Is medical allowance taxable in Pakistan?

Medical allowance provided by an employer is exempt from income tax up to 10% of the employee's basic salary under Clause (139) of Part I of the Second Schedule, provided the employer does not simultaneously reimburse actual medical expenses.

When is the tax year in Pakistan?

The statutory tax year in Pakistan runs from July 1 of a calendar year to June 30 of the subsequent year. For instance, Tax Year 2026-2027 covers income earned between July 1, 2026, and June 30, 2027.

What happens if my employer deducts more tax than required?

If your employer withholds excess tax, you can claim an income tax refund by filing your annual return on the FBR IRIS portal, or carry forward the credit to offset tax liabilities in subsequent years.

How Income Tax on Salary Works in Pakistan

Understanding the Salaried Classification Under Pakistani Tax Law

Under Section 12 and Section 149 of the Income Tax Ordinance 2001, an individual is legally classified as a salaried taxpayer if more than 75% of their total gross annual income is derived from employment salary rather than business profits, freelance contracts, or rental yield. This distinction is crucial because the Federal Board of Revenue (FBR) maintains separate, preferential tax rate schedules for salaried individuals compared to business individuals and Association of Persons (AOPs).

Salary income encompasses base pay, cost-of-living allowances, overtime remuneration, bonuses, utility allowances, medical allowances above statutory exemption caps, and the monetized value of perquisites such as company-provided vehicles and accommodation. Employers in Pakistan are legally mandated as withholding agents to deduct tax at source (PAYE) in equal monthly installments across the financial year (July 1 to June 30).

The Progressive Slab Mechanism Explained

A frequent misconception among salaried professionals in Pakistan is that entering a higher tax bracket exposes their entire annual income to that higher percentage. Pakistani income taxation operates on a progressive marginal bracket system. Under this structure, your income is divided into discrete horizontal tiers, and each tier is taxed exclusively at the rate designated for that specific tier.

For example, the initial threshold of Rs 600,000 per annum (Rs 50,000 per month) enjoys a statutory zero percent (0%) tax rate across the board. Every rupee earned up to Rs 600,000 remains entirely tax-free, regardless of whether your total annual salary reaches Rs 1,000,000 or Rs 10,000,000. When your compensation crosses into higher slabs, only the excess amount over the lower boundary is subjected to the incremental marginal rate.

Official FBR Tax Slabs for Tax Year 2026-2027

The Finance Act establishes the following progressive statutory brackets for salaried individuals for Tax Year 2026-2027: (1) Incomes up to Rs 600,000 incur Rs 0 tax (0%). (2) Incomes from Rs 600,001 to Rs 1,200,000 incur 1% of the amount exceeding Rs 600,000. (3) Incomes from Rs 1,200,001 to Rs 2,200,000 incur a fixed base tax of Rs 6,000 plus 11% of the amount exceeding Rs 1,200,000.

(4) Incomes from Rs 2,200,001 to Rs 3,200,000 incur a fixed base of Rs 116,000 plus 20% of the amount exceeding Rs 2,200,000. (5) Incomes from Rs 3,200,001 to Rs 4,100,000 incur a fixed base of Rs 316,000 plus 25% of the amount exceeding Rs 3,200,000. (6) Incomes from Rs 4,100,001 to Rs 5,600,000 incur a fixed base of Rs 541,000 plus 29% of the amount exceeding Rs 4,100,000. (7) Incomes from Rs 5,600,001 to Rs 7,000,000 incur a fixed base of Rs 976,000 plus 32% of the amount exceeding Rs 5,600,000. (8) Incomes exceeding Rs 7,000,000 incur a fixed base of Rs 1,424,000 plus 35% of the amount exceeding Rs 7,000,000. The surcharge on high earners has been abolished for salaried individuals under the current Finance Act.

Step-by-Step Calculation Walkthrough with Realistic Numbers

Consider an employee earning a monthly gross salary of Rs 150,000. Their annualized salary calculates to Rs 1,800,000 (150,000 multiplied by 12). This figure falls directly into Slab 3 (Rs 1,200,000 to Rs 2,200,000).

To compute the annual tax liability under the 2026-2027 schedule: First, take the fixed base tax for Slab 3, which is Rs 6,000. Next, calculate the excess income beyond the slab minimum: Rs 1,800,000 minus Rs 1,200,000 equals Rs 600,000. Apply the 11% marginal rate to this excess: 11% of Rs 600,000 equals Rs 66,000. Add the base tax to the marginal tax: Rs 6,000 plus Rs 66,000 yields an annual tax liability of Rs 72,000. Dividing by 12 months produces a monthly payroll withholding deduction of Rs 6,000, leaving a net take-home salary of Rs 144,000 per month.

Tax Credits, Rebates, and Deductible Allowances

Salaried taxpayers in Pakistan can legitimately reduce their final computed tax burden through statutory tax credits authorized under the Income Tax Ordinance. Key avenues include Section 62 (investments in approved mutual funds and life insurance), Section 63 (contributions to approved pension funds under the Voluntary Pension System - VPS), and Section 61 (charitable donations made to non-profit entities listed under the Second Schedule).

Furthermore, salaried parents are entitled to claim a deductible education allowance under Section 60D if their annual taxable income remains below Rs 1,500,000, allowing a deduction of school tuition fees up to statutory caps. Documenting these deductions with your payroll department allows for lower monthly withholding.

How Income Tax on Salary Works in Pakistan (2026-2027)