Under Section 12(7) of the Income Tax Ordinance, 2001, if an employee
(a) is paid salary in arrears, and
(b) as a result of this arrear payment, he is chargeable to tax at higher rates of tax than would have been applicable if the amount had been paid in the tax year in which services were rendered
the employee can elect for the amount to be taxed at the rate that would have been applicable if the amount had been paid in the tax year in which the services were rendered.
If a taxpayer elects to have the arrear amount taxed at the relevant rate under section 12(7) 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) Include the amount of arrears in the Pay, Wages or other remuneration entered in the first column against code 1009
(iii) Enter the amount of arrears elected to be taxed at the relevant 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 ‘Salary Arrears u/s 12(7) Chargeable to Tax at Relevant Rate‘ in the relevant row at the bottom of the screen in the first column against code 64210056
(vii) Go to the ‘Attribute‘ tab by clicking it from the top horizontal row
(viii) Enter the average rate calculated as given above against ‘Relevant Tax Rate for Salary Arrears u/s 12(7)‘. 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.