DEDUCTION FROM INCOME – I T ORDINANCE 2001 Allowable deductions · Ordinance 2001 & Rules 2002

Allowances and Tax Credits (all heads)

Allowances and Tax Credits (all heads)

Reliefs given after income is computed, whatever your source of income. Part IX (sections 60 to 60D) and Part X (sections 61 to 65)

In short

  • Deductible ALLOWANCES reduce your taxable income (section 9).
  • Tax CREDITS reduce the tax itself, usually at your average rate of tax (tax / taxable income x eligible amount).
  • Unused allowances and credits are lost: no refund and no carry forward (sections 60(3), 60D(3), 65(3)).

Deductible allowances (reduce income)

Zakat paid

Section 60
  • Zakat you paid during the tax year under the Zakat and Ushr Ordinance, 1980 is deducted from your total income.
  • It reduces income, not tax. If your income is already nil, the unused amount is lost (no refund, no carry forward).
  • Zakat deducted by a bank on your profit on debt is claimed under that income instead, so do not claim it twice.
What your team should check (4)
  1. Was the Zakat paid under the Zakat and Ushr Ordinance, 1980 (deducted at source or paid to an authorised Zakat fund)?
  2. Was it paid within the same tax year (1 July to 30 June) in which it is claimed?
  3. Is a Zakat deduction certificate or official receipt on file?
  4. Has the same Zakat NOT already been claimed against profit on debt under section 40(2)?

Keep on file: Bank Zakat deduction certificate / CZ-50 receipt

Workers' Welfare Fund (WWF) paid

Section 60A
  • WWF actually paid during the year, under the federal Ordinance or a provincial WWF law, is deducted from total income.
  • Not allowed for WWF paid to a province by a trans-provincial establishment.
What your team should check (4)
  1. Was the WWF actually paid (not just provided for) during the tax year?
  2. Was it paid under the WWF Ordinance, 1971 or the applicable provincial WWF law?
  3. If the entity is trans-provincial, has any WWF paid to a province been excluded from the claim?
  4. Are challans / payment proofs on file?

Keep on file: WWF challans, computation

Workers' Profit Participation Fund (WPPF) paid

Section 60B
  • WPPF paid during the year under the Companies Profits (Workers' Participation) Act, 1968 or a provincial law is deducted from total income.
  • Not allowed for WPPF paid to a province by a trans-provincial establishment.
What your team should check (4)
  1. Was the WPPF actually paid during the tax year?
  2. Was it paid under the 1968 Act or the applicable provincial WPPF law?
  3. If the entity is trans-provincial, has any WPPF paid to a province been excluded from the claim?
  4. Are payment proofs and the WPPF computation on file?

Keep on file: WPPF computation, payment proof

Children's tuition fee

Section 60D
  • Available only to an individual whose taxable income is below Rs 1.5 million.
  • Allowance is the LOWEST of: 5% of tuition fee paid, 25% of taxable income, or Rs 60,000 x number of children.
  • Either parent who actually pays the fee can claim it, by giving the NTN or name of the school / institution.
  • Unused amount cannot be carried forward. Employers do not count it when deducting tax from salary.
What your team should check (6)
  1. Is the claimant an individual with taxable income below Rs 1.5 million?
  2. Was the tuition fee paid by the claimant during the tax year?
  3. Has the allowance been limited to the lowest of 5% of fee, 25% of taxable income and Rs 60,000 per child?
  4. Is the NTN or name of the educational institution available for the return?
  5. Has the other parent NOT claimed the same fee?
  6. Are fee vouchers / paid receipts on file?

