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

Income from Business

Income from Business

For traders, manufacturers, service providers, professionals and companies. Sections 18 to 36 and Third Schedule

In short

  • Any expense spent WHOLLY AND EXCLUSIVELY to run your business in the tax year is deductible (section 20).
  • Things that last more than a year (machines, vehicles, software, buildings) are claimed gradually through depreciation or amortisation.
  • Section 21 lists expenses that are NOT allowed, mostly linked to withholding tax and banking-channel payments. Check the watch-outs carefully.

Day-to-day business expenses

Running expenses of the business

Section 20(1), 67 and 174; Rules 13, 29, 30
  • Typical examples: salaries and wages, rent of premises, electricity and gas, repairs, stationery, travelling, advertising, professional fees, freight, insurance.
  • Each expense must be for the business only, relate to this tax year, and be of revenue (not capital) nature.
  • Expenses that clearly belong to one class of income go to that class. Common expenses (e.g. general admin) shared with exempt, final-tax or other income are split by gross receipts: expense x receipts of that class / total receipts (Rule 13). A CA / CMA certificate of the basis is accepted unless significant variations are found.
  • Keep proper books, vouchers and invoices for every receipt and expense, and preserve them for 6 years after the tax year (Rules 29 and 30). Non-company businesses have minimum record lists that depend on turnover and type of business.
What your team should check (7)
  1. Was each expense incurred wholly and exclusively for the business?
  2. Does each expense relate to this tax year?
  3. Is each expense of revenue nature (benefit not lasting beyond one year)?
  4. Is each expense supported by an invoice / voucher (with payee name and address where over Rs 10,000) and recorded in the books?
  5. Have common expenses been apportioned between taxable, exempt and final-tax income using the Rule 13 gross-receipts formula?
  6. Where accounts are audited, is a CA / CMA certificate of the apportionment basis available?
  7. Are books and records kept as required by Rules 29 and 30 and preserved for 6 years?

Keep on file: Invoices, vouchers, ledgers, bank statements, apportionment working

Own agricultural produce used as raw material

Rule 11
  • If you grow crops (or receive them as rent-in-kind) and use them as raw material in your business, you deduct their MARKET VALUE when used.
  • If the produce has no ordinary market, the deduction is the cost of cultivation plus land revenue / rent for the area.
  • No other deduction is allowed for the costs of growing that produce.
What your team should check (3)
  1. Is the produce grown by the taxpayer (or received as rent-in-kind) and used as raw material in the business?
  2. Has it been valued at market price at the time of use (or cultivation cost plus land revenue where there is no market)?
  3. Have the cultivation costs NOT also been claimed separately?

Keep on file: Market price evidence, cultivation cost records

Business animals that died or became useless

Section 20(1A)
  • For animals used in the business (not held for sale) that died or became permanently useless: cost minus anything recovered from the carcass / sale.
What your team should check (2)
  1. Were the animals used in the business and not held as stock-in-trade?
  2. Has the claim been reduced by any amount realised from the carcass or sale?

Keep on file: Purchase record, vet / disposal record

Amalgamation costs

Section 20(3)
  • An amalgamated company can deduct legal, financial advisory and administrative costs of planning and carrying out the amalgamation.
What your team should check (1)
  1. Is the claimant the amalgamated company and do the costs relate to planning / implementing the amalgamation?

Keep on file: Advisers' invoices, scheme of amalgamation

Capital spending – claimed over several years

Depreciation on business assets

Section 22, Third Schedule Part I; Rules 12, 224
  • Rates on reducing balance: buildings 10%; furniture, plant and machinery, motor vehicles, ships, technical books 15%; computer hardware, IT-manufacturing machinery, aircraft 30%; offshore platforms 20%; disability access ramps (up to Rs 250,000 each) 100%.
  • Land is not depreciable. Cost of a car not plying for hire is capped at Rs 7.5 million.
  • If an asset is partly used for business, only the business share is allowed.
  • On sale: gain over tax written down value is income; shortfall is a deduction.
  • No depreciation on additions where the withholding tax under sections 152 / 153 on the purchase was not deducted and paid.
  • With the return you must give the asset-wise details listed in Rule 12: description, part-use, date acquired, opening WDV, additions, rates, depreciation / initial allowance / amortisation, closing WDV, and for disposals the sale price and gain or loss.
  • Leasing companies and modarabas claim depreciation on leased assets only if SECP-licensed, with leased vehicle value capped as per the Third Schedule (Rule 224).
What your team should check (8)
  1. Is a tax fixed-asset register maintained showing cost, additions, disposals and tax WDV?
  2. Have the correct Third Schedule rates been applied on written down value?
  3. Has land been excluded from the depreciable cost?
  4. Has the cost of passenger vehicles not plying for hire been capped at Rs 7.5 million?
  5. Has depreciation been restricted for assets partly used privately?
  6. Was withholding tax under section 152 / 153 deducted and deposited on the purchase of additions?
  7. Have gains / losses on disposals been computed on tax WDV?
  8. Have the Rule 12 asset-wise particulars been prepared for furnishing with the return?

