Last updated: October 2026
An agreed salary is not necessarily the amount that reaches an employee’s bank account. The actual payment may vary due to approved earnings, attendance adjustments, tax withholding and other applicable deductions. In Pakistan, payroll calculation is most effective when it is documented as a step-by-step process: Verifying employee details, setting up earnings, checking attendance, verifying applicable deductions and verifying net pay. All amounts should include clearly identifiable source, basis and approval.
Quick answer: To calculate payroll in Pakistan, start with gross earnings (basic salary, allowances, and approved overtime), subtract the applicable deductions (income tax, employee EOBI, provident fund, loan repayments and approved unpaid leave) and the result is net salary. For payroll dates from 1 July 2026, income tax on salary follows the Finance Act 2026 slabs for Tax Year 2027. Vertex HCM, a Pakistan-based HR and payroll software, automates these steps by linking employee records, attendance, deductions, and payslips in one place.
Key takeaways
- Net salary is gross earnings minus applicable deductions.
- Salary tax is withheld under Section 149 of the Income Tax Ordinance, 2001 and worked out on annual taxable salary, even though payroll runs monthly.
- Overtime is generally paid at twice the ordinary rate. The Punjab Labour Code 2026 pays three times on public holidays.
- EOBI contributions are 5% (employer) and 1% (employee) of the minimum wage, not of actual salary.
- Every deduction needs a rule, an authorisation and a supporting record.
- Vertex HCM helps businesses in Pakistan apply these rules consistently by keeping payroll, attendance, and approvals in one connected system.
What Is Payroll Calculation?
Payroll calculation will determine the amounts an employee is paid and what they are paid for a pay period. Generally speaking, gross salary is the salary that comes before deductions. Gross earnings consist of the applicable earnings that are being processed (salary, allowances, and approved variable payments). Deductions are amounts that are appropriately deducted from payment to an employee. Taxable income is income as determined by applicable rules, which may not be equal to gross income. Net salary is the resultant payment:
Gross earnings − applicable deductions = net salary.
The calculation depends on employment terms, current requirements, and authorized company policies.
Before each payroll run, set a cut-off for approved inputs and reconcile opening records. Identify new joiners, departures, salary revisions, and retrospective adjustments. After review, obtain final payment approval, issue payslips and retain the calculation records. Tax remittances and contribution payments require separate tracking; transferring net salaries does not complete every payroll obligation.
Salary Components in Pakistan
Often salaries are the sum of basic salary and allowances. In addition, some workers are paid bonuses, commission, overtime or other additional pay. When performing employee payroll or employee salary calculation, refer to the approved compensation record and its effective date. Acknowledge that each component is either a fixed, a variable or a component related to eligibility. For example, the commission that can be earned by a salesperson can change from month to month while fixed allowances apply to an employee in the office. Payroll calculation in Pakistan depends on variable payments that are documented separately so that reviewers can see how this month is different from the last.
Basic Salary and Allowances
Basic salary is the fundamental component of salary defined by the terms of the contract. Gross earnings may be increased by house/rent, conveyance, medical and company specific allowances. For gross salary calculation, only include components that are payable for the period, with changes in components approved or applicable or apportioned accordingly. Always do not assume that an allowance is taxable or not taxable based on the name of the allowance. Check its treatment against the prevailing rules and conditions. Do not assume that all reimbursements of business expenses are allowances or income and pay them out as such.
Attendance, Leave and Overtime
Attendance records are used to determine days worked, absences, paid leave, unpaid leave and shift-related exceptions. Make sure that all punches and pending approvals are resolved before calculating attendance adjustments. Paid leave cannot be confused with unpaid leave. Unpaid leave must be based on a calculation basis, and a business can’t simply assume that one daily-rate divisor applies to all situations.
A review may result from late coming but a late mark does not give authority to deduct pay. Overtime treatment will be dependent upon the applicable law, employment terms, and company policy. Check eligibility, pay basis and approvals. The overnight shift must be matched properly between calendar dates, otherwise, the shift will be double counted as absence or overtime.
