Salary Income Tax in Pakistan: Complete 2025

Salary Income Tax in Pakistan: Complete Guide for Salaried Employees (2025–26)

What Is Salary Income Under Pakistani Tax Law?
What Is Included in Salary? A Comprehensive Breakdown
Salary Tax Slabs for Tax Year 2025–26
The 75% Rule — Are You a “Salaried Person”?
Surcharge on High-Income Earners (Section 4AB)
Perquisites and Their Tax Treatment
Pension Income — Special Tax Rules
How Your Employer Deducts Tax — Section 149
Tax Credits Available to Salaried Employees
Exemptions on Salary Income
Step-by-Step Guide: Filing Your Salary Income Tax Return
Real-Life Stories from Sialkot
Frequently Asked Questions (FAQ)
Final Thoughts & CTA

1. What Is Salary Income Under Pakistani Tax Law?

If you work for someone — whether a government department, a private factory, a corporate office, or even a local business — the money you receive from that employment is taxed as salary income under Pakistani law.

Under Section 12 of the Income Tax Ordinance, 2001 (ITO 2001), any salary received by an employee in a tax year — other than amounts specifically exempt from tax — is chargeable under the head “Salary”. This is one of the five heads of income defined in Section 11 of the Ordinance.

For Sialkot‘s large workforce — factory workers, export managers, office staff, and government employees alike — understanding salary income tax in Pakistan is not just a legal obligation, but a financial survival skill. Whether you work in the sports goods sector, surgical instruments, or the leather industry, your monthly payslip has a tax story behind it.

Furthermore, the rules go well beyond just your basic pay. The ITO 2001 takes a broad view of what counts as salary, including allowances, bonuses, perquisites, and even amounts paid by your employer on your behalf.

2. What Is Included in Salary? A Comprehensive Breakdown

Section 12(2) of the ITO 2001 defines salary as any amount received by an employee from any employment, whether of a revenue or capital nature. This is a wide definition. It includes:

Pay, wages, and remuneration — your basic monthly salary, overtime pay, leave pay, and payment in lieu of leave
Bonuses and commissions — annual performance bonuses, sales commissions, and professional fees paid by an employer
Allowances — cost of living allowance, house rent allowance (HRA), utilities, education, entertainment, and travel allowances. However, an allowance solely expended in performing your official duties is excluded — but this exception does not apply if the allowance is paid monthly on a fixed or percentage basis
Perquisites — benefits such as free or subsidized housing, use of a company vehicle, or any other employer-provided benefit convertible to money or not
Employer reimbursements — amounts your employer pays back to you for personal expenses (not official business expenses)
Profits in lieu of salary — such as golden handshake payments, compensation for redundancy, amounts received for entering or terminating an employment contract, and restrictive covenant payments
Pension and annuity — monthly pension from a former employer
Employee share schemes — shares issued under Section 14 at a value exceeding what you paid

In addition, Section 12(5) clarifies that it does not matter whether the benefit comes from your current employer, a past employer, a future employer, or even an associate of the employer — if it relates to your employment, it is taxable as salary.

3. Salary Tax Slabs for Tax Year 2025–26

The salary income tax rates in Pakistan for Tax Year 2026 (July 2025 to June 2026) are set out in Division I of Part I of the First Schedule of the ITO 2001, as amended by the Finance Act 2025.

3.1 Rates for Salaried Individuals (Where Salary > 75% of Taxable Income)

This is the main salary slab table applicable if your salary income exceeds 75% of your total taxable income — meaning you are primarily a salaried person:

S. No.	Taxable Income	Rate of Tax
1	Up to Rs. 600,000	0%
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

Important: If your taxable income exceeds Rs. 10 million, an additional 9% surcharge (Section 4AB) applies on the tax computed above.

3.2 Rates for Non-Salaried / Mixed-Income Individuals (Salary ≤ 75% of Taxable Income)

If your salary income is 75% or less of your total taxable income — meaning you also have significant business, rental, or other income — you are taxed under the general individual slab rates, which are higher than the salaried rates above.

4. The 75% Rule — Are You a “Salaried Person”?

This is a critical distinction that many salaried employees in Sialkot overlook — especially those who also receive rental income from a property or earn some business income on the side.