Keep on file: Tax fixed asset register, purchase invoices, WHT challans

Initial allowance – 25% in the first year

Section 23 and Third Schedule Part II
  • Extra 25% of cost for NEW plant and machinery first put to use in Pakistan in the business.
  • Not for: road vehicles (unless plying for hire), furniture, machinery already used in Pakistan, buildings, or assets fully expensed elsewhere.
What your team should check (4)
  1. Is the asset plant / machinery not previously used in Pakistan?
  2. Was it first put to business use (or commercial production started) in this tax year?
  3. Have vehicles not plying for hire, furniture and buildings been excluded?
  4. Has the initial allowance been deducted from cost before normal depreciation?

Keep on file: Import / purchase documents, commissioning report

First-year allowance – 90% for alternate energy equipment

Section 23B and Third Schedule Part II
  • A company-owned industrial undertaking gets 90% of the cost of plant and equipment installed to generate alternate energy, instead of the initial allowance.
What your team should check (3)
  1. Is the undertaking owned and managed by a company?
  2. Is the plant / equipment installed for generation of alternate energy and put to use after 1 July 2009?
  3. Has the normal initial allowance NOT also been claimed on the same asset?

Keep on file: Invoices, installation certificate

Amortisation of intangibles (software, licences, patents, franchise)

Section 24
  • Cost is spread evenly over the useful life; if the life is not certain, over 15 years.
  • Self-generated goodwill is not allowed.
  • Partly business use: only the business share. Days of use in the year are counted.
What your team should check (4)
  1. Does the intangible have a useful life of more than one year and is it used in the business?
  2. Has cost been spread over its useful life (15 years where not ascertainable)?
  3. Has self-generated goodwill been excluded?
  4. Has the deduction been pro-rated for days in use and business share?

Keep on file: Licence / purchase agreement, amortisation schedule

Start-up costs before business began – 20% a year

Section 25 and Third Schedule Part III
  • Feasibility studies, prototypes, trial production and similar costs before the business started are written off at 20% a year (straight line). Land and depreciable assets are excluded.
What your team should check (3)
  1. Was the expenditure incurred before commencement of business, wholly to earn taxable income?
  2. Has land and depreciable / amortisable cost been excluded?
  3. Is it being written off at 20% straight line, not exceeding total cost?

Keep on file: Pre-commencement expense schedule

Special deductions

Scientific research in Pakistan

Section 26
  • Research spending in Pakistan to develop your business, including payments to research institutions. Not for buying assets, property, or searching for natural deposits.
What your team should check (2)
  1. Was the research undertaken in Pakistan for developing the business?
  2. Have asset purchases, immovable property and mineral exploration costs been excluded?

Keep on file: Research contracts, invoices

Employee schools, hospitals and training

Section 27
  • Running costs (not capital) of a school or hospital in Pakistan for employees and their families; a government-recognised industrial training institute; or training of Pakistani citizens under an FBR-approved scheme.
What your team should check (2)
  1. Is the expenditure of revenue (not capital) nature?
  2. Is the institution for employees / dependents, a recognised training institute, or an FBR-approved training scheme?