How to Calculate Overtime Pay in Pakistan
In most Pakistani labor laws, overtime is paid at twice the ordinary rate of pay. According to PakHisaab’s summary of the three laws, the Factories Act 1934 and the Sindh Factories Act 2015 pay double for hours beyond the daily and weekly limits, while the Punjab Labour Code 2026 (section 179) pays double for overtime and weekly rest day work and triple for work on a public holiday. Executives and managerial staff are generally not eligible under the factories laws, as WageIndicator explains, so eligibility always depends on the law that applies to the establishment.
| Law | Overtime rate | Public holiday work |
| Factories Act 1934 (Islamabad factories) | 2× ordinary rate | No separate rate |
| Sindh Factories Act 2015 | 2× ordinary rate | No separate rate |
| Punjab Labour Code 2026 (section 179) | 2× ordinary rate, including weekly rest day | 3× ordinary rate |
The laws do not prescribe how to turn a monthly salary into an hourly rate. A common method is to divide the monthly wage by 208 hours (48 hours a week × 52 weeks ÷ 12, which is the same as 26 working days × 8 hours).
As a fictional example, take a monthly wage of PKR 52,000. The hourly rate is PKR 250, the overtime rate is PKR 500, and 10 overtime hours add PKR 5,000 to gross earnings. Overtime limits also differ by law. For example, PakHisaab reports that in Punjab, overtime needs the worker’s agreement and cannot exceed 2 hours a day or 8 hours a week. Check the law and contract that apply before approving hours.Vertex HCM brings attendance and approval workflows into the same system as payroll, so approved hours reach payroll without repeated manual entry.
Employee Salary Deductions
Examples of usual salary deductions in Pakistan include income tax, employee contribution to EOBI (where applicable), provident fund contributions, repayments of loans and advances, and adjustments for allowed “unpaid leave.” There should also be a valid basis for company specific deductions. Maintain the applicable rule, authorization, and supporting record for each deduction.
Separate employee and employer contributions. This is not an automatic subtraction in an employee’s net-pay and should be in the employer cost and statutory records. Review deducted and outstanding loan balances before repayments. It is important to note that an advance that has been recovered and appeared on the spreadsheet last month should not stay active if it is not being recovered this month.
Legal Limits on Deductions and Pay Dates
Deductions are not a free choice for the employer. Under the Payment of Wages Act 1936 and its provincial versions, as summarized by WageIndicator:
- A wage period cannot exceed one month.
- Establishments with fewer than 1,000 workers must pay wages before the end of the seventh day after the wage period. Larger establishments have until the tenth day.
- Allowed deductions include income tax, provident fund subscriptions, recovery of advances or overpayments, deductions ordered by a court, and approved housing or amenity charges.
- Fines are limited to 3% of the wages payable in a wage period, and only for acts that were notified in advance.
The Punjab Labour Code 2026 (Act IX of 2026, enacted on 10 February 2026 and effective from the date the government notifies) also regulates advances in section 18. An advance can be an interest-free loan of up to three times the applicable minimum wage for unskilled workers. Recovery instalments cannot exceed 20% of the worker’s remuneration, payments must go through banking channels, and no new advance should be given until the previous one is repaid. Confirm the commencement status and the rules that apply to your province before applying these limits.
Income Tax and Payroll
Even though payroll is processed monthly, salary withholding still needs to be done on an annual basis and it is essentially a taxable salary view. The salary withholding structure is outlined in the Income Tax Ordinance, Section 149. October 2026 payroll is in Tax Year 2027 for an ordinary tax year. Read and use the Finance Act 2026 and any subsequent relevant amendments, not a previous tax table.
The salaried individual slabs for Tax Year 2027 (1 July 2026 to 30 June 2027) are shown below, as listed by TaxGuide.pk from the Finance Act 2026.
| Annual taxable income (PKR) | Tax |
| Up to 600,000 | 0% |
| 600,001 to 1,200,000 | 1% of the amount over 600,000 |
| 1,200,001 to 2,200,000 | 6,000 + 11% of the amount over 1,200,000 |
| 2,200,001 to 3,200,000 | 116,000 + 20% of the amount over 2,200,000 |
| 3,200,001 to 4,100,000 | 316,000 + 25% of the amount over 3,200,000 |
| 4,100,001 to 5,600,000 | 541,000 + 29% of the amount over 4,100,000 |
| 5,600,001 to 7,000,000 | 976,000 + 32% of the amount over 5,600,000 |
| Above 7,000,000 | 1,424,000 + 35% of the amount over 7,000,000 |
As a fictional illustration, an annual taxable salary of PKR 2,400,000 (PKR 200,000 a month) gives tax of 116,000 + 20% of 200,000, which is PKR 156,000 a year, or about PKR 13,000 a month if the same salary applies all year. The illustration ignores exemptions, credits and other income.
