In general, salary means any payment received by an employee for physical and mental work from the employer for a definite time or work. It is a structure of payment from an employer to an employee, which may be specified in an employment contract. In Income Tax Ordinance (ITO), 1984 an inclusive definition is given where it used that salary includes any wages;
(a) Any annuity, pension, or gratuity;
(b) Only fees, commission, allowances, perquisites or profit in lieu of or in addition to salary and wages.
(c) Any advance salary.
Elements of salary: Based on the above definition and practical situation elements of salary can be identified as follows –
(a) Basic Salary: It means to paid or payable monthly or otherwise.
(b) Bonus: It means the payment of extra salary based on monthly basic salary or otherwise.
(c) Dearness Allowance: It means the payment made by the employer to the employee for inflation which is general is a percentage of basic salary.
(d) Commission: It means the payment in lieu of salary or in addition to salary for service rendered.
(e) Annuity: It means the annual grant paid by an employer to the employee for a definite year of life.
(f) Pension: It is a reward for past services usually paid by the employer, voluntarily or under a contract of obligation.
(g) Gratuity: Its means a lump sum payment which is made at the time of leaving the job as a reward for past service.
(h) Leave Encashment: It means the payment received by an employee for his uninjured earned leave during his femur of service.
(i) Compensation for loss of service: If an employee receives an amount of termination of service or for exchange condition of service it will be treated as salary.
(j) Contribution to recognized provident fund: Both employer and employees contribute to a recognized provident fund. It is treated as salary.