Salary Tax Exemptions in Pakistan 2026 — What Is and Isn't Taxable
Not every rupee of your salary is taxable in Pakistan. The Income Tax Ordinance provides specific exemptions for portions of certain allowances, perquisites, and conditions. Knowing them helps employees minimise tax legitimately and helps employers configure payroll correctly. Here is the practical 2026 guide.
The basic exemption threshold
Salary income up to the basic exemption threshold is not taxed. This threshold is set in the Income Tax Ordinance and can change with Finance Acts — verify the current threshold (commonly around PKR 600,000 per year for salaried persons).
Allowances and their tax treatment
Basic salary
Fully taxable.
House Rent Allowance (HRA)
Fully taxable in general. Specific exemptions may apply in limited cases.
Conveyance allowance
Specific portions may be exempt under the Ordinance — verify current limits.
Medical allowance
Often the lower of actual medical expenses or 10% of basic salary is exempt — verify against current rules.
Utilities allowance
Generally taxable.
Special allowances
Various allowances paid for special purposes (e.g., uniform allowance, transport allowance to and from work) may have specific exemption rules per the Ordinance.
Perquisites and their tax treatment
Company-provided accommodation
Valued at a percentage of salary (typically) and added to taxable income.
Company-provided vehicle (with driver) for personal use
Valued at a percentage of vehicle cost (typically) and added to taxable income.
Medical insurance premium (employer-paid)
Often tax-exempt within specific limits.
Provident Fund employer contribution
For recognised PF, within limits, not added to taxable income.
EOBI employer contribution
Not added to taxable income.
Gratuity from approved scheme
Tax-exempt within limits.
One-time payments and their treatment
Bonus / commission
Fully taxable.
Leave encashment
Tax treatment depends on scheme — fully or partially taxable typically.
Final settlement / gratuity
From approved scheme, partially exempt within limits.
Arrears
Fully taxable, added to current year income.
Tax credits (reduce final tax)
Donations to approved charities
Within limits, the tax credit is a percentage of the donation amount.
Investment in approved schemes (mutual funds, shares)
Within limits, tax credit at applicable rate.
Insurance premium paid
Within limits, tax credit.
Education expenses
For children of taxpayer (within specific limits), tax credit.
Each credit has its own conditions and limits. Verify against current Finance Act.
What is NOT exempt (often misunderstood)
- Cash bonuses (fully taxable)
- Mobile / internet allowances (typically taxable)
- Marriage allowance (fully taxable)
- Festival gifts (fully taxable if monetary)
- Reimbursement of personal expenses (taxable as income)
Salary structuring for tax efficiency
Within legal limits, salary structuring can reduce tax:
- Maximise exempt allowances within limits (medical, conveyance per rules)
- Use recognised PF (tax-exempt within limits)
- Employer-paid medical insurance (tax-exempt within limits)
- Approved gratuity scheme
Aggressive structuring that has no business reality (calling 50% of salary "medical allowance" when actual medical cost is 5%) creates audit risk. Stay within reasonable bounds.
Employer obligations
The employer must:
- Calculate taxable income correctly per Ordinance rules
- Apply exemptions only where qualifying
- Withhold tax per slabs on the taxable portion
- Issue salary tax certificate showing taxable income + tax withheld
- Maintain records for audit
The Zaffre HRM exemption handling
Zaffre HRM supports configurable allowance types with exempt vs taxable distinction, perquisite valuation, tax credit application, and accurate salary tax certificate generation. See: tax calculation guide.
Critical caveat
Tax exemption rules are specific to the current Income Tax Ordinance and Finance Act. This article is general guidance, not tax advice. Verify against current rules and consult a tax practitioner for specific situations.