Medical Allowance Exemption: Salary Tax Rules in Pakistan for 2026

Almost every salary slip in Sialkot carries a line for medical allowance, yet very few employees or even HR departments know exactly when that amount is tax-free and when it quietly becomes taxable. The Medical Allowance Exemption under Pakistani tax law is more specific than most people assume, and getting the structure wrong costs employees real money at the time of salary tax deduction. Furthermore, this is one of the most commonly confused provisions in the Income Tax Ordinance, often mixed up with a tax credit that was actually abolished years ago.

At Trusty Consulting, a Sialkot tax consultant firm that reviews payroll structures for exporters, schools, and small manufacturers across the city, we regularly find medical allowance being paid in a way that unnecessarily increases an employee’s tax liability. Therefore, this guide explains exactly what this exemption covers, how it works in practice, and how to structure it correctly for Tax Year 2026.

What Is the Medical Allowance Exemption Under Pakistani Tax Law?

This relief is granted under Clause 139, Part I of the Second Schedule to the Income Tax Ordinance, 2001. This is important to get right from the start: it is an exemption from taxable salary income, not a tax credit. A tax credit directly reduces the tax payable, while an exemption simply removes an amount from taxable income before tax is calculated at all. Many payroll staff still refer to the old Section 62A medical tax credit, but that provision was omitted by the Finance Act 2022 and no longer exists. The only medical relief available to salaried individuals today runs through Clause 139.

Two Different Paths Under the Medical Allowance Exemption

Clause 139 actually offers two separate routes, and an employment contract can only follow one of them at a time.

Route 1 — Fixed Medical Allowance: Where the employer does not provide free medical treatment, hospitalization, or reimbursement of medical charges under the terms of employment, a fixed medical allowance paid to the employee is exempt up to 10% of the employee’s basic salary. No bills or hospital documentation are required, since it is a flat allowance rather than a reimbursement.

Route 2 — Actual Reimbursement: Where the terms of employment do provide free medical treatment, hospitalization, or reimbursement, the actual reimbursement is exempt — but only if the National Tax Number of the hospital or clinic is provided, and the employer certifies and attests the medical or hospital bills. Without both conditions, the reimbursement loses its exempt status and becomes a taxable perquisite.

Route	Exempt Amount	Documentation Required
Fixed medical allowance (no free-treatment clause)	Up to 10% of basic salary	None
Actual reimbursement (free-treatment clause exists)	Full reimbursed amount	Hospital/clinic NTN + employer attestation

Who Can Claim This Exemption?

The exemption is available to salaried employees whose employment terms fall under either route above. Separately, the Ordinance also provides a smaller relief for individuals generally: a resident individual taxpayer may claim personal medical expenditure to the extent of 10% of taxable income returned, or Rs. 30,000, whichever is lower, provided the receipts show the name, National Tax Number, and complete address of the medical practitioner, and are furnished along with the return of income. This second relief is far less commonly used, but it can help a self-employed professional or small business owner who does not receive a salary-based medical allowance at all.

Step-by-Step: How to Structure Medical Allowance Correctly

1. 1

   Decide the route in the employment contract itself — fixed allowance or free treatment/reimbursement. Mixing the two informally is where most disputes with FBR begin.

2. 2

   Cap a fixed allowance at 10% of the employee’s basic salary to keep the entire amount exempt; any excess above that limit becomes taxable.

3. 3

   Collect the hospital/clinic’s NTN at the time the bill is submitted for reimbursement, not months later.

4. 4

   Have the employer certify and attest each medical or hospital bill before processing reimbursement, and keep that attestation on file.

5. 5

   Reflect the correct treatment in monthly withholding tax calculations and the annual salary certificate from the start, rather than correcting it later.

6. 6

   Retain hospital receipts, NTN details, and attestation records for as long as FBR can reopen an assessment.

Common Mistakes That Make Medical Allowance Taxable

• Paying a medical allowance above 10% of basic salary, with the excess wrongly treated as exempt
• Reimbursing medical bills without the hospital’s National Tax Number
• Processing reimbursements without the employer’s certification and attestation on the bills
• Confusing this relief with the old Section 62A medical tax credit, abolished by the Finance Act 2022
• Paying both a fixed allowance and reimbursing bills under the same employment terms, which the law does not clearly permit at the same time

Why This Matters for Sialkot’s Salaried Professionals

Sialkot’s economy runs on a mix of exporters, schools, hospitals, and manufacturing units that all employ salaried staff, and medical allowance is one of the most common line items on every one of their payrolls. Furthermore, because the exemption depends on paperwork collected at the time of the medical expense rather than at year-end, a business that only checks compliance during tax season usually discovers the missing NTNs and attestations too late to fix them. Getting this right from the first payslip protects both the employer’s withholding tax accuracy and the employee’s take-home pay.

How Trusty Consulting Can Help

Reviewing a payroll structure takes far less time than untangling a year of incorrectly taxed reimbursements. As a Sialkot tax consultant working with exporters, schools, and manufacturers across the city and nearby areas like Sambrial, Daska, and Pasrur, Trusty Consulting reviews employment contracts, payroll policies, and withholding tax calculations to make sure medical allowance is structured correctly from day one.

Frequently Asked Questions