Keep on file: Bills, approval / recognition letter

Mark-up, interest and lease rentals

Section 28
  • Profit / interest on loans used for the business.
  • Lease rentals to banks, financial institutions, approved modarabas and leasing companies for business assets. For a car not plying for hire, principal is capped at Rs 2.5 million.
  • Shares of profit paid under musharika / modaraba / PTC arrangements used in the business.
What your team should check (5)
  1. Was the borrowed money actually used for the business?
  2. Is the lessor a scheduled bank, financial institution, approved modaraba or approved leasing company?
  3. For passenger vehicles not plying for hire, has the principal for lease rental been capped at Rs 2.5 million?
  4. Has withholding tax been deducted where required on profit on debt paid?
  5. Are bank / lessor certificates on file?

Keep on file: Loan / lease agreements, bank certificates

Bad debts written off

Section 29
  • Allowed if the amount was earlier included in your taxable income (or is a loan given by a financial institution), is written off in this year's accounts, and is reasonably irrecoverable.
  • If recovered later, the recovery is taxed (or any shortfall is allowed) in that year.
What your team should check (4)
  1. Was the debt earlier included in taxable business income (or lent by a financial institution in its business)?
  2. Has it actually been written off in the accounts of this tax year?
  3. Is there reasonable evidence that it is irrecoverable (recovery efforts, legal notices)?
  4. Has the claim been limited to the amount written off?

Keep on file: Write-off approval, recovery correspondence

Special deductions for banks, NBFCs, HBFC and modarabas

Sections 29A, 30 and 31
  • NBFCs and HBFC: reserve for consumer-loan bad debts up to 3% of income from consumer loans.
  • Banks, DFIs, NBFCs and modarabas: profit on non-performing loans parked in a suspense account under SBP / SECP prudential rules (taxed when recovered).
  • Companies: transfers to a participatory reserve, up to 5% of participatory redeemable capital.
What your team should check (3)
  1. Is the claimant the type of institution covered by section 29A / 30 / 31?
  2. Have the percentage limits (3% / 5%) been respected?
  3. Is suspended profit credited to a suspense account as per prudential regulations, and recoveries offered to tax?

Keep on file: Prudential computations, auditor reports

Deductions and credits after working out business 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

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

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

Watch-outs: expenses NOT allowed (section 21)

Payments where withholding tax was not deducted

Section 21(c)
  • Any expense on which you had to deduct or collect withholding tax is disallowed unless the tax was deducted and paid to the government.
  • For purchases of raw material and finished goods, the disallowance is limited to 20% of such purchases.
  • Tax later recovered from you by the department (sections 161 / 162) counts as paid.
What your team should check (3)
  1. Has withholding tax been deducted on every payment requiring it (salaries, rent, services, contracts, goods, commission, profit on debt, non-residents)?
  2. Has all deducted tax been deposited in the government treasury on time?
  3. Have withholding statements been filed and reconciled with the ledger?

Keep on file: WHT challans (CPRs), withholding statements

Large payments not made through the bank

Section 21(l), (la), (m) and (s)
  • Expenses under one account head over Rs 250,000 in total must be paid by crossed cheque, crossed draft / pay order, online transfer or card from the business bank account. Payments up to Rs 25,000, and utility bills, freight, travel fare, postage and statutory dues are excepted.
  • Companies: once FBR notifies it, such payments must be made digitally from the business account declared under section 114A.
  • Salary over Rs 32,000 a month must be paid by crossed cheque, bank transfer or digital means.
  • If a customer paid you over Rs 200,000 against a single invoice otherwise than through bank / digital means, 50% of expenses claimed for that sale are disallowed.
What your team should check (4)
  1. Were payments under each account head exceeding Rs 250,000 in aggregate made through the business bank account by banking channel?
  2. Were all salaries above Rs 32,000 per month paid through bank / digital means?
  3. Were receipts above Rs 200,000 per invoice received through banking channel or digital means?
  4. (Companies) Is the business bank account declared under section 114A and used for digital payments?

Keep on file: Bank statements, payroll bank advice

Purchases from persons without NTN, commission to non-filers

Section 21(q) and (ca)
  • 10% of expenses attributable to purchases from persons who do not hold an NTN are disallowed (for agricultural produce, only purchases from middlemen).
  • Commission on Third Schedule (sales tax) products above 0.2% of supplies is disallowed if paid to a person not on the Active Taxpayers List.
What your team should check (2)
  1. Is the NTN of every supplier recorded, and the 10% disallowance worked out on non-NTN purchases?
  2. Have recipients of commission on Third Schedule goods been verified on the Active Taxpayers List?

Keep on file: Supplier master with NTNs, ATL checks

Entertainment, utilities, promotion limits and FBR integration

Section 21(d), (o), (p) and (r); Rules 10, 33A-33G
  • Entertainment (meals, refreshments and reasonable leisure facilities) is allowed only for: entertainment abroad linked to business deals or head office; foreign customers and suppliers in Pakistan; customers and clients at your business premises; meetings of shareholders, agents, directors or employees; and opening of branches. Guests must be directly related to your business (Rule 10).
  • Utility bills: section 21(p) allows FBR to prescribe limits, but the Income Tax Rules (amended up to 15 September 2026) do not yet prescribe any. Watch for future notifications.
  • Pharmaceutical manufacturers: sales promotion and advertisement above 10% of turnover is disallowed.
  • 3% of expenses claimed are disallowed if a person required to integrate with FBR (fiscal electronic device / POS under Rules 33A to 33G) fails to do so.
What your team should check (5)
  1. Does all entertainment expense fall within the five Rule 10 categories and relate to persons directly connected with the business?
  2. Has entertainment of a personal or social nature been excluded?
  3. Have any utility-bill limits notified by FBR after 15 September 2026 been checked?
  4. (Pharma manufacturers) Is promotion / advertisement expense within 10% of turnover?
  5. If required under Rule 33A, is every outlet / POS integrated with FBR's system?

Keep on file: Entertainment log with guest details, FBR POS integration proof

Employee fund contributions

Section 21(e), (ea) and (f); Sixth Schedule; Rules 103-120
  • Contributions are allowed only to recognised provident funds and approved pension, superannuation or gratuity funds.
  • For approved gratuity, pension and superannuation funds, only 50% of the contribution is allowed.
  • Under the Rules, the employer's yearly contribution per employee may not exceed 20% of salary for a superannuation fund (Rule 110), or one month's salary (last month of the year) for a gratuity fund (Rule 117). Past-service and deficit contributions need the Commissioner's approval.
  • Provident fund contributions need arrangements to deduct tax on payments from the fund.
What your team should check (5)
  1. Are the funds recognised / approved by the Commissioner?
  2. Has the claim for gratuity, pension and superannuation fund contributions been limited to 50%?
  3. Are superannuation contributions within 20% of each employee's salary, and gratuity contributions within one month's salary per employee (Rules 110 and 117)?
  4. Do any past-service or deficit (special) contributions have the Commissioner's prior approval?
  5. Are arrangements in place for deduction of tax under section 149 on payments from the fund?

Keep on file: Fund recognition / approval letters, trust deeds

Other expenses never allowed

Section 21(a), (b), (g), (h), (i), (j) and (n)
  • Income tax on profits, and tax deducted from your receipts.
  • Fines and penalties for breaking any law, rule or regulation.
  • Personal or household expenses.
  • Transfers to reserves and capital spending (except through depreciation / amortisation).
  • For an AOP: profit on debt, commission, salary or remuneration paid to its own members.
What your team should check (5)
  1. Have income tax and tax deducted at source been excluded from expenses?
  2. Have all fines and penalties been added back?
  3. Have personal / household expenses been excluded?
  4. Have reserves and capital expenditure been excluded (other than via depreciation / amortisation)?
  5. (AOP) Have salary, commission and profit paid to members been added back?

Keep on file: Tax computation, add-back schedule

Unpaid liabilities after 3 years

Section 34(5), (5A) and (6)
  • An expense claimed but still unpaid three years after the year of claim is added back to income; it is allowed again when paid.
  • Any benefit from a trading liability written back or waived is taxable.
What your team should check (2)
  1. Has an ageing of payables been reviewed and amounts unpaid beyond three years added back?
  2. Have write-backs / waivers of trading liabilities been offered to tax?

Keep on file: Creditors ageing

Good to know

  • Companies must use accrual accounting; others may use cash or accrual (section 32). Stock is valued at the lower of cost or net realisable value (section 35).
  • A business loss can be carried forward for 6 years against business income (8 years for hotel companies). Unabsorbed depreciation / amortisation has its own rule (section 57).
  • Speculation business is kept separate; its losses only offset speculation profits (section 19 and 58).
  • Any expense later recovered (refund, insurance claim) becomes income in the year received (section 70). No expense can be deducted twice (section 73).
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