The practical payroll tax calculation process is
- Estimate applicable annual taxable salary, including relevant variable earnings and benefits.
- Apply the current salary tax rules, checking applicable exemptions, credits, and additional charges.
- Determine estimated annual tax liability.
- Calculate period withholding using the applicable method, considering tax already withheld.
- Recalculate when salary, bonuses, employment circumstances, or relevant rules change.
EOBI and Other Applicable Contributions
(EOBI) provides benefits for the old age of covered employees. determine if the employer and employee are encompassed by the scheme; check on the current contribution basis and treatment. (EOBI) Contributions are 5% of the minimum wage for the employer and 1% of the minimum wage for the employee. They are calculated on the minimum wage, not on actual salary, so the amounts change when the minimum wage changes. The (EOBI) law makes a distinction between employer and employee contributions and bans the recovery of the employer’s contribution from employee wages.
Social security provincial is separate checking. A company doing business in Karachi and Lahore should check what provincial coverage is required as well as what the wage limits & contribution rates are, rather than apply one blanket assumption across the country. The number of deductions for the provident fund will depend on the applicable arrangement and rules. Maintain employee deductions and employer contributions in different columns and compare with contribution records to ensure amounts payable are correct.
How to Calculate Net Salary
The following fictional monthly example demonstrates arithmetic only. Its tax and deduction amounts are assumed figures, not statutory rates or a tax calculation for a real employee.
- Basic salary: PKR 80,000.
- Allowances: PKR 20,000.
- Approved overtime earnings: PKR 5,000.
- Gross earnings: PKR 105,000.
- Assumed tax withholding: PKR 4,000.
- Assumed employee provident fund deduction: PKR 3,000.
- Authorized loan repayment: PKR 2,000.
- Total employee deductions: PKR 9,000.
- Net salary: PKR 96,000.
The calculation is PKR 105,000 minus PKR 9,000. Employer contributions, if applicable, would be recorded separately. Net salary calculation in Pakistan should end with a reconciliation between the payroll register, approved payment file and payslip.
Common Payroll Calculation Mistakes
Errors often arise from:
- Outdated tax rules or incorrect employee information.
- Missing attendance, incorrect overtime or duplicate leave adjustments.
- Duplicate deductions and incorrect statutory contribution treatment.
- Spreadsheet formulas referencing the wrong cells.
- Salary changes entered without correct effective dates.
- Payslips showing incorrect descriptions, amounts or balances.
Compare current payroll with the previous period and investigate unexpected movements. Check new joiners, leavers and employees with revised compensation separately. A second reviewer should confirm material adjustments before payment. This way, the payroll process in Pakistan becomes effective. Moving from spreadsheets to Vertex HCM helps reduce several of these errors at the source, because inputs, deductions, and payslips stay linked in one system.
How Payroll Software Like Vertex HCM Automates Salary Calculation
Payroll software in Pakistan can connect employee records, attendance, leave, overtime, allowances, deductions, tax calculations, statutory contributions, & payslips. Vertex HCM is a Pakistan-based HR and payroll software that offers payroll services alongside attendance, leave, commissions, provident fund, and approval workflows in one system. Because these modules are connected, approved inputs feed configured calculations, which reduces repeated manual entry and keeps payroll in step with attendance and leave records. For businesses moving away from spreadsheets, Vertex-HCM gives payroll teams a single place to run salary calculations for Pakistani businesses. Payroll management in Pakistan depends on automation that still requires verified rules, accurate data, and controlled changes. Test updates, review exceptions, and reconcile outputs before release.
FAQ’s
What is payroll calculation?
Payroll calculation works out what an employee is paid for a pay period. It starts with gross earnings, subtracts the applicable deductions, and ends with net salary. The result depends on employment terms, current requirements, and authorized company policy.
How is net salary calculated in Pakistan?
Net salary is gross earnings minus applicable deductions. As a fictional example, gross earnings of PKR 105,000 less assumed deductions of PKR 9,000 gives PKR 96,000. These are assumed figures, not statutory rates. The calculation should end with a reconciliation between the payroll register, the payment file, and the payslip.
What are the salary tax slabs for Tax Year 2027 in Pakistan?
