Income From Salary Chapter- 07
Any income representing any payment received by way of gratuity or commutation of pension by an
employee on his retirement or, in the event of his death, by his heirs as does not exceed-
(i) in the case of an employee of the Government, a Local Government, a statutory body or
corporation established by any law for the time being in force, the amount receivable in
accordance with the rules and conditions of the employee's services;
(ii) any amount receivable from any gratuity fund approved by the Commissioner in accordance
with the rules in Part III of the Sixth Schedule;
(iii) in the case of any other employee, the amount not exceeding Rs. 3 00,000 receivable under any
scheme applicable to all employees of the employer and approved by the Board for the
purposes of this sub-clause; and
(iv) in the case of any employee to whom sub-clause (i), (ii) and (iii) do not apply, 50% of the
amount receivable or Rs.75,000, whichever is the less:
Provided that nothing in this sub-clause shall apply -
(a) to any payment which is not received in Pakistan;
(b) to any payment received from a company by a director of such company who is not a
regular employee of such company;
(c) to any payment received by an employee who is not a resident individual; and
(d) to any gratuity received by an employee who has already received any gratuity from the
same or any other employer.
Important notes: On the one hand, the ordinance treats all directors of a company as “employees” through fiction
of law [2(22)(a)] and on the other makes a distinction between regular and non-regular director- cum- employees. However in the matter of exemptions, no relief is given to directors of
companies who are not contractual employee. The benefit of this exemption should be given to
all directors.
Gratuity will be ignored while determining tax liability of the deceased because it did not
become due to him in his life-time and became due to his legal heirs after his death – Board’s
Circular No. 12 of 1960.
CBR vide its Circular No. 17 of 1959 and Circular No. 16 of 1967 provided the option to a taxpayer
to be assessed at the rates applicable for the current year or at the average rate of tax of his last
three years income.
The following further instructions are also attached with this option:
- Where average rate for last 3 years worked out at Nil, then no tax would be payable by the said
taxpayer. - Where the employee was taxable in 3 preceding years but due to his absence from Pakistan,
he was not charged to tax, gratuity received by him will be taxed at the average rate of tax at
which he would have been liable if he was a resident person in 3 preceding years. - Gratuity income will be ignored at the time of computation of taxable income of a deceased
person, however the same may be added to the income of his legal heirs as “income from other
sources”.
Example:
ABC Ltd. has paid gratuity amounting to Rs. 1,0 75 ,000 to Mr. A in addition to the taxable salary of
Rs.2,500,000 in the tax year 202 3. The past 3 years assessed tax results of his assessment are as
under:
Tax year Taxable income Tax Liability
2022 1,800,000 177,800
2021 2,400,000 435,600
2020 1,400,000 1 55,628