Medical Allowance Tax Exemption (Clause 139) in 2026-27
One of the few real exemptions on salary
Most salary allowances in Pakistan are fully taxable, but the medical allowance is a genuine exception. Under Clause 139 of Part I of the Second Schedule to the Income Tax Ordinance 2001, a medical allowance is exempt from tax up to 10% of an employee's basic salary. This treatment is unchanged by the Finance Act 2026, so it carries forward intact into tax year 2026-27.
How the 10% cap works
The exemption is tied to basic salary, not to gross pay. If your basic salary is Rs 1,000,000 a year, up to Rs 100,000 of medical allowance is exempt. Any medical allowance above that 10% ceiling is added back to taxable income and taxed at your normal slab rate.
| Annual basic salary | Exempt medical allowance (10%) |
|---|---|
| Rs 600,000 | Rs 60,000 |
| Rs 1,200,000 | Rs 120,000 |
| Rs 2,400,000 | Rs 240,000 |
An important condition: 139(a) vs 139(b)
Clause 139 has two mutually exclusive routes. The 10%-of-basic medical allowance exemption applies only when the employer does NOT separately provide free medical treatment or reimburse hospital bills under the terms of employment. If your employer instead provides free treatment or health insurance directly, that benefit follows the other limb of the clause and the cash medical allowance route does not stack on top. In short, you get one or the other, not both.
A worked example
Imagine Sara has a basic salary of Rs 1,500,000 and receives a medical allowance of Rs 200,000 a year, with no separate free treatment from her employer. Her exempt limit is 10% of Rs 1,500,000 = Rs 150,000. So Rs 150,000 is exempt, and the remaining Rs 50,000 is taxed at her slab rate. If her employer had instead covered her hospital bills directly, the cash allowance would not enjoy the 10% exemption.
Why it pays to structure this correctly
Because medical allowance is one of the few exempt heads available to salaried staff, structuring a portion of pay as medical allowance (within the 10% cap) is a legitimate way to lower taxable income. We cover this further in our salary structuring guide.
How Zaffre HRM handles it
Zaffre HRM, the payroll module within Zaffre Axon, knows the Clause 139 rule. When you configure an employee's pay structure, Zaffre HRM automatically exempts medical allowance up to 10% of basic and taxes any excess, and it blocks the exemption where free medical treatment is already provided, keeping you compliant with the mutually exclusive conditions. Because allowance taxability is configured centrally on Zaffreaxon, every payslip across your company applies the rule consistently with zero manual calculation.
References: Income Tax Ordinance 2001, Second Schedule, Part I, Clause 139; Finance Act 2026 (Federal Budget 2026-27); FBR.
Get compliant payslips
Book a demo with Zaffre Tech to see how Zaffre HRM applies the medical allowance exemption correctly for every employee, every month.