Under Division I of the First Schedule, the lower salaried tax rates apply only if salary income exceeds 75% of your total taxable income. If it does not, you will be taxed at the higher general individual rates.

Example: Ahmed, an accounts manager at a Sialkot sports goods factory, earns Rs. 1,800,000 in salary but also receives Rs. 700,000 in rental income from a shop. His total taxable income is Rs. 2,500,000 and salary is Rs. 1,800,000 — which is 72% of total income. Since 72% is below 75%, Ahmed does not qualify for the salaried rates. His tax will be computed at the general individual rates, which are higher.

Therefore, it is always wise to consult a Sialkot tax consultant to properly assess which slab applies to you.

5. Surcharge on High-Income Earners — Section 4AB

Under Section 4AB, inserted by the Finance Act 2024, a surcharge is payable by individuals where taxable income exceeds Rs. 10 million. For salaried persons, this surcharge rate is 9% of the income tax computed under Division I.

For non-salaried individuals or AOPs, the rate is 10%. However, for those whose primary income is salary, the law provides a slight relief at 9%.

This surcharge is an addition on top of your regular income tax, calculated during annual assessment and also accounted for by your employer when computing withholding tax under Section 149.

6. Perquisites and Their Tax Treatment

6.1 What Are Perquisites?

A perquisite is any benefit provided by an employer to an employee beyond basic cash pay. Under Section 13 of the ITO 2001, the value of perquisites is determined and added to your salary for tax purposes.

Common perquisites include:

Company vehicle — use of a car provided by the employer
Housing or accommodation — free or subsidized housing provided by the employer (value prescribed by rules)
Interest-free or concessional loans — if your employer gives you a loan at below-market interest, the difference is treated as a perquisite (the “benchmark rate” per Section 13 is based on the SBP discount rate)
Property transfers or services — fair market value of property transferred or services provided by the employer

6.2 Exempt Perquisites (Second Schedule, Clause 53A)

Not all perquisites are taxed. The Second Schedule, Clause 53A exempts certain perquisites where the employer bears no marginal cost, including:

Free or subsidized food provided by hotels and restaurants to employees during duty hours
Free or subsidized education provided by an educational institution to children of its employees
Free or subsidized medical treatment provided by a hospital or clinic to its employees

7. Pension Income — Special Tax Rules

Pension income received from a former employer is included in the definition of salary under Section 12(2)(f). However, special rules apply, inserted by the Finance Act 2025 via Section 12(2A):

If an individual has attained the age of 70 years, their pension is fully exempt from income tax — regardless of amount.
If pension income exceeds Rs. 10 million in a tax year (for individuals below 70), it is taxed as a final tax at a separate slab:

Pension Amount	Tax Rate
Up to Rs. 10 million	0%
Exceeding Rs. 10 million	5% on the excess only

If you continue to work for the same former employer or its associate while also receiving a pension, the pension will be taxed at the regular salary slab rates — not at the concessional pension rates.

This is an important consideration for Sialkot-based factory owners and directors who may draw both salary and pension from their own companies.

8. How Your Employer Deducts Tax — Section 149

Under Section 149 of the ITO 2001, every person responsible for paying salary to an employee is legally obligated to deduct tax at source at the time of payment.

8.1 Average Rate Method

The amount of tax deducted is based on the employee’s average rate of tax, computed using the formula:

Average Rate = A ÷ B

Where:

A = Tax payable on the employee’s estimated total salary income for the year (including Section 4AB surcharge)
B = The employee’s estimated salary income for the year

The employer then spreads this annual tax liability evenly across monthly salary payments. Moreover, adjustments are made for:

Tax already withheld from the employee under other heads during the year
Tax credits admissible under Section 61 (charitable donations) and Section 63 (voluntary pension fund contributions), after obtaining documentary evidence from the employee

8.2 Directorship Fee — Flat 20% Deduction

Under Section 149(3), payments made as directorship fees or fees for attending board meetings are taxed at a flat rate of 20% via withholding — regardless of the director’s total income.

