What counts as salary for tax purposes: are overtime, commission and perks included?

Almost everything your employer pays or provides because of your job counts as salary for income tax. Section 12 of the Income Tax Ordinance, 2001 casts the net wide on purpose: basic pay, overtime, bonus, commission, allowances, reimbursed expenses and benefits in kind are all “Salary” unless a specific provision of the Ordinance exempts them.

What does the law say?

Section 12(1) charges tax on “any salary received by an employee in a tax year”, other than salary that is exempt. Section 12(2) then defines salary as any amount received from any employment, “whether of a revenue or capital nature”, and lists what is included:

Item on your payslip or in your contract	Where section 12(2) covers it
Basic pay, wages, leave pay, payment in lieu of leave, overtime, bonus, commission, fees, gratuity, hardship or danger supplements	Clause (a)
Perks and benefits, even if you cannot turn them into cash	Clause (b)
Allowances: cost of living, rent, utilities, education, entertainment, travel and similar	Clause (c)
Your own expenses that the employer pays or reimburses	Clause (d)
Joining bonus, payment for agreeing to changed terms, termination and golden handshake payments, non-compete payments, certain provident fund receipts	Clause (e)
Pension or annuity	Clause (f)
Amounts taxed as salary under the employee share scheme provisions of the Ordinance	Clause (g)

Two exclusions sit inside the definition. An allowance “solely expended in the performance of the employee’s duties” is not salary, and neither is a reimbursement of expenditure incurred “on behalf of the employer” in doing the job. The Explanation to clause (c) narrows the first exclusion: an allowance paid monthly on a fixed basis or as a percentage of salary, or one that is not wholly and actually spent on the employer’s behalf, does not qualify.

Section 12(5) adds that it does not matter who pays. An amount counts as received from employment even if it comes from an associate of the employer, a third party under an arrangement with the employer, or a past or prospective employer, and even if it is paid to your associate rather than to you.

How are perks valued?

Section 13 sets the taxable value of benefits in kind (clause (b) above). It does not apply to allowances or reimbursements, which are taxed at the amount paid.

• Car for private use (s.13(3)): an amount “computed as may be prescribed”, meaning under the Income Tax Rules.
• Driver, cook, gardener or other domestic help (s.13(5)): the total salary the employer paid that person for serving you, less anything you paid the employer.
• Utilities (s.13(6)): fair market value of electricity, gas, water and telephone provided, less what you paid.
• Loan at no or low profit (s.13(7)): profit at the benchmark rate, or the shortfall below it. The second proviso says this does not apply to loans of one million rupees or less. Section 13(14) sets the benchmark rate at five per cent for tax year 2003, rising one per cent a year but not above ten per cent.
• Debt waived by the employer (s.13(9)) or your debt paid to someone else (s.13(10)): the full amount.
• Property transferred or services provided (s.13(11)): fair market value less what you paid.
• Housing (s.13(12)): an amount computed as prescribed.
• Any other perk (s.13(13)): fair market value when provided, less what you paid, unless the rules say otherwise.

Can I deduct my own work costs?

No. Section 12(4) says: “No deduction shall be allowed for any expenditure incurred by an employee in deriving amounts chargeable to tax under the head “Salary”.” Petrol for commuting, a laptop you bought, or professional memberships you pay yourself do not reduce your taxable salary. Relief comes only through the specific exemptions in the Second Schedule, tax credits and tax reductions the Ordinance provides.

Worked example (illustrative figures)

Bilal is a sales executive in Faisalabad. His tax year 2027 package, with all amounts invented:

Item	Rs.
Basic pay (12 x 110,000)	1,320,000
Fixed monthly fuel allowance (12 x 15,000)	180,000
Sales commission	250,000
Overtime	60,000
Company provides electricity at his home (utilities, s.13(6)), fair market value	36,000
Total salary	1,846,000

The fuel allowance is paid on a fixed monthly basis, so under the Explanation to section 12(2)(c) it is not treated as solely spent on duties. The electricity is a utility provided by the employer (section 13(14)(c) defines utilities to include electricity, gas, water and telephone), valued at fair market value under section 13(6).

Tax year 2027 rates for an individual whose salary is more than seventy-five per cent of taxable income are in clause (2) of Division I, Part I, First Schedule. Rs. 1,846,000 falls in the band above Rs. 1,200,000 and up to Rs. 2,200,000: Rs. 6,000 plus 11% of the amount above Rs. 1,200,000.

1. Amount above Rs. 1,200,000: 1,846,000 - 1,200,000 = 646,000
2. 11% of 646,000 = 71,060
3. Tax for the year: 6,000 + 71,060 = Rs. 77,060

If Bilal had wrongly left out commission, overtime and the electricity, his employer’s estimate would be Rs. 1,500,000 and the tax Rs. 39,000 (6,000 + 11% of 300,000). The gap of Rs. 38,060 would still be owed. Section 149 requires the employer to deduct on the employee’s estimated salary income for the year, so every element above belongs in that estimate.

What if the benefit is exempt?

Section 12(1) excludes “salary that is exempt from tax under this Ordinance”. Exemptions for particular allowances or benefits sit in the Second Schedule and other provisions, each with its own conditions. This page does not list them. An item is exempt only if a provision of the Ordinance exempts it, so an exemption can always be traced to a specific clause.

Common mistakes

• “Perks are free because I never get cash.” Section 12(2)(b) includes a perquisite “whether convertible to money or not”.
• “My allowance is for travel, so it is not taxed.” The label is irrelevant. The Explanation to section 12(2)(c) excludes fixed monthly or percentage allowances from the “solely expended” carve-out.
• “A payment from the group’s other company is not my salary.” Section 12(5)(a) covers payments by an associate of the employer or a third party under an arrangement with the employer.
• “If my employer pays my tax, that is the end of it.” Section 12(3) grosses the salary up by the tax the employer pays.

What to check in the official text

Read section 12 in full, including the Explanation to clause (2)(c), and section 13 for the perk you receive. The car and housing values in section 13(3) and 13(12) depend on the Income Tax Rules, 2002, so check the current rule. Check the Second Schedule for any exemption before assuming an item is tax free. The tax year 2027 slab table is clause (2) of Division I, Part I of the First Schedule.