Tax treatment of Gratuity

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Taxation Management FIN 623

MODULE 6

LESSON 6.29

SALARY AND ITS COMPUTATION

GRATUITY

Purpose:

· Provision of Gratuity to employees or

· Undertaking of provision (payment) of gratuity on retirement or

· On employees becoming incapacitated or

· On termination of their employment after completion of minimum period of service specified in

the regulations of fund or to the widows, children or dependants of such employees on their death

· All benefits granted by the fund shall be payable only in Pakistan

Approved Gratuity Fund

· Commissioner of Income Tax may accord approval to any gratuity fund.

Condition for Approval

· Fund established under an irrevocable trust and purposes of gratuity fulfilled.

Tax treatment of Gratuity is as under:

· Gratuity pertaining to government employees/ their families:

Any gratuity received on retirement/ death by employee of the government, a local authority or a

statutory body or corporation or family is wholly exempt from tax under clause 13(i), part I of

second schedule.

Clause 13, Part I of Second Schedule

(i)

In the case of an employee of the Government, a local authority, 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 two hundred thousand rupees

receivable under any scheme applicable to all employees of the employer and approved by the

Central Board of revenue 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, fifty per cent of the

amount receivable or seventy-five thousand rupees, 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.

received by any employee who has already received any gratuity from the same or any other

employer.

Exercise-1 on Gratuity:

Compute taxable income and tax thereon for tax year 2007 in respect of Mr. A, an employee of

Government of the Punjab.

Relevant information/data is given below.

Salary

Rs. 800,000

Gratuity

Rs. 1,000,000

Tax deducted at source

Rs. 54,000

Solution to Exercise 1:

Tax payer: Mr. Yasir

Tax year: 2007

Residential Status: Resident

NTN: 000111

Computation of taxable income and tax thereon:

In Rs

Particulars

Total income

Exempt Income

Taxable Income

Salary

800,000

Nil

800,000

Gratuity

1,000,000

Nil

Refer (Note-1)

Taxation Management FIN 623

Taxable Income

800,000

Tax liability:

Tax rate of 7.50 is at serial no 10 for taxable income exceeding Rs 700,000 up to Rs 850,000 shall be

applied.

800,000 x 7.5% = Rs.60,000

Tax payable =

Rs 60,000

Tax deducted at source =

Rs 54,000

Tax payable with return

Rs 6,000

N-1:

Amount received as gratuity is exempt in this case under clause 13(i), Part I, Second Schedule of the

Ordinance.

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