9. Tax Credits Available to Salaried Employees

One of the most powerful ways to legally reduce your salary income tax in Pakistan is by claiming available tax credits. Two major ones are:

9.1 Section 63 — Voluntary Pension Fund (VPS) Contribution

A salaried individual who contributes to an approved pension fund under the Voluntary Pension System Rules, 2005 is entitled to a tax credit under Section 63.

The tax credit formula is:

(A ÷ B) × C

Where A = tax assessed, B = taxable income, C = the lesser of:

Actual contribution paid in the year
20% of taxable income

For individuals who join the pension fund above the age of 40, an additional 2% per year for each year of age above 40 is allowed — subject to a total cap of 50% of the prior year’s taxable income.

This credit is directly deducted from your tax liability, making it one of the most effective tax-saving tools for salaried persons in Pakistan.

9.2 Section 61 — Charitable Donations

A tax credit is available for donations made to approved FBR-recognized nonprofit organizations and charitable institutions listed in the Second Schedule of the ITO 2001. Employers can factor in this credit when computing Section 149 withholding, provided documentary proof is submitted by the employee.

9.3 Section 63A — Low-Cost Housing Loan (New — Finance Act 2025)

A brand-new tax credit has been introduced by the Finance Act 2025 under Section 63A for individuals who take a housing loan from a scheduled bank or approved financial institution for construction or acquisition of a personal house (up to 2,500 sq. ft. of land or a flat up to 2,000 sq. ft.). The credit is:

(A ÷ B) × C, where C = lesser of actual profit on debt paid OR 30% of taxable income.

This is a significant new benefit for first-time home buyers who are also salaried employees.

10. Exemptions on Salary Income

Certain salary-related amounts are specifically exempt from tax under Part I of the Second Schedule of the ITO 2001, including:

Gratuity received from an employer on retirement (from an approved gratuity fund — exempt regardless of amount; from unapproved funds, specific limits apply)
Provident fund repayment of employee contributions — the employee’s own previously contributed amount is not taxable when refunded
Workers Participation Fund — any income received by a worker from the WPF under the Companies Profits (Workers Participation) Act, 1968 is exempt
Benevolent grants paid from the Central Employees Benevolent Fund
Commuted pension from Government or an approved pension scheme
Foreign government officials’ salary — exempt subject to reciprocity conditions under Section 43
UN/specialized agency employees’ salary — exempt under Section 42
Government employees serving abroad — allowances and perquisites paid outside Pakistan by the Government under Clause (5A) are exempt

11. Step-by-Step Guide: Filing Your Salary Income Tax Return

If you are a salaried employee in Pakistan, you are required to file an annual income tax return with FBR IRIS by September 30 of each year. Here is how to do it:

Step 1: Obtain Your NTN Register on the FBR IRIS portal to get your National Tax Number (NTN) if you do not already have one. You need your CNIC and a valid mobile number.

Step 2: Get Your Employer Certificate (Section 165) Ask your employer’s payroll or HR department for your annual salary certificate, which shows your total salary, allowances, perquisites, and tax deducted at source during the tax year.

Step 3: Gather Supporting Documents Collect proof of any tax credits you plan to claim:

VPS contribution certificates (Section 63)
Donation receipts from FBR-approved organizations (Section 61)
Housing loan profit payment certificates if applicable (Section 63A)

Step 4: Log In to IRIS and Select Return Type Log into IRIS, select “Declaration” and then “114(I) — Return of Income for Salaried Individuals.”

Step 5: Fill in Salary Income Details Enter your salary, allowances, bonuses, and perquisites as shown on your employer certificate. Add any other heads of income (property, other sources) separately.

Step 6: Claim Applicable Tax Credits and Deductible Allowances Enter details of VPS contributions, charitable donations, and any housing loan payments in the relevant fields to reduce your tax liability.

Step 7: Cross-Check Tax Deducted at Source Ensure that the tax withheld by your employer matches what is reflected in your IRIS account under the “Tax Deducted at Source” section. Any discrepancy should be resolved with your employer.

Step 8: Submit the Return and Save the Acknowledgement Once all entries are verified, submit the return electronically. Save your acknowledgement slip — this is proof of filing.

Step 9: Pay Any Balance Tax Due If your total tax liability exceeds the amount already withheld by your employer, pay the balance using a PSID via FBR’s payment system.

