If my employer pays my income tax for me (net salary package), is that also taxable?

What does the law say?

Section 12(3) of the Income Tax Ordinance, 2001 deals with net packages directly: where an employer agrees to pay the tax chargeable on an employee’s salary, the employee’s income chargeable under the head “Salary” is “grossed up by the amount of tax payable by the employer”.

In plain terms, the tax your employer pays for you is a benefit, and it is added to your salary. Your taxable salary is the net amount you receive plus the tax your employer bears.

How does it work in practice?

Section 149 requires the person paying salary to deduct tax at the employee’s average rate, worked out on estimated salary income for the year using the rates in Division I of Part I of the First Schedule. On a net package, the employer does not cut your pay. It bears the deduction itself, but the estimate it uses must be the grossed-up salary, not the net amount.

This creates a loop: the tax depends on the grossed-up salary, and the grossed-up salary depends on the tax. The figures only settle when the grossed-up salary minus the tax on it equals the net amount agreed. Section 12(3) does not prescribe a method for finding that point; the example below simply finds the figure where the two balance.

Worked example (illustrative figures)

Farah joins a multinational company in Karachi on a net package: she is promised Rs. 2,400,000 in hand for tax year 2027 (1 July 2026 to 30 June 2027), and the company will bear all tax. Salary is her only income, so the salaried rates in clause (2) of Division I of Part I of the First Schedule apply.

The relevant rows of that table:

Taxable income	Tax
Over Rs. 1,200,000 up to Rs. 2,200,000	Rs. 6,000 + 11% of the amount above Rs. 1,200,000
Over Rs. 2,200,000 up to Rs. 3,200,000	Rs. 116,000 + 20% of the amount above Rs. 2,200,000

Step 1: a first guess shows the loop. Tax on Rs. 2,400,000 alone is Rs. 116,000 + 20% x Rs. 200,000 = Rs. 156,000. But adding Rs. 156,000 takes the salary to Rs. 2,556,000, and tax on that is higher again. So Rs. 156,000 is not the final figure.

Step 2: find the balancing gross salary. Call the gross salary G. In the Rs. 2,200,000 to Rs. 3,200,000 band, tax is Rs. 116,000 + 20% x (G minus Rs. 2,200,000), which simplifies to 20% of G minus Rs. 324,000. The net must equal Rs. 2,400,000:

G minus (20% of G minus Rs. 324,000) = Rs. 2,400,000 80% of G + Rs. 324,000 = Rs. 2,400,000 80% of G = Rs. 2,076,000 G = Rs. 2,595,000

Step 3: check. Tax on Rs. 2,595,000 = Rs. 116,000 + 20% x Rs. 395,000 = Rs. 116,000 + Rs. 79,000 = Rs. 195,000. Net: Rs. 2,595,000 minus Rs. 195,000 = Rs. 2,400,000. It balances, and G is inside the band used.

Result. Farah’s taxable salary is Rs. 2,595,000, her tax for the year is Rs. 195,000 (borne by the employer), and she receives Rs. 2,400,000. Spread over 12 months, that is Rs. 16,250 a month.

What if the employer pays only part of my tax?

Section 12(3) applies to the tax the employer “agrees to pay”. If it bears only a fixed amount or part of the tax, that is the amount payable by the employer that is added. The same loop applies, since the addition itself raises the tax.

What if I also have rent or business income?

If your salary is no more than 75% of your taxable income, clause (2) of Division I no longer applies and the general individual rates in clause (1) are used instead. Grossing up still applies to the salary part under section 12(3), but whether your employer’s agreement covers tax on your other income depends on your contract, which the Ordinance does not decide.

Common mistakes

• Declaring only the net amount in the return. Section 12(3) makes the grossed-up figure your income under the head “Salary”.
• Grossing up once and stopping. Adding the tax on the net figure understates salary because the extra amount is taxed too.
• Assuming the net figure decides your tax band. The band is set by the grossed-up salary. In the example, a net Rs. 2,400,000 is taxed as Rs. 2,595,000.
• Treating tax borne by the employer as a gift. Section 12(3) adds the tax the employer agrees to pay to the employee’s income under the head “Salary”.

What to check in the official text

• Section 12(3) of the Ordinance, as amended to 30 June 2026.
• Section 149, for how the employer computes the monthly deduction at the average rate.
• Clause (2) of Division I of Part I of the First Schedule for the tax year 2027 salaried rates, and clause (1) if salary is 75% or less of your taxable income.
• Your appointment letter: the exact wording on who bears tax, and on what income, decides how much is grossed up.