How does my employer calculate the tax deducted from my salary each month?

What does the law say?

Section 149(1) of the Income Tax Ordinance, 2001 makes every person responsible for paying salary deduct tax at the time of payment. The deduction is not a flat percentage. It is made at “the employee’s average rate of tax”, computed on the employee’s estimated income under the head “Salary” for the whole tax year, using the rates in Division I of Part I of the First Schedule.

Section 149(2) gives the formula for that average rate:

• A is the tax that would be payable if your estimated annual salary (B) were your taxable income for the year, plus any tax under section 4AB
• B is your estimated income under the head “Salary” for the year
• Average rate = A / B

For a salaried individual, the rates used to work out A are the clause (2) table in Division I of the First Schedule. For tax year 2027 that table starts at 0% up to Rs. 600,000 and rises to 35% above Rs. 7,000,000. The section 4AB surcharge (printed inside section 4 in the consolidated text) is part of the formula in general, but its proviso says no surcharge is payable on salary income, so for most employees A is simply the table tax.

What can the employer adjust?

Section 149(1) lets the employer make adjustments “as may be necessary” for three things:

1. tax already withheld from you under the Ordinance during the tax year
2. any excess deduction or deficiency arising out of a previous deduction
3. failure to make a deduction during the year

It also allows adjustment of tax withheld from you under other heads, and of tax credits under sections 61 and 63, but only “after obtaining documentary evidence”. Those credits are covered on separate pages.

How does it work in practice?

Your employer does not know your final annual salary on 1 July. It has to estimate it. Section 149 does not say how the estimate is built; the simplest approach is salary already paid plus current monthly pay for the months left. Section 12 counts allowances, bonuses and perquisites as salary, so they belong in the estimated salary, not only basic pay.

Whenever the estimate changes (a raise, a bonus, a new allowance), the annual tax and the average rate change too, and section 149 lets the employer correct earlier over or under deductions in later months. The Ordinance does not prescribe one spreading method, so two employers can reach the same annual total by slightly different monthly paths.

Worked example (illustrative figures)

Hamza works for a pharmaceutical distributor in Faisalabad. His salary is made up; the rates are the tax year 2027 rates.

July to December: Rs. 250,000 a month

• Estimated annual salary (B): Rs. 250,000 x 12 = Rs. 3,000,000
• Slab: Rs. 2,200,001 to Rs. 3,200,000, so Rs. 116,000 + 20% of the amount over Rs. 2,200,000
• Tax (A): Rs. 116,000 + (20% x Rs. 800,000 = Rs. 160,000) = Rs. 276,000
• Average rate: Rs. 276,000 / Rs. 3,000,000 = 9.2%
• Monthly deduction: 9.2% x Rs. 250,000 = Rs. 23,000

After six months, Rs. 138,000 has been deducted.

From January: raise to Rs. 300,000 a month

• New estimated annual salary: (6 x Rs. 250,000) + (6 x Rs. 300,000) = Rs. 1,500,000 + Rs. 1,800,000 = Rs. 3,300,000
• Slab: Rs. 3,200,001 to Rs. 4,100,000, so Rs. 316,000 + 25% of the amount over Rs. 3,200,000
• New annual tax: Rs. 316,000 + (25% x Rs. 100,000 = Rs. 25,000) = Rs. 341,000
• Already deducted: Rs. 138,000
• Balance for January to June: Rs. 341,000 - Rs. 138,000 = Rs. 203,000
• Spread over six payments: Rs. 203,000 / 6 = about Rs. 33,833 a month

Months	Salary per month	Tax per month	Tax for the period
July to December	Rs. 250,000	Rs. 23,000	Rs. 138,000
January to June	Rs. 300,000	about Rs. 33,833	Rs. 203,000
Year			Rs. 341,000

The raise adds Rs. 300,000 to Hamza’s salary for the year and Rs. 65,000 to his tax. That is Rs. 200,000 taxed at 20% (up to Rs. 3,200,000) plus Rs. 100,000 taxed at 25% (Rs. 40,000 + Rs. 25,000). The annual total is exactly what the table charges on Rs. 3,300,000.

What if my salary drops or I leave mid-year?

If your estimated annual salary falls, the annual tax falls and the employer can reduce later deductions under section 149(1)(ii). If you leave before the employer can correct an over-deduction, the correction does not happen through payroll; any excess is a matter for your return and refund claim, which are separate topics.

What if I have two employers?

Each employer deducts under section 149 on the salary it pays. Neither is told about the other unless you provide evidence, so the combined deductions can fall short of the tax on your total salary. That situation is covered on the page about two jobs.

Common mistakes

• “Tax is a fixed percentage of my monthly pay.” The rate is the average rate on estimated annual salary, which changes when your pay changes.
• “Only basic salary is taxed.” Section 12 includes allowances such as rent, utilities, education and travel allowances in salary.
• “The employer cannot change the deduction mid-year.” Section 149(1) expressly allows adjustments for earlier excess or short deductions.

What to check in the official text

Read section 149(1) and (2) in full, and the clause (2) table of Division I, Part I of the First Schedule in the source PDF for the rates. Check your employer’s annual deduction certificate against your own calculation of the year’s tax on your total salary.