Step 10: Appear on the Active Taxpayer List (ATL) After filing, your name will appear on FBR’s Active Taxpayer List, entitling you to lower withholding rates across numerous transactions.

12. Real-Life Stories from Sialkot

Story 1: The Factory Manager Who Didn’t Know About Perquisites

Usman bhai works as a production manager at a surgical instruments firm on Sambrial Road, Sialkot. For years, he had been using a company car and receiving a subsidized monthly meal at the factory canteen, without giving it a second thought.

However, when he visited a Sialkot tax consultant at Trusty Consulting, he discovered that the company car was being treated as a perquisite — and its value was being added to his annual salary for tax calculation purposes by his employer. The canteen meals, however, being provided by the employer at no marginal cost during duty hours, were specifically exempt under Clause 53A of the Second Schedule.

This simple consultation saved him from filing an incorrect return. He also learned he could claim a tax credit under Section 63 by contributing to a Voluntary Pension Scheme — effectively reducing his net tax liability.

Story 2: The Export Executive and the 75% Rule

Sana, a senior export coordinator at a leather goods company in Sialkot’s industrial zone, earns Rs. 2,400,000 per year in salary. She also owns a small plot that generates Rs. 800,000 in annual rental income. Her total taxable income is Rs. 3,200,000.

Her salary represents 75% of her total income — exactly at the threshold. She worried about which tax slab would apply. After consulting Trusty Consulting, she learned that since her salary exactly equals 75% of taxable income, she qualifies for the more favorable salaried tax rates under the First Schedule. Her tax was computed correctly, and she paid only what was actually due — not a rupee more.

This demonstrates why getting proper tax advice in Sialkot — or anywhere in Pakistan — can make a real difference to your annual finances.

13. Frequently Asked Questions (FAQ)

Q1: Is overtime pay taxable as salary in Pakistan? Yes. Overtime payment is explicitly listed as part of salary under Section 12(2)(a) of the ITO 2001 and is fully taxable.

Q2: Are medical allowances taxable? Medical allowances paid as a fixed monthly amount are generally taxable as salary. However, free or subsidized medical treatment provided directly by a hospital or clinic operated by the employer is exempt under Clause 53A of the Second Schedule.

Q3: Is a golden handshake payment taxable? Yes. Any compensation received on termination of employment, including redundancy payments and golden handshake payments, is included in the definition of salary under Section 12(2)(e)(iii) and is taxable. However, the employee may elect a special averaging formula under Section 12(6) to mitigate the tax spike.

Q4: What if my employer does not deduct tax? The primary obligation is on the employer under Section 149. However, the employee remains personally liable to pay any tax due when filing their annual return. Employers who fail to deduct face separate penalties under FBR regulations.

Q5: Is arrear salary taxed differently? Under Section 12(7), if salary is paid in arrears and causes the employee to be taxed at higher rates than if it had been paid in the year earned, the employee can elect to be taxed at the rates applicable to the original year. This election must be made by the due date of the return.

Q6: I am a salaried person but also receive some rental income. Which tax rates apply? It depends on the 75% rule. If your salary exceeds 75% of your total taxable income, the salaried rates apply. If not, the general individual rates apply. A tax professional can help you determine this accurately.

14. Final Thoughts

Salary income tax in Pakistan is more nuanced than most employees realize. From perquisites and allowances to pension rules and voluntary pension credits, each element of your compensation package has a defined tax treatment under the Income Tax Ordinance, 2001. Getting these details right is the difference between overpaying the government and keeping what is legally yours.

Whether you are a factory worker in Sialkot’s sports goods cluster, a manager at a surgical instruments exporter, or a government employee — understanding how your salary is taxed empowers you to plan smarter and comply confidently.

At Trusty Consulting, we specialize in helping salaried employees, business owners, and exporters across Sialkot and Pakistan navigate the complexities of the Income Tax Ordinance, 2001. From salary tax computation to return filing and deductible allowance planning, our team is ready to assist.

📍 Visit us: tconsultingpk.com 📱 WhatsApp us: 03296325872

Don’t let tax complexity cost you money — let Trusty Consulting handle it for you.