Medical Allowance Optimization in Pakistani Payroll
The medical allowance exemption is one of the most commonly used provisions in Pakistani salary structuring. Where an employer does not separately provide free medical treatment or reimburse actual medical expenses, a medical allowance is generally exempt from tax up to 10% of the employee's basic salary. Amounts above that ceiling become taxable.
Structuring Within the Rules
To use the exemption correctly, the medical allowance should be defined as a distinct salary head and the exempt portion calculated as 10% of basic - not 10% of gross. If basic salary changes, the exempt cap changes with it, so the calculation must be dynamic. Importantly, an employer generally cannot claim both the cash medical allowance exemption and separate reimbursement of medical bills for the same benefit; the structure should reflect one consistent approach.
What Payroll Should Handle Automatically
- Calculate the exempt portion as 10% of current basic salary
- Treat any medical allowance above the cap as taxable
- Adjust the exemption automatically when basic salary is revised
- Prevent double-claiming of allowance plus reimbursement
- Document the exempt amount for audit purposes
Zaffre HRM, the payroll module of Zaffre Axon by Zaffre Tech, applies the 10%-of-basic cap automatically and recalculates it on every increment, so the exemption is always correct without manual intervention. This is lawful optimization, not avoidance - it simply ensures employees receive the relief the rules allow.
To configure medical allowance the right way, Book a demo with our team.