Tax Treatment in Pakistan Taxation is a critical part of financial planning, and different income sources are taxed differently. Whether you earn a salary, run a business, invest, or own rental properties, understanding how each income stream is taxed can help you minimize liabilities and maximize savings. This guide breaks down common income sources in Pakistan and their tax implications under FBR (Federal Board of Revenue) rules.
Earned Income: Salaries & Wages
Tax Treatment in Pakistan
Salaried individuals in Pakistan fall under FBR’s progressive tax slabs (ranging from 0% to 35%). Key considerations:
- Tax exemptions apply to certain allowances (e.g., medical, conveyance).
- Voluntary Pension Schemes (VPS) contributions reduce taxable income.
- Annual tax returns must be filed if income exceeds the taxable threshold.
Business & Self-Employment Income
Tax Deductions & Compliance
Freelancers, sole proprietors, and business owners must follow FBR’s business tax regulations:
- Presumptive tax regime for small businesses (fixed tax rates).
- Deductible expenses (office rent, utilities, salaries).
- Advance tax applies on turnover exceeding specified limits.
Investment Income: Dividends & Capital Gains
Tax on Stocks, Bonds & Mutual Funds
- Dividend Income: Subject to 15% withholding tax (adjustable in annual returns).
- Capital Gains Tax (CGT):
- Short-term (held <1 year): 15% for stocks, variable for real estate.
- Long-term (held >1 year): Reduced rates or exemptions.
- Tax-free investments: Some government bonds (e.g., PIBs) offer tax-free returns.
Rental Income: Property Taxation
FBR’s Rental Income Tax Rules
- Taxable at applicable income slab rates.
- Deductible expenses: property repairs, mortgage interest (if applicable), and 10% standard allowance for maintenance.
Other Income Sources
Tax on Foreign Income, Royalties & More
- Foreign income is taxable if remitted to Pakistan.
- Royalties & technical fees: Subject to withholding tax (10-20%).
How to Reduce Tax Liability Legally
- Invest in tax-advantaged accounts (e.g., VPS, SSAS).
- Claim all eligible deductions (medical, education expenses).
- File returns on time to avoid penalties.