Employment Termination Benefits

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LAW

Under Section 12(2)(e)(iii) of the Income Tax Ordinance, 2001, Salary includes any amount received on termination of employment including any compensation for redundancy or loss of employment and golden handshake payments

Under Section 12(6) of the Income Tax Ordinance, 2001, an employee who has received such payment can elect for the amount to be taxed at an average rate of the three preceding years, which will be computed by dividing the total tax payable or paid by the employee on his total income for the three preceding years by his total taxable income for the three preceding years.

 

PROCESS

If a taxpayer elects to have the employment termination benefits taxed at the average rate under section 12(6) of the Income Tax Ordinance, 2001, in the return, the following steps will be followed

(i) Click ‘Employment‘ from the left of the screen, and then click ‘Salary

(ii) Enter the amount of ‘Profits in Lieu of or in Addition to Pay, Wages or Other Remuneration (including Employment Termination Benefits)’ in the first column against code 1099

(iii) Enter the amount of employment termination benefits elected to be taxed at average rate in the second column so that the system excludes it from the amount subject to normal tax

(iv) Click ‘Tax Chargeable / Payments‘ on the left of the screen

(v) Click ‘Final / Fixed / Minimum / Average / Relevant / Reduced Tax‘ tab

(vi) Add the amount of ‘Employment Termination Benefits u/s 12(6) Chargeable to Tax at Average Rate‘ in the relevant row at the bottom of the screen in the first column against code 64210054

(vii) Go to the ‘Attribute‘ tab by clicking it from the top horizontal row

(viii) Enter the average rate calculated as given above against ‘Average Tax Rate for Employment Termination Benefits u/s 12(6)‘. For example if the average rate is 15%, write 15 in the relevant space in attributes.

(ix) On pressing calculate in the data tab, the system will automatically apply the rate entered above on the amount.

 

 

 

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3 comments on Employment Termination Benefits

  1. Hi,

    Thanks for the information. However, can you please include the average percentage of Provident Fund or Gratuity Fund? Because the employer doesn’t provide the average tax calculated for the employment termination benefits. Moreover, please mention that, should it be the total amount of Provident Fund or Gratuity Fund till to date (30 June “Tax year”) or just the amount availed during the year.

    Thanks!

  2. Can we elect on our own or will get the permission in written from commissioner for tax deduction on the base of last three years average rate?

    1. If you have received termination benefits and want to be taxed on average rates then you are required to elect for such option. The concerned Commissioner may approve such application.
      Please read Section 12(6) of the Income Tax Ordinance 2001.

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