Salary Tax & Filer Status: What Every Employee Should Know

Salary Tax & Filer Status In this video, we delve into an important distinction that often confuses salaried employees: the difference between having a taxed salary and being categorized as a filer in Pakistan. Many employees mistakenly believe that if their salary is taxed by their employer, they automatically qualify as a filer. However, this is far from the truth. We aim to clear up this misunderstanding and provide a step-by-step explanation of how taxation and filing work.

What Does “Taxed Salary” Mean?
A taxed salary refers to the income that your employer deducts tax from before transferring your monthly pay to your account. Employers in Pakistan are obligated to deduct income tax at the source under the “Withholding Tax” mechanism. The deducted amount is then deposited into the Federal Board of Revenue (FBR) on behalf of the employee.

For example, if your monthly salary is Rs. 100,000 and the applicable tax rate is 10%, your employer will deduct Rs. 10,000 and deposit the remaining Rs. 90,000 into your account. While this ensures tax compliance at the employer’s level, it does not automatically mean that the employee becomes a filer.

What is a Filer?
Being a filer in Pakistan refers to an individual who has submitted their income tax return to the FBR. The FBR uses this tax return to assess an individual’s financial activities, such as their sources of income, assets, and tax payments.

A filer enjoys numerous benefits, including:

1. Lower withholding tax rates on banking transactions, property dealings, and vehicle purchases.
2. A stronger financial profile, which is essential for availing loans and other credit facilities.
3. Legal compliance, avoiding penalties associated with non-filer status.

Taxed Salary Does Not Automatically Equal Filer Status
Many salaried employees assume that since their employer deducts income tax, they automatically become filers. This misconception arises because the tax deduction at the source is just one part of the taxation process. To become a filer, you must actively file your income tax return.

Filing a tax return involves:

• Declaring your total annual income (salary and any additional sources).
• Listing your deductions, exemptions, and investments.
• Calculating your tax liability and reconciling it with the tax already deducted.

Without filing this return, the FBR cannot categorize you as a filer, even if your salary has been taxed.

Why is Filing Your Tax Return Important?

1. Legal Requirement: As per Pakistani tax law, every individual earning above the taxable limit must file a tax return.
2. Avoiding Higher Taxes: Non-filers face significantly higher withholding tax rates. For example, non-filers pay double the tax rate on property transactions, banking withdrawals, and vehicle registrations.
3. Financial Transparency: Filing ensures that your financial activities are transparent, which can be beneficial for future investments or business dealings.
4. Access to Benefits: Filers can enjoy reduced tax rates on various transactions and gain better access to banking and credit facilities.

How to Become a Filer
To become a filer, follow these steps:

1. Register with the FBR: If you don’t already have an NTN (National Tax Number), you can register on the FBR’s IRIS portal.
2. Gather Required Documents: This includes your CNIC, salary slips, proof of investments, and other financial records.
3. Submit Your Tax Return: Use the IRIS portal to file your annual income tax return. If you’re unsure how to do this, consult a tax consultant or watch our video tutorials for guidance.

Misconceptions About Filing

• “My Employer Files My Tax Return”: This is incorrect. Employers only deduct and deposit your income tax but do not file your return. Filing is a personal responsibility.
• “I Don’t Need to File If My Salary is Below the Taxable Limit”: Even if your income falls below the taxable threshold, it is advisable to file a return to document your financial profile.
• “I’m Not a Business Owner, So I Don’t Need to File”: Tax filing is mandatory for individuals, whether they are salaried, self-employed, or business owners, as long as they meet the criteria set by the FBR.

Benefits of Being a Filer

1. Lower Tax Rates: Filers pay reduced withholding taxes on banking transactions, property purchases, and vehicle registrations.
2. Ease in Financial Transactions: Banks and financial institutions prefer working with filers.
3. Compliance with Law: Filing ensures you avoid penalties and legal complications.
4. Improved Financial Record: Filing creates a record of your income and assets, which can be useful for loans and other financial matters.