Tax on Salary in Pakistan: An In-Depth Overview

Understanding the tax system in Pakistan, particularly regarding salary taxation, is crucial for salaried individuals and employers alike.

In this blog article, we will discuss about the current income tax slabs, implications for taxpayers, and the broader context of tax policies in Pakistan.

The Structure of Income Tax in Pakistan

Income tax in Pakistan is governed by the Income Tax Ordinance of 2001, which has undergone numerous amendments over the years.

The Federal Board of Revenue (FBR) is responsible for implementing tax laws and collecting taxes. The income tax system is progressive, meaning that higher income levels are taxed at higher rates.

Current Income Tax Slabs (2024-2025)

For the fiscal year 2024-2025, the government has established new income tax slabs that affect salaried individuals. Below is a summary of the current tax slabs:

These rates reflect a slight increase compared to previous years and indicate a growing tax burden on higher earners.

Key Changes in Taxation

The Finance Act of 2024 introduced several significant changes:

• Increased Tax Rates: The rate for individuals earning between Rs. 600,001 and Rs. 1,200,000 has increased from 2.5% to 5%.
• Surcharge for High Earners: A new surcharge applies to individuals with taxable income exceeding PKR 10 million at a rate of 10% on their income tax liability
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• Exemption Threshold: The exemption threshold remains at PKR 600,000; however, this means that many individuals who previously paid no tax are now subject to a minimum charge due to the revised slabs.

Impact on Salaried Individuals

The changes in tax slabs have significant implications for salaried individuals:

• Increased Financial Burden: Individuals earning just above the exemption threshold will experience a noticeable increase in their tax liabilities.
• Budgeting for Taxes: Employees must adjust their financial planning and budgeting strategies to accommodate higher deductions from their salaries.
• Need for Tax Awareness: Understanding these changes is essential for both employees and employers to ensure compliance and optimize tax liabilities.

Tax Filing Process

Filing taxes can be daunting for many individuals in Pakistan due to complex regulations and paperwork requirements. Here’s a brief overview of the process:

1. Registration: Individuals must register with the FBR as taxpayers.
2. Documentation: Collect necessary documents such as salary slips, bank statements, and any other income sources.
3. Filing Returns: Use the FBR’s online portal or consult with a tax professional to file returns accurately.
4. Payment of Taxes: Ensure timely payment of any taxes owed to avoid penalties.

Benefits of Filing Taxes

Filing taxes not only fulfills legal obligations but also provides several benefits:

• Access to Government Services: Being a registered taxpayer allows individuals access to various government services and benefits.
• Eligibility for Loans: Many financial institutions require proof of income through tax filings when applying for loans or credit.
• Building a Financial Profile: Regular filing helps build an individual’s financial profile which can be beneficial for future investments or business opportunities.

The taxation landscape in Pakistan continues to evolve with new regulations impacting salaried individuals significantly. Understanding these changes is crucial for effective financial planning and compliance with legal obligations.

How can I calculate my monthly tax liability using the new tax slabs?

To calculate your monthly tax liability in Pakistan using the new tax slabs for the fiscal year 2024-2025, follow these steps:

Understanding the Tax Slabs

The income tax slabs for salaried individuals are structured as follows:

Steps to Calculate Monthly Tax Liability

1. Determine Your Annual Salary: Calculate your total annual salary.
2. Identify Your Taxable Income: This is your annual salary minus any applicable deductions.
3. Apply the Tax Slabs: Use the slabs above to determine your total annual tax liability.
4. Calculate Monthly Tax Liability: Divide your total annual tax by 12 to find your monthly tax liability.

Example Calculation

Let’s assume you have an annual salary of Rs. 1,500,000.

1. Identify Your Taxable Income:
   • Total Salary = Rs. 1,500,000
2. Determine Applicable Tax Bracket:
   • The income falls in the range of Rs. 1,200,001 to Rs. 2,200,000.
3. Calculate Total Tax:
   • According to the slab:
     • First Rs. 600,000 = No tax
     • From Rs. 600,001 to Rs. 1,200,000 = $5\%\times (1,200,000-600,000)=\text{Rs }30,000$
     • From Rs. 1,200,001 to Rs. 1,500,000 = $30\text{ fixed }+(15\%\times (1,500,000-1,200,000))$
     • Calculation: $30+(0.15\times (300,000))=30+45=\text{Rs }75$
   • Therefore:
     • Total Annual Tax = $0+\text{Rs }30+\text{Rs }75=\text{Rs }105$
4. Calculate Monthly Tax Liability:
   • Monthly Tax = Total Annual Tax / 12
   • Monthly Tax = $105/12\approx \text{Rs }8.75$

Important Considerations

• Ensure you factor in any additional deductions or exemptions you may qualify for.
• If your income exceeds PKR 10 million annually (PKR ~833k monthly), a surcharge of 10% on your income tax applies.
• Keep abreast of any changes in tax laws or rates that may affect your calculations.

By following these steps and using the provided slabs and examples as a guide, you can accurately calculate your monthly tax liability in Pakistan under the new tax regime for fiscal year 2024-2025.