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Tax on Prizes and Winnings - K. K. ADVISORS

August 26, 2020by Admin0

Tax on Prizes and Winnings:

 

Mr. Aslam is a marketing head of the S. N. Enterprise. Following are the particulars for filing his annual income tax return.

 

His monthly salary from July 01, 2019 to June 30, 2020 Rs. 180,000
He received a cash prize for his sales target achievement Rs. 100,000
He won performance award Rs. 45,000
Prize money on Prize bonds Rs. 15,000
Tax collected by the company Rs. 20,000
Tax deducted on prize bonds Rs. 3,000

 

Compute tax liability of Mr. Aslam for the tax year 2020?

 

Solution:

 

Salary (180,000 x 12) Rs. 2160,000
Performance award Rs. 45,000
Total taxable income Rs. 2205,000

 

Tax liability for the year

Fixed Rs. 70,000
Varies = (2205,000-1200,000) x 15% Rs. 150,750
Total tax liability Rs. 220,750

 

Notes

  • Performance reward by nature is treated as a bonus from the employer to the employee. Therefore, it is included in computing the tax liability as per normal tax regime
  • Cash prize is taxable under final tax regime (FTR), therefore is not included in computing the taxable income. Separate tax is being withheld and collected by the employer at the rate of tax which is 20% on the amount received by Mr. Aslam.

(Rs. 100,000 x 20% = 20,000)

  • He also won prize on prize bond which also falls under FTR. Total tax collected at the rate of 20%

(Rs. 15,000 x 20% = 3,000)

The tax falls under FTR will be furnish separately in the annual return

Explanation on section 156 of the Income tax Ordinance 

  • Every person winning a prize from the below-mentioned cases, not in cash, shall liable to pay tax at the below-mentioned rates

 

Rate of Tax
Prize Bond 15%
Raffle 20%
Lottery 20%
Quiz 20%
Promotion of sales 20%
Crossword puzzle 15%

 

  • Withholding tax is to be collected or deducted at source at the time of payment of the total amount.
  • It is collected by the person or institution that is making the payment.
  • Tax to be collected at the fair market value of the prize.
  • The tax-deductible or collected shall be treated as final tax liability on the income arising from the prizes or winning.

Admin

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