The Federal Board of Revenue (FBR) has issued 20 new taxable slabs, ranging between zero and 20 percent, for calculation of income tax by salaried individuals. The progressive income slabs would be applicable on salary paid from July 1.
The FBR issued income tax circular 6 of 2008 here on Friday, clarifying the changes made through Finance Act 2008 for computation of income tax payable by salaried class on the basis of revised slabs.
Through this circular, the FBR also explained the concept of marginal tax relief for the salaried taxpayers. The marginal tax relief is an optional scheme, which will be workable only up to the extent of a marginal jump into the next income slab tax rate.
The basic exemption for salaried person has been enhanced from Rs 150,000 to Rs 180,000. For the women taxpayer, this limit will be Rs 240,000. The tax slabs have also been revised. These changes have been brought through Finance Act, 2008 and will be applicable for the "tax year 2009". However, for withholding purposes these will apply to salary paid on or after July 1, 2008.
According to the circular, the revised slabs of taxable income and rate of tax for salaried taxpayers are as follows:
-- Where taxable income does not exceed Rs 180,000, the rate of tax is zero percent.
-- Where taxable income exceeds Rs 180,000, but does not exceed Rs 250,000, the rate of tax is 0.25 percent.
-- Where the taxable income exceeds Rs 250,000 but does not exceed Rs 350,000, the rate is 0.75 percent.
-- Where taxable income exceeds Rs 350,000, but does not exceed Rs 400,000, the rate will be 1.50 percent.
-- Where the taxable income exceeds Rs 400,000, but does not exceed Rs 450,000, the rate is 2.50 percent.
-- Where the taxable income exceeds Rs 450,000, but does not exceed Rs 550,000, the rate is 3.50 percent.
-- Where the taxable income exceeds Rs 550,000 but does not exceed Rs 650,000, the rate is 4.50 percent.
-- Where the taxable income exceeds Rs 650,000, but does not exceed Rs 750,000, the rate is 6.00 percent.
-- Where the taxable income exceeds Rs 750,000, but does not exceed Rs 900,000, the rate is 7.50 percent.
-- Where the taxable income exceeds Rs 900,000, but does not exceed Rs 1050,000, the rate is nine percent.
-- Where the taxable income exceeds Rs 1050,000 but does not exceed Rs 12,00,000, the rate is 10 percent
-- Where the taxable income exceeds Rs 1,200,000, but does not exceed Rs 1,450,000, the rate is 11 percent.
-- Where the taxable income exceeds Rs 1,450,000, but does not exceed Rs 1,700,000, the rate is 12.50 percent.
-- Where the taxable income exceeds Rs 1,700,000, but does not exceed Rs 1,950,000, the rate is 14 percent.
-- Where the taxable income exceeds Rs 1,950,000, but does not exceed Rs 2,250,000, the rate is 15 percent.
-- Where the taxable income exceeds Rs 2,250,000, but does not exceed Rs 2,850,000, the rate is 16 percent.
-- Where the taxable income exceeds Rs 2,850,000 but does not exceed Rs 3,550,000, the rate is 17.50 percent.
-- Where the taxable income exceeds Rs 3,550,000 but does not exceed Rs 4,550,000, the rate is 18.50 percent.
-- Where the taxable income exceeds Rs 4,550,000 but does not exceed Rs 8,650,000, the rate is 19 percent.
-- Where the taxable income exceeds Rs 8,650,000, the rate of income tax is 20 percent.
-- Where the salary income constitutes more than 50 percent of the total income of a taxpayer, the total income will be charged to tax at the rates provided in para (1A) of Part 1 of the First Schedule.
All perquisites, allowances or benefits, (except those covered under Part-1 of the Second Schedule to the Ordinance), are to be included in the salary income.
About the marginal tax relief, the FBR said that presently the income from salary is charged to tax at different flat rates, ranging from zero percent to 20 percent on progressive income slabs.
The salaried person, whose income slab changes marginally due to increase in the pay and allowances etc, face hardship as with the marginal switching over to next slab tax liability increases disproportionately. To address the hardship, the concept of "marginal tax" relief has been introduced through the following provision, inserted in Para 1-A of Part-1 of the First Schedule to the Income Tax Ordinance, 2001.
"Provided further that where the total income of a taxpayer marginally exceeds the maximum limit of a slab, the income tax payable shall be the tax payable on the maximum of that slab plus an amount equal to 20 percent of the amount by which the total income exceeds the said limit where the total income does not exceed 500,000: the rate is 30 percent of the amount by which the total income exceeds the said limit.
-- Where the total income does not exceed 10,50,000, the rate is 40 percent of the amount by which the total income exceeds the said limit where the total income does not exceed 20,00,000; the rate is 50 percent of the amount by which the total income exceeds the said limit where the total income does not exceed 44,50,000, the rate is 60 percent of the amount by which the total income exceeds the said limit where the total income exceeds 44,50,000".
By virtue of aforesaid provisions if income of a salaried person marginally exceeds the maximum limit of a slab and tax is charged at a high rate, he would calculate his tax liability by applying the above formula and get marginal relief in tax. The calculation of marginal relief and tax payable under these provisions of law has also been explained with the help of examples in the circular.
The scheme/slabs of aforesaid marginal tax relief will be workable only up to the extent of a marginal jump into the next income slab tax rate and with the increase of difference between marginal income and maximum of a slab, it will have diminishing effect on tax liability.
This is an optional scheme and when the relief worked out through this provision ceases to exist then it would not be applicable and tax shall automatically be calculated at a particular rate on a particular level of income.