Keep on file: Paid fee vouchers, institution NTN

Tax credits (reduce tax)

Donations to approved institutions (tax credit)

Section 61; Rules 211-220, 228(4)
  • Donations to approved bodies give a tax CREDIT (reduces tax directly) at your average tax rate.
  • Eligible: government-run education boards, universities, schools, hospitals and relief funds; approved non-profit organisations; bodies listed in the Thirteenth Schedule.
  • Limit: 30% of taxable income for individuals / AOPs, 20% for companies. Only 15% / 10% if the donee is your associate.
  • Cash donations count only if paid by crossed cheque / bank.
  • Donated goods are valued under Rule 228(4): imported goods at customs value plus duties paid; locally made goods at purchase price plus taxes; used assets at tax written down value; vehicles under the vehicle valuation rule; anything else at fair market value set by the Commissioner.
  • A non-profit organisation must hold a valid approval from the Commissioner (Rules 211 to 220) for your donation to qualify.
What your team should check (7)
  1. Is the donee an eligible institution under section 61 (government-run, approved NPO or Thirteenth Schedule)?
  2. Was the donation paid through a crossed cheque / banking channel (not cash)?
  3. Has the claim been limited to 30% (individual / AOP) or 20% (company) of taxable income?
  4. If the donee is an associate, has the lower limit of 15% / 10% been applied?
  5. Is the donee's receipt and approval / NPO status evidence on file?
  6. For donations in kind, has the value been worked out as per Rule 228(4)?
  7. Has the credit been worked out at the average rate of tax (tax / taxable income x eligible donation)?

Keep on file: Donation receipt, bank proof, NPO approval

Contribution to approved Voluntary Pension Fund (tax credit)

Section 63
  • Individuals with salary or business income get a tax credit for contributions to an approved pension fund under the Voluntary Pension System Rules, 2005.
  • Limit: contribution up to 20% of taxable income, credited at your average tax rate.
  • Transfers from an employer's pension / provident scheme into your pension account do not qualify.
What your team should check (5)
  1. Is the claimant an eligible person with income under Salary or Income from Business?
  2. Was the contribution made during the tax year to a fund approved under the VPS Rules, 2005?
  3. Has the eligible amount been limited to 20% of taxable income?
  4. Has any transfer of an existing employer scheme balance been excluded?
  5. Is the pension fund manager's contribution certificate on file?

Keep on file: Pension fund manager certificate

Profit paid on a house loan (tax credit)

Section 63A
  • Individuals get a tax credit for profit / mark-up (or rent share) paid on a loan to build or buy ONE personal house.
  • House land area up to 2,500 sq ft, or flat up to 2,000 sq ft.
  • Loan must be from a scheduled bank, SECP-regulated financial institution, government, statutory body or listed public company.
  • Limit: 30% of taxable income, at your average tax rate. Once claimed, no claim for another house for 15 years.
  • Not allowed if the same profit is already deducted against rental income under section 15A.
What your team should check (7)
  1. Is the claimant an individual using the loan for construction / purchase of one personal house or flat?
  2. Is the house land area up to 2,500 sq ft (or flat area up to 2,000 sq ft)?
  3. Is the lender a scheduled bank, SECP-regulated institution, government, statutory body or listed public company?
  4. Has the eligible profit been limited to 30% of taxable income?
  5. Has the same profit NOT been deducted against rent under section 15A?
  6. Has no credit for another house been claimed in the last 15 tax years?
  7. Is the lender's certificate of profit paid on file?

Keep on file: Bank profit certificate, property documents

Cost of integrating with FBR systems (tax credit)

Section 64D; Rules 33A-33G
  • Persons required to integrate with FBR's computerised system (POS / real-time monitoring) get a tax credit of 10% of the amount invested in the equipment and software.
  • Who must integrate, and how (fiscal electronic device, licensed integrator, registered POS at every notified outlet), is set out in Rules 33A to 33G. The integration cost itself is borne by the taxpayer (Rule 33B(12)), which is why this credit helps.
  • Credit is for the tax year in which the system is installed, integrated and configured.
  • Running and maintenance costs do not qualify. Credit is only against normal tax.
What your team should check (5)
  1. Is the person legally required to integrate with FBR's system (Income Tax, Sales Tax or FED law)?
  2. Was the expenditure only on equipment, hardware or software used exclusively for integration?
  3. Was the system installed, integrated and configured with FBR in this tax year?
  4. Has the credit been limited to 10% of the amount invested, excluding running / maintenance costs?
  5. Are purchase invoices and FBR integration confirmation on file?

Keep on file: Invoices, FBR integration confirmation

Good to know

  • Industrial tax credits for investment and specified undertakings (sections 65B, 65E, 65F, 65G) apply only to qualifying companies and periods; consult your adviser.
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