What's Exempt from Your Salary? A Complete Guide

Here's something many salaried Pakistanis don't realize: not every rupee your employer pays you is subject to tax. Several components of your salary package are either fully or partially exempt — and knowing them can meaningfully reduce your taxable income. Let's walk through the main exemptions for Tax Year 2026.

Medical Allowance and Benefits

If you receive a medical allowance, it is exempt from tax up to 10% of your basic salary, provided it is given in lieu of free medical treatment. If instead your employer provides free medical treatment or reimburses your medical expenses directly under a proper medical scheme, those benefits are fully exempt with no upper ceiling.

Recognized Provident Fund

Contributions your employer makes to a Recognized Provident Fund (one approved by FBR) are exempt up to the lower of one-tenth of your salary or Rs. 150,000 per year. The interest credited to a recognized fund also enjoys exemption up to specified limits.

Gratuity

Gratuity received from a Recognized Gratuity Fund is exempt. If your gratuity comes from an unrecognized fund, it is taxable, though it may qualify for a concessional treatment. Gratuity is typically received when you leave a job, so this exemption matters most during job transitions.

Leave Encashment

Payment received for unused leave (leave encashment) on retirement is fully exempt for government employees. For private-sector employees, leave encashment is generally included in taxable income, so the treatment depends on your employer type.

A Quick Summary

The Bottom Line

Understanding your exemptions ensures you don't pay tax on income you're legally entitled to exclude. When you file with FiloTaxes, these exemptions are factored in automatically based on your salary structure — so you never overpay.