Under the Finance Act 2026, salaried individuals pay no tax up to PKR 600,000 a year. Rates then rise from 1% above PKR 600,000 to 35% above PKR 7,000,000. The slabs apply from 1 July 2026. Check the Finance Act and any later amendments before each payroll run.
What is the overtime rate in Pakistan?
Overtime is generally paid at twice the ordinary rate of pay. The Punjab Labour Code 2026 pays three times for work on a public holiday. Eligibility, limits, and the hourly rate basis depend on the law that applies to your establishment, your employment terms, and company policy.
What information is needed to calculate payroll?
You need verified employee details, approved salary components with effective dates, attendance and leave records, approved overtime, allowances, authorized deductions, loan balances, and the current tax rules. Set a cut-off for approved inputs before each run.
How does overtime affect payroll?
Approved overtime is added to gross earnings. How it is treated depends on the applicable law, employment terms, and company policy, so check eligibility, pay basis, and approvals first. Overnight shifts should also be matched correctly across calendar dates to avoid double counting.
What is the difference between gross salary and net salary?
Gross salary is what is earned before deductions. Net salary is the amount left after applicable deductions such as tax, contributions, and repayments. Net pay is what reaches the employee’s bank account and what the salary slip shows at the bottom.
How is income tax included in the payroll calculation?
Salary withholding is worked out on an annual taxable salary basis, even though payroll runs monthly. It is covered by Section 149 of the Income Tax Ordinance. Use the current rules, including the Finance Act 2026 and any later amendments, not an old tax table, and recalculate when salary or bonuses change.
What deductions can be made from an employee’s salary?
Common examples are income tax, employee EOBI contribution where applicable, provident fund, loan or advance repayments, and approved unpaid leave adjustments. Each deduction needs a valid basis, authorization, and a supporting record. Employer contributions are recorded separately.
How much of a salary can be recovered for an advance?
Under section 18 of the Punjab Labour Code 2026, recovery instalments cannot exceed 20% of the worker’s remuneration, and payments should go through banking channels. Check that the code is in force for your establishment, and follow your province’s rules.
When must salaries be paid in Pakistan?
Under the Payment of Wages Act (1936) and its provincial versions, establishments with fewer than 1,000 workers must pay wages before the end of the seventh day after the wage period. Larger establishments have until the tenth day. A wage period cannot exceed one month.
What is the minimum wage in Pakistan?
Minimum wages are notified separately by each province and Islamabad, and they change. As of October 2026, PakHisaab reports that Sindh’s minimum wage is PKR 43,000 from 1 July 2026, while Punjab’s notified rate is still PKR 40,000. Always confirm the current notification for your location.
How does attendance affect salary calculation?
Attendance records determine days worked, absences, paid leave, unpaid leave, and shift exceptions. Missing punches and pending approvals should be resolved first. A late mark alone does not give authority to deduct pay.
Can payroll software calculate employee salaries automatically?
Yes, within the rules that have been set up. Payroll software in Pakistan can connect employee records, attendance, leave, overtime, allowances, deductions, tax, and payslips. Vertex HCM is a Pakistan-based payroll software that does this: it offers payroll services along with attendance, leave, commissions, provident fund, and approval workflows for businesses in Pakistan. You still need accurate data, tested rules, and a review of exceptions before release.
How often should payroll calculations be updated?
Review inputs every payroll run. update the setup when salary, bonuses, joiners, or leavers, or the relevant rules change, for example, after a new finance act. Compare each month with the previous one and look into unexpected movement’s.
What does (EOBI) mean in a salary slip?
(EOBI) stands for Employees’ Old-Age Benefits Institution. On a salary slip, an EOBI line is the employee’s contribution toward old-age benefits, where the employer and employee are covered by the scheme. The employee pays 1% of the minimum wage, and the employer pays 5%. The law does not allow the employer’s share to be recovered from wages.
What is a payroll system in Pakistan?
A payroll system is the process and tool’s a company uses to calculate and pay salaries. It can be spreadsheet’s or payroll software. Software links employee records, attendance, leave, deductions, and payslips in one place. Whatever you use, check that Pakistan-specific obligations such as tax and contributions are handled correctly.
Which payroll software can Pakistani businesses use?
Vertex-HCM is a Pakistan-based payroll software that brings payroll, attendance, leave, commissions, provident fund and approval workflows into one system, so businesses can move away from spreadsheets. Whichever software you choose, check how it handles rule setup, approvals, reporting and support.