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

Salary

Salary

For employees, pensioners and directors drawing a salary. Sections 12 to 14 read with Parts IX and X

In short

  • The law does NOT allow an employee to deduct expenses from salary (section 12(4)). Travel to office, clothes, phone, etc. cannot be claimed.
  • You can still lower your tax lawfully through the allowances and tax credits listed below.
  • Money your employer pays back for expenses you incurred ON the employer's behalf (official duties) is not your salary in the first place.

Deductions from income (allowances)

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

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 directly)

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

Other lawful reliefs for salaried persons

Official expense reimbursements

Section 12(2)(c) and (d)
  • An allowance that is wholly spent on official duties, or a reimbursement of expenses you incurred for the employer, is not taxed as salary.
  • A fixed monthly allowance, or one paid as a percentage of salary, IS taxable even if it is called a "duty" allowance.
What your team should check (3)
  1. Are reimbursed amounts supported by bills for expenses actually incurred on the employer's behalf?
  2. Have fixed monthly / percentage-based allowances been included in taxable salary?
  3. Has the employer's salary certificate been reconciled with the return?

Keep on file: Expense claims with bills, salary certificate

Golden handshake or arrears taxed at a lower rate

Section 12(6) to (8)
  • Termination / golden handshake money can be taxed at your average rate of the previous three years instead of this year's higher slab.
  • Arrears of salary can be taxed at the rates of the years to which they relate.
  • You must elect this in writing by the due date of the return (or later if the Commissioner allows).
What your team should check (3)
  1. Was a golden handshake / termination payment or salary arrears received in the year?
  2. Has the beneficial rate (3-year average, or rates of the earlier years) been worked out?
  3. Was the written election filed by the return due date?

Keep on file: Settlement letter, prior 3 years returns, election letter

Perquisites valued correctly

Section 13; Rules 3 to 7
  • House provided by the employer: valued at the rent the employer would otherwise pay, but not less than 45% of the minimum of the basic pay scale (30% where house rent allowance is admissible at 30%) (Rule 4).
  • Car provided by the employer: 5% of its cost (or fair market value if leased) a year if used partly privately, 10% if used only privately (Rule 5).
  • Utilities, domestic staff and other benefits are taxed at their value under section 13. These rules also cover company directors (Rule 6).
  • An interest-free or low-interest employer loan up to Rs 1 million is not taxed as a perquisite.
  • Anything you pay the employer for a perquisite reduces its taxable value.
What your team should check (5)
  1. Has employer-provided accommodation been valued at not less than 45% (or 30% where HRA is 30%) of the minimum of the basic pay scale, as per Rule 4?
  2. Has an employer-provided car been valued at 5% (part private use) or 10% (fully private use) of cost / FMV, as per Rule 5?
  3. Have all other perquisites (utilities, domestic staff, loans) been valued as per section 13?
  4. Have amounts paid by the employee for perquisites been deducted from their value?
  5. For employer loans above Rs 1 million, has the benchmark-rate benefit been included?

Keep on file: Employer perquisite statement

Good to know

  • Pension from a former employer above Rs 10 million a year is taxed as final tax at special rates; a person aged 70 or more is not taxed on pension income (section 12(2A)).
  • A loss under any other head cannot be set off against salary income (section 56).
  • Tax deducted by your employer is adjusted against your final tax. Rule 31(1) requires you to keep the salary certificate showing salary and tax deducted.
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