Taxation Management (FIN623)
Assignment # 02
Marks: 20
Please read the following Instructions carefully before attempting the
Assignment:
• Last date for submission of Assignment is June 9th, 2011.
• The slab rates have been given in Lecture # 25 uploaded on the LMS.
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Question:
Mr. Nasir, after retirement from a multinational company as a senior executive, was rehired on contract for a period of three years. However, due to certain reasons, the contract was prematurely terminated six months earlier i.e. on December 31, 2010.
The details of emoluments received by him during the tax year 2010 are given below:
Rs.
Basic salary (per month) 70,500
Rent of furnished accommodation (per month) 30,000
Utilities allowance (per month) 12,000
Medical benefits reimbursed during the year 25,000
House rent was paid by the company directly to the landlord. Medical benefits were reimbursed against bills submitted by Mr. Nasir.
On his retirement as a permanent employee, he had been paid gratuity from the approved fund. According to rules of the fund, he was also entitled to a special gratuity in lieu of his services rendered under the contract. Accordingly, an amount of Rs. 120,000 was also paid out of the fund, on termination of the contract.
In lieu of premature termination, the following additional benefits were allowed to Mr. Nasir:
A compensation for the early rumination of Rs. 150,000 was paid.
He had obtained an interest free loan of Rs. 200,000 on July 1, 2009 was payable in lump sum on March 31, 2010. 25% of the outstanding balance was waived and remaining amount of loan was deducted from his final settlement. The benchmark rate according to Income Tax Ordinance, 2001 is 12%.
He was allowed to retain a 1600cc car which was in his use, at accounting book value of Rs. 650,000. The fair market value of the car at the time of settlement was Rs. 700,000.
Required:
Calculate the taxable income and tax liability for the tax year 2010.
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Solution:
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Tax Payer: Mr. Nasir Tax Year: 2010
Residentail Status: Resident NTN: xxxxxxx-x
Computation of taxable income and tax thereon:
Particulars "Total
Income" "Exempt
Income" "Taxable
Income"
Basic Salary 846,000 - 846,000
House Allowance 360,000 - 360,000
Utilities Allowance 144,000 - 144,000
Medical Allowance 25,000 84,600 -
Conveyance Allowance 65,000 - 65,000
Compensation Allowance 150,000 - 150,000
Interest Free Loan 24,000 - 24,000
Loan Waived off 50,000 - 50,000
Gratuity Allowance - Exempt -
Special Allowance - Exempt -
Other Allowances 120,000 120,000 -
Total Taxable Income 1,639,000
Rate of Tax 12.50%
Tax Liability for the Tax Year 2010 204,875
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See income tax rules 2002 updated
2[Provided further that where House Rent Allowance is admissible . thirty per
cent, the value taken for the purpose of this rule shall be an amount not less than
thirty per cent of minimum of the time scale of basic salary or the basic salary
where there is no time scale.] (Reference: Page # 10, Valuation of Accommodation)
If house rent paid then the amount taken should not be less then 30% not 45%
For personal use only 10% of:
(a) the cost to the employer for
acquiring the motor vehicle; or,
(b) the fair market value of the motor
vehicle at the commencement of
the lease, if the motor vehicle is
taken on lease by the employer;
Reference: Page # 10, Valuation of Conveyance
FMV taken only if motor vehicle is on lease, and FMV taken at the time of commencement not on settlement please note that
further the tax liability is to be calculated for the tax year 2010 not 2009, so please follow the rules that are apply in the respective years
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Tax payer: Mr. Nasir Tax Year: 2010
Residential status: Resident NTN: xxxxxx
Computation of taxable income and tax thereon:
Particular Total Exempt Taxable
Basic Salary ( 70500 × 6 ) 423000 423000
House Rent Allowance ( 30000 × 6 ) 190350 190350
Utilities allowance ( 12000 × 6 ) 72000 72000
Medical Allowance ( Exempt upto 10% ) 25000 84600
Benefit on retain the car (700000 - 650000) 50000 50000
Compensation Allowance 150000 150000
Interest Free Loan ( 200000 × 12% × 6 / 12 ) 12000 12000
Loan Waived-off ( 200000 × 25% ) 50000 50000
Gratuity Allowance Exempt
Special Allowance Exempt
Other Allowances 120000 120000
Total Taxable Incomes 947350
Tax Liability
Tax rate will be 9.00%
Taxable income = 947350×9.00% = 85261.5
Or this is another method which I take from different locations…… so its your choice
which one you preferred.
Tax on Rs. 900000 @ 7.5% 67500
Tax on Rs. 47350 @ 30% 14205
Total tax liability 81705
