs. 1,200,000) Rs. 6,000 + 11% × Rs. 880,000 Rs. 6,000 + Rs. 96,800 = Rs. 102,800
Ahmed’s annual income tax = Rs. 102,800 — approximately Rs. 8,567/month, deductible by his employer under Section 149.
Anecdote: A client of ours — a mid-level bank manager — came to us confused about why his employer had deducted Rs. 40,000 more tax than expected. After reviewing his salary slip, we discovered that his employer had incorrectly included a company-paid training expense as a taxable perquisite. By correctly applying Section 12(2)(c), we filed a revised computation and he received a tax refund of Rs. 40,000. Knowing the law pays literally.
9. How Trusty Consulting Can Help
Tax laws change every year. The Finance Act, 2025 brought significant changes to salary tax slabs, pension rules, and medical exemptions and staying updated is not easy for someone focused on their career.
At Trusty Consulting, we help salaried professionals across Pakistan:
- ✅ Accurately calculate their income tax on salary in Pakistan 2026
- ✅ Identify all available exemptions to reduce their tax burden
- ✅ File their income tax returns on time via FBR IRIS
- ✅ Handle FBR notices and refund claims professionally
📲 WhatsApp us at 03296325872 for a free quick consultation.
🌐 Visit us at tconsultingpk.com to learn more about our services.
Don’t let tax season stress you out let the professionals handle it.