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

Income from Other Sources

Income from Other Sources

For royalty, sub-lease rent, lease of building with plant, prizes, gifts and other income. Sections 39 and 40

In short

  • Covers income that does not fall under any other head: royalty, ground rent, sub-lease rent, lease of a building with plant and machinery, amenities charged to tenants, annuities, certain gifts, etc.
  • Expenses PAID in the year to earn this income are deductible, but not capital spending (section 40).
  • Income already taxed under sections 5, 5AA, 6, 7 or 7B (e.g. dividends, profit on debt) is taxed separately at fixed rates and is outside this head.

Deductions allowed

Expenses paid to earn the income

Section 40(1) and (6); Rule 31(4)
  • Expenses actually PAID in the year, to the extent they were paid to earn this income.
  • Capital spending (benefit lasting more than one year) is not allowed here.
  • Rule 31(4) lists the records to keep: royalty / lease / use-of-property agreements, evidence of profit-bearing debt and tax deducted, evidence of Zakat deducted, and evidence of every expense claimed.
What your team should check (4)
  1. Was each expense actually paid in the tax year?
  2. Was it paid to earn the income taxed under this head?
  3. Has capital expenditure been excluded?
  4. Are the agreements and evidence listed in Rule 31(4) on file?

Keep on file: Agreements, bills, payment proofs (Rule 31(4))

Zakat deducted from profit on debt

Section 40(2)
  • Zakat deducted at the time profit on debt is paid to you is deducted from that income.
What your team should check (2)
  1. Was the Zakat deducted under the Zakat and Ushr Ordinance at the time of payment of profit?
  2. Has the same Zakat not been claimed again under section 60?

Keep on file: Bank Zakat deduction certificate

Depreciation for building leased with plant and machinery

Section 40(3)
  • If you lease out a building together with plant and machinery, you get depreciation on the plant, machinery and building, and initial allowance on plant and machinery, under the business rules.
What your team should check (2)
  1. Is the income from lease of a building together with plant / machinery?
  2. Have depreciation and initial allowance been computed under sections 22 and 23?

Keep on file: Lease agreement, asset register

Watch-outs

Business disallowance rules apply; no double claims

Section 40(4) and (5)
  • Section 21 restrictions (withholding tax, cash payments, personal expenses, fines) apply here too. An expense deductible under another head cannot be claimed again here.
What your team should check (2)
  1. Has withholding tax been deducted where required on expenses claimed?
  2. Have expenses deductible under another head been excluded?

Keep on file: WHT challans

Cash loans, deposits and gifts can become income

Section 39(3)
  • A loan, advance, share deposit or gift received from someone other than a bank, otherwise than by crossed cheque / banking channel / digital means from a person holding NTN, is taxed as your income.
What your team should check (1)
  1. Were all loans, advances, share deposits and gifts received through banking channel / digital means from NTN holders?

Keep on file: Bank statements, lender NTN

Good to know

  • Amounts received for vacating a building are spread over 10 years (section 39(2)).
  • Gifts from relatives as defined in section 85(5) are not taxed under this head.
Important: This site is a helper tool only. It does not constitute legal or tax advice. Anyone using or acting upon its results should first consult their own legal advisor or tax advisor. Read the full disclaimer.