How are employee stock options taxed for employees of a Pakistani tech company?

Share options are a common part of pay at Pakistani tech startups, particularly those with foreign investors. The Income Tax Ordinance, 2001 deals with them in section 14, which treats the benefit as salary but fixes the timing at the issue of shares rather than at the grant of the option.

What does the law say?

Section 14 sets out when an employee share scheme produces salary income, and how much:

Event	Rule in section 14	Salary amount
Option granted	Section 14(1): not chargeable to tax	Nil
Shares issued, no restriction	Section 14(2)	Fair market value at the date of issue, less consideration paid for the shares and for the option
Shares issued with a transfer restriction	Section 14(3)	Nothing until the earlier of a free right to transfer or disposal; then fair market value at that time, less consideration paid
Option sold or otherwise disposed of	Section 14(5)	Consideration received less the employee’s cost of the option

Section 12(2)(g) confirms that salary includes “any amount chargeable to tax as “Salary” under section 14”. Section 14(4) sets the employee’s cost of the shares as the consideration paid for the shares, plus any consideration paid for the option, plus the amount taxed as salary.

How is fair market value measured?

Section 68(1) defines fair market value as the price the asset would ordinarily fetch on sale in the open market at that time. Section 68(2) says it is determined “without regard to any restriction on transfer or to the fact that it is not otherwise convertible to cash”. Under section 68(3), where the price is not ordinarily ascertainable, the Commissioner may determine it. Shares in an unlisted startup often have no open market price, so this matters.

Section 14(3) and section 68(2) are not easy to read together. Section 14(3) delays the charge for restricted shares, while section 68(2) says value ignores restrictions on transfer. The Ordinance does not explain the interaction for any particular lock-in, and this page does not resolve it.

How does the employer withhold?

Section 149(1) requires the employer to deduct tax at each payment of salary, at the average rate on the employee’s estimated salary income for the year. The section 14 amount is salary, so it goes into that estimate. Section 149(1) applies the average rate to “the amount paid”. A share issue is not a cash payment, and section 149 does not describe how to withhold on it directly. What the section does allow is adjustment for “any excess deduction or deficiency arising out of any previous deduction”, which lets the remaining cash salary payments in the year carry the extra tax.

Worked example (illustrative figures)

Sana is a product manager at an Islamabad SaaS startup, paid Rs. 250,000 a month in tax year 2027 with no other income. In January 2027 she exercises options over 5,000 shares at Rs. 50 a share. She paid nothing for the grant. The shares are issued with no restriction and the fair market value at issue is Rs. 250 a share. All amounts are invented. The rates are the clause (2) rates for tax year 2027.

Before the share issue:

1. Estimated annual salary: Rs. 250,000 x 12 = Rs. 3,000,000.
2. Tax: Rs. 116,000 + 20% x (Rs. 3,000,000 - Rs. 2,200,000) = Rs. 276,000.
3. Monthly deduction: Rs. 276,000 / 12 = Rs. 23,000. July to December: 6 x Rs. 23,000 = Rs. 138,000.

After the share issue:

1. Section 14(2) amount: (5,000 x Rs. 250) - (5,000 x Rs. 50) = Rs. 1,250,000 - Rs. 250,000 = Rs. 1,000,000.
2. Revised estimated salary: Rs. 3,000,000 + Rs. 1,000,000 = Rs. 4,000,000.
3. Tax: Rs. 316,000 + 25% x (Rs. 4,000,000 - Rs. 3,200,000) = Rs. 316,000 + Rs. 200,000 = Rs. 516,000.
4. Still to deduct: Rs. 516,000 - Rs. 138,000 = Rs. 378,000.
5. Spread over January to June: Rs. 378,000 / 6 = Rs. 63,000 a month.
6. Sana’s cost of the shares under section 14(4): Rs. 250,000 + Rs. 0 + Rs. 1,000,000 = Rs. 1,250,000.

Even spreading is one way of making the section 149 adjustment. The section does not prescribe it.

What if the shares are locked in?

Take the same facts, but the shares cannot be transferred until a date in tax year 2029, when the fair market value is Rs. 300. Section 14(3) means nothing is taxed in tax year 2027. In tax year 2029 the salary amount is (5,000 x Rs. 300) - Rs. 250,000 = Rs. 1,250,000. If Sana sold the shares before the lock-in ended, the charge would arise at the sale.

What if she sells the option instead?

Suppose Sana sells her option back under the scheme for Rs. 400,000, having paid nothing for it. Section 14(5) gives a gain of Rs. 400,000 - Rs. 0 = Rs. 400,000, which is salary for that tax year.

Common mistakes

• Taxing at grant. Section 14(1) expressly excludes the option’s value at grant.
• Ignoring the exercise price. Section 14(2) deducts what the employee paid, including anything paid for the option.
• Forgetting the cost base. The salary amount is added to the cost of the shares under section 14(4), which reduces any later gain on sale.
• Leaving payroll unchanged. The section 14 amount raises the employee’s estimated salary and average rate under section 149.

What to check in the official text

Read sections 12, 14, 68 and 149, and the clause (2) table of Division I of Part I of the First Schedule in the official PDF. Tax on a later sale of the shares falls under capital gains provisions not covered on this page, and any valuation determined by the Commissioner under section 68(3) is case specific.