Table of Contents
Introduction
Withholding tax on salary income is deducted under Section 149 of the Income Tax Ordinance 2001.
Withholding tax on salary is deducted by an employer while paying salaries to the employees at the prescribed rates.
According to Section 149 of the Income Tax Ordinance, 2001, an employer or his designated person shall withhold/deduct income tax at the average rate of tax from payment of salary to the employee(s) exceeding the exemption limit as given in Division I of Part I of the First Schedule after allowing adjustment of tax withheld under other heads and tax credit admissible under section 61 and 63 during the tax year duly supported by the documentary evidence for any tax paid by the said employee, any extra or less deduction of tax during the preceding period, and deduction of tax was erroneously missed which was otherwise required under Income Tax ordinance, 2001.
Procedure of Withholding Tax on Salary Income
The employer deducts withholding income tax on salary income according to the threshold and rates prescribed in Division I Part I of the First Schedule of the Income Tax Ordinance, 2001. The taxable salary includes all the allowances and perquisites as defined in Section 12 of the Income Tax Ordinance, 2001.
Adjustment of Tax Already Paid
The withholding tax on salary is deducted after allowing adjustment for tax already paid and tax credit under Sections 61 and 63 of the Income Tax Ordinance, 2001. It implies that if the employee claims with proof that he has paid income tax on some other transaction. The employer will allow adjustment for such tax while withholding income tax from the salary of the employee.
For example, if the tax payable on the salary of an employee is Rs.10,000 and the employee claims that he has paid income tax of Rs.2,000 on his telephone bill for that month. The employer will withhold an income tax of Rs.8,000 by allowing an adjustment of Rs.2,000 against tax payable of Rs.10,000.
Similarly, the employer can make an adjustment for overpaid or less deducted tax in any previous year.
Tax Credit against Withholding Tax on Salary Income
A withholding agent will allow tax credit under Section 61 and Section 63 of the Income Tax Ordinance, 2001 while withholding tax on salary income.
Tax Credit under Section 61 against Withholding Tax on Salary Income
A person shall be entitled to a tax credit in respect of any sum paid, or any property given by the person in the tax year as a donation to —
- any board of education or any university in Pakistan established by, or under, a Federal or a Provincial law;
- any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a Provincial Government or
Local Government; or - any non-profit organization or any person eligible for tax credit under section 100C of this Ordinance; or
- entities, organizations and funds mentioned in the Thirteenth Schedule to this Ordinance.
The amount of tax credit allowed for a tax year shall be computed according to the following formula, namely:—
(A/B)*C
where: A is the amount of tax assessed to the person for the tax year before the allowance
of any tax credit under this Part
B is the person’s taxable income for the tax year
C is the lesser of —
(a) the total amount of the person’s donations in the year, including the fair market value of any property given; or
(b) where the person is —
(i) an individual or association of persons, thirty per cent of the taxable income of the person for the year; or
(ii) a company, twenty per cent of the taxable income of the person for the year
Provided that where any sum is paid or any property is given to an associate by a donor, clause (b) of component C shall be, in the case of—
(i) an individual or association of persons, fifteen percent of the taxable income of the person for the year; or
(ii) a company, ten percent of the taxable income of the person for the year
For example, an individual has a taxable income of Rs. 1500,000 and the tax assessed is Rs. 52000 for the year. He has donated Rs.50,000 during the same period. The tax credit under Section 61 will be calculated as given below:
A = Rs.52,000
B = Rs. 1,500,000
C= Rs. 50,000 (Lesser of amount donated and 30% of taxable income)
Tax Credit = (A/B)*C=(52000/1500000)*50,000 = Rs. 1733
Tax Payable = 52,000-1,733= Rs. 50,267
Tax Credit Section 63 against Withholding Tax on Salary Income
According to the provisions of Section 63 of the Income Tax Ordinance, 2001, a person eligible under sub-section (19A) of Section 2 of Income Tax Ordinance, 2001 having income taxable under the head “Salary” or the head “Income from Business” shall be entitled to a tax credit for a tax year for contribution or premium paid in the year by the person in approved pension fund under the Voluntary Pension System Rules, 2005.
The amount of tax credit allowed shall be calculated as given below: —
(A/B) x C
Where.-
A is the amount of tax assessed before tax credit;
B is taxable income for the tax year; and
C is the lesser of —
(i) the total contribution or premium paid in the year; or
(ii) twenty per cent of taxable income for the tax year.
For example a salaried person has taxable income Rs. 2,000,000 and the tax assessed is Rs. 115,000 for the year. He has contributed Rs.60,000 during the same period. The tax credit under Section 61 will be calculated as given below:
A = Rs. 115,000
B = Rs. 2,000,000
C= Rs. 60,000 (Lesser of amount donated and 20% of taxable income)
Tax Credit = (A/B)*C=(115,000/2,000,000)*60,000 = Rs. 3,450
Tax Payable = 60,000-3,450= Rs. 56,550
Average Rate of Tax for Computing Withholding Tax on Salary Income
The withholding tax on monthly salary is calculated at an average rate of tax under Section 149 of the Income Tax Ordinance, 2001, as given below:
A/B
A is the tax that would be payable if the amount referred to in component B of the formula were the employee’s taxable income for that year; and
B is the employee’s estimated income under the head “Salary” for that year
For example monthly salary of a person is Rs. 150,000.
The estimated salary income for the tax year will be Rs. 1,800,000
Tax payable on estimated annual salary income= Rs. 90,000
Then A =Rs. 90,000
B = Rs. 1,800,000
Average Rate of Tax = A/B= 90,000/1,800,000 =5%
The tax to be deducted at source (withheld) from monthly salary = 150,000*5%= Rs. 7,500
Withholding Tax on Directorship Fees
The Section 149 (3) of Income Tax Ordinance, 2001, “every person responsible for making payment for directorship fee or fee for attending board meeting or such fee by whatever name called, shall at the time of payment, deduct tax at the rate of twenty percent of the gross amount payable.”
Conclusion
The withholding tax on salary income under Section 149 of the Income Tax Ordinance, 2001 is a direct tax that is adjustable.
FAQs
Q. What is withholding Tax on salary?
Ans. Withholding tax is a tax deducted at source on the salary income of an employee under the Income Tax Ordinance, 2001.
It is deducted by the employer from the salary payment and deposited in the government exchequer on behalf of the employee.
Q. Is withholding tax deducted from salary?
Ans. Withholding tax is deducted from gross salary at the applicable rate after allowing adjustments and credits as admissible under Income Tax Ordinance, 2001.
Q. Is withholding tax on salary adjustable?
Ans. Yes
Q. Is withholding tax deducted monthly?
Ans. Withholding tax on salary is deducted at the time of payment.
Q. Who is exempt from withholding tax?
Ans. A individual whose annual income from salary is below Rs. 600,000 and he does not have other source of taxable income.