CAF-2 · Chapter 5
Salary MCQs with Answers
10 multiple-choice questions on Salary for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under the Income Tax Ordinance, 2001, what is the basis of chargeability for income under the head "Salary"?
- A) A) Accrual basis
- B) B) Receipt basis
- C) C) Whichever is earlier between accrual or receipt
- D) D) Matching concept basis
Show answer & explanation
Answer: B) B) Receipt basis
Salary is taxable strictly on a receipt basis; any salary received by an employee in a tax year shall be chargeable to tax in that year.
Question 2
An employee incurred expenses on travelling for the employer's business and was paid a specific allowance solely to cover those official duties. How will this allowance be treated for tax purposes?
- A) A) It will be fully included in the taxable salary.
- B) B) 50% of the allowance will be taxable.
- C) C) It will be completely excluded from the taxable salary.
- D) D) It will be taxed under "Income from Other Sources".
Show answer & explanation
Answer: C) C) It will be completely excluded from the taxable salary.
Any allowance provided to an employee is included in salary, excluding any allowance solely expended in the performance of duties of employment.
Question 3
Mr. Zaid is provided with a rent-free accommodation by his employer. His basic salary is Rs. 120,000 per month, but his minimum of time scale (MTS) is Rs. 100,000 per month. The annual fair market rent of the accommodation is Rs. 500,000. What amount will be added to his taxable salary for the accommodation?
- A) A) Rs. 500,000
- B) B) Rs. 540,000
- C) C) Rs. 648,000
- D) D) Rs. 450,000
Show answer & explanation
Answer: B) B) Rs. 540,000
The amount to be included is the higher of the fair market rent (Rs. 500,000) or 45% of the MTS (45% x Rs. 100,000 x 12 = Rs. 540,000). Therefore, Rs. 540,000 will be added.
Question 4
A company provided a leased 1300cc car to its marketing manager for both official and private use. The fair market value of the car at the commencement of the lease was Rs. 3,000,000. What amount will be included in the manager's taxable salary for this perquisite?
- A) A) Rs. 300,000
- B) B) Rs. 150,000
- C) C) Rs. 0
- D) D) Rs. 450,000
Show answer & explanation
Answer: B) B) Rs. 150,000
For a leased vehicle used partly for personal and partly for official use, 5% of the fair market value (FMV) of the motor vehicle at the commencement of the lease is added to the salary (5% of 3,000,000 = Rs. 150,000).
Question 5
ABC Ltd. granted a loan of Rs. 2,000,000 to an employee on 1 July 2025 at a concessional interest rate of 4% per annum. The benchmark rate specified in the law is 10%. What amount will be added to the employee's taxable salary for the tax year 2026?
- A) A) Rs. 200,000
- B) B) Rs. 120,000
- C) C) Rs. 80,000
- D) D) Nil, because loans up to Rs. 2,000,000 are exempt.
Show answer & explanation
Answer: B) B) Rs. 120,000
Since the loan exceeds the Rs. 1,000,000 exemption limit, the difference between the benchmark rate (10%) and the actual rate paid (4%) is taxable. 6% of Rs. 2,000,000 = Rs. 120,000.
Question 6
Mr. Tariq's employer agreed to bear the tax chargeable on his salary. According to Section 12(3) of the Income Tax Ordinance, 2001, how should this be treated?
- A) A) The tax borne by the employer is exempt from tax for the employee.
- B) B) The tax borne by the employer is treated as an additional benefit and the salary must be grossed up.
- C) C) The tax borne by the employer is treated as a deductible allowance.
- D) D) It is taxable as a separate block of income at a flat 15% rate.
Show answer & explanation
Answer: B) B) The tax borne by the employer is treated as an additional benefit and the salary must be grossed up.
Where an employer agrees to pay the tax chargeable on an employee's salary, the amount paid is treated as an additional benefit, and the salary income must be grossed up by the amount of tax payable by the employer.
Question 7
Mr. Fahad resigned from his job and received Rs. 500,000 from an unapproved gratuity fund. He has never received any gratuity before. What amount of this gratuity will be exempt from tax?
- A) A) Rs. 500,000 (Fully exempt)
- B) B) Rs. 300,000
- C) C) Rs. 250,000
- D) D) Rs. 75,000
Show answer & explanation
Answer: D) D) Rs. 75,000
Gratuity received from an unapproved scheme or fund is exempt up to Rs. 75,000 or 50% of the amount receivable (Rs. 250,000), whichever is lower. Thus, Rs. 75,000 is exempt.
Question 8
An employee received a substantial Golden Handshake payment upon termination of employment. Under Section 12(6), the employee has the option to have this amount taxed at:
- A) A) A flat rate of 10%.
- B) B) The average rate of tax paid over the three preceding tax years.
- C) C) The rate applicable to the highest tax slab.
- D) D) Zero percent, as it is a capital receipt.
Show answer & explanation
Answer: B) B) The average rate of tax paid over the three preceding tax years.
An employee receiving compensation on termination (including a golden handshake) may elect to have the amount taxed at the average rate of tax calculated over the three preceding tax years.
Question 9
Mr. Ali receives a basic salary of Rs. 2,000,000 per annum and a medical allowance of Rs. 250,000 per annum. His employer does NOT provide any free medical facility. What is his taxable medical allowance?
- A) A) Rs. 250,000
- B) B) Rs. 200,000
- C) C) Rs. 50,000
- D) D) Nil
Show answer & explanation
Answer: C) C) Rs. 50,000
Medical allowance is exempt up to 10% of the basic salary (10% of 2,000,000 = Rs. 200,000). The remaining amount (Rs. 250,000 - Rs. 200,000) of Rs. 50,000 is taxable.
Question 10
In the case of a Recognized Provident Fund, what is the exemption limit for the employer's contribution to the fund?
- A) A) It is fully exempt with no limits.
- B) B) It is fully taxable.
- C) C) Lower of Rs. 150,000 or 1/10th of (Basic Salary + Dearness Allowance).
- D) D) Higher of 16% of accumulated balance or 1/3rd of basic salary.
Show answer & explanation
Answer: C) C) Lower of Rs. 150,000 or 1/10th of (Basic Salary + Dearness Allowance).
For a Recognized Provident Fund, the employer's yearly contribution is exempt up to Rs. 150,000 or 1/10th of (Basic Salary + Dearness Allowance), whichever is lower.