Income Tax in Pakistan – A Comprehensive Guide

Income tax is one of the most significant sources of revenue for the Government of Pakistan. It helps fund national development projects, defense, education, healthcare, and infrastructure. Administered primarily by the Federal Board of Revenue (FBR), the income tax system in Pakistan is based on the Income Tax Ordinance, 2001, which governs the tax liabilities of individuals, associations, companies, and other entities. This comprehensive guide covers everything you need to know about income tax in Pakistan — including who is required to pay, applicable tax rates, filing procedures, exemptions, penalties, and more.

Who Is Liable to Pay Income Tax in Pakistan?
Income tax in Pakistan is levied on both residents and non-residents who earn income from Pakistani sources. Taxpayers are classified as:

• Individuals (salaried, business owners, freelancers)

• Association of Persons (AOPs)

• Companies (private limited, public, foreign, etc.)

• Non-residents (earning Pakistan-source income)

Residents are taxed on their global income, while non-residents are taxed only on Pakistan-source income, as defined under Section 101 of the Income Tax Ordinance, 2001.

Types of Income Subject to Tax

• Salary income

• Business income

• Property income (rent)

• Capital gains (on securities or property)

• Dividend income

• Interest or profit on debt

• Foreign remittances (in limited cases)

• Gains on disposal of assets

Income Tax Rates in Pakistan

1. Salaried Individuals (Tax Year 2024–25)

2. Non-Salaried Individuals & AOPs (Tax Year 2024–25)

3. Companies

• Private Companies: 29%

• Banking Companies: 39%

• Small Companies: 20% (subject to conditions under Section 2(59A))

• Insurance Companies: 35%

• Oil and Gas Companies: 40%

Minimum Tax on Turnover
Certain businesses are subject to minimum tax on turnover if their taxable income is below the minimum threshold. The rate is typically 1.25%, though it varies by sector.

Tax Deduction at Source (Withholding Taxes)
In Pakistan, many transactions are subject to advance tax deduction or withholding. Some examples include:

• Salaries (Section 149)

• Dividends (Section 150)

• Contracts (Section 153)

• Rent (Section 155)

• Electricity bills (Section 235)

• Cash withdrawals (Section 231A)

Withholding agents must deduct tax at the time of payment and deposit it with the FBR. The deducted tax is adjustable against the taxpayer’s final liability.

Income Tax Return Filing in Pakistan

1. Who Must File Returns?

• All companies

• AOPs and individuals with income above the taxable limit

• Persons having more than one source of income

• Owners of commercial electricity connections

• Property holders in urban areas

• Individuals earning foreign income or remittances

2. Deadline for Filing

• Individuals/AOPs: September 30 (Tax Year following July–June fiscal year)

• Companies: December 31 (or within 6 months of the accounting year-end)

3. How to File

• Register on the IRIS Portal (https://iris.fbr.gov.pk)

• Provide basic information and get an NTN

• File Form 114(1) (individuals), 114(2) (companies), and wealth statement (Form 116)

• Attach required documents: salary slips, bank statements, property records, and tax deduction certificates

4. Benefits of Filing Tax Returns

• Inclusion in the Active Taxpayer List (ATL)

• Lower withholding tax rates

• Eligibility for bank loans, visas, and tenders

• Legal proof of income

• Avoidance of penalties

Tax Credits and Exemptions

Pakistan’s tax regime offers multiple credits, rebates, and exemptions to encourage savings, investment, and welfare.

Common Tax Credits

• Donations to Approved Charities (Section 61)

• Investment in Mutual Funds (Section 62)

• Insurance Premium (Section 62A)

• Profit on Debt (Section 64A)

Exemptions

• Foreign remittances (Section 111(4))

• Agricultural income (if properly declared)

• Certain NGO and NPO incomes

• Income from Behbood Certificates and Pensioners’ Benefit Accounts

Penalties for Non-Compliance

Failure to comply with income tax laws can result in serious penalties under the Income Tax Ordinance, 2001:

• Non-filing of returns: Penalty up to Rs. 50,000 or higher

• Misreporting income: Additional tax and fine up to 100% of the tax

• Failure to maintain records: Penalty of Rs. 10,000 to Rs. 50,000

• Concealment of income: May result in prosecution, fine, and imprisonment

Filing a Revised Return
Taxpayers can revise their return within five years of the original submission under Section 114(6), provided the revision is due to a bona fide mistake or omission. However, revisions may attract audit.

Audit by FBR
The FBR selects returns for audit under Sections 177 and 214C. The audit may examine:

• Accuracy of declared income

• Discrepancies in bank records or property

• Improper tax deductions or rebates

• Incomplete documentation

Appeals and Disputes
Taxpayers have the right to appeal against an assessment order issued by the FBR:

• File appeal before Commissioner (Appeals) within 30 days

• Further appeal can be made to the Appellate Tribunal Inland Revenue (ATIR)

• Cases may be escalated to High Court and Supreme Court if legal questions arise

FBR’s Digital Platforms for Taxpayers

• IRIS: Main tax return filing system

• TAX ASAN App: Mobile filing for salaried individuals

• e-Pay: For online tax payments via bank or mobile wallets

• ATL Portal: Verifies whether a person is on the Active Taxpayers List

Recent Reforms and Budget Updates (FY 2024–25)

• Enhanced penalties for non-filers

• Increase in tax on luxury and non-essential items

• Rationalization of tax rates on digital services

• Broadening of the tax base through NADRA and utility bill data

• Digitization of tax records and compliance enforcement

Tips for Staying Compliant

• Always file on time

• Maintain proper records of income, receipts, and deductions

• Reconcile tax deductions with bank statements

• Consult a tax advisor or registered intermediary

• Monitor FBR notifications and SROs for rate changes

How Sterling.pk Helps You With Income Tax

At Sterling.pk, we provide expert income tax services for individuals, businesses, freelancers, and corporate entities in Pakistan. Our offerings include:

• NTN registration and income tax return filing

• Tax planning and optimization

• Preparation of wealth statements

• Withholding tax compliance

• FBR audit handling and appeal filing

• Corporate and digital income tax solutions

Our experienced tax advisors ensure that you stay compliant, minimize your tax liability, and avoid unnecessary penalties.

Conclusion
Income tax in Pakistan is a dynamic and evolving domain that affects individuals and businesses across the country. With clearly defined tax slabs, online filing systems, and expanding digital infrastructure, it is now easier than ever to stay tax compliant. Whether you’re a salaried employee, a business owner, or an investor, understanding the income tax system is key to financial planning and legal protection. For hassle-free compliance, expert advice, and complete tax solutions, reach out to Sterling.pk — your trusted tax and accounting partner in Pakistan.