Taxation of Gifts and Donations in Pakistan

Gifts and donations are common in both personal and corporate settings in Pakistan. Whether for charitable purposes, personal generosity, or business goodwill, these transfers often have tax implications. The Income Tax Ordinance, 2001 governs the treatment of both gifts (received or given) and donations (usually to charitable institutions). Understanding how these are taxed—or exempted—is vital for tax planning and compliance. This article provides a comprehensive guide on the taxation of gifts and donations in Pakistan, including exemptions, filing requirements, and available tax credits.

Legal Framework Governing Gifts and Donations
The tax treatment of gifts and donations is primarily regulated under:

• Section 39(1)(j) of the Income Tax Ordinance, 2001 (for gifts under “Income from Other Sources”)

• Section 60 (for Zakat deductions)

• Section 61 (for tax credit on donations)

• Section 37(4) (for capital gains and fair market valuation)

• Second Schedule of the Ordinance (for exemptions and approved institutions)

The application of tax depends on whether you are receiving a gift, giving a gift, or donating to a charity or institution.

Definition and Types of Gifts
Under Pakistani tax law, a gift is any voluntary transfer of movable or immovable property without consideration. Common types include:

• Cash gifts

• Property gifts (plots, homes, land)

• Jewelry and vehicles

• Bank transfers

• Gifts of shares and business assets

The taxability of gifts depends on the relationship between donor and recipient, and the purpose of the gift.

Tax Treatment of Gifts Received
Gifts received are generally taxed under Section 39(1)(j) as Income from Other Sources, unless they fall within exemptions.

Exempt Gifts:
The following gifts are not taxable:

• Gifts received from blood relatives:

  • Parents

  • Siblings

  • Spouse

  • Children and grandchildren

• Gifts on marriage (Clause 56, Part I, Second Schedule)

• Gifts received under a will or inheritance

• Gifts received from a non-resident family member with proof of remittance

• Gifts backed by gift deeds and declared in the wealth statements of both parties

Taxable Gifts:

• Gifts from friends, distant relatives, employers

• Gifts without documentation or proof of bank transfer

• Gifts where value cannot be substantiated

• Gifts from non-filers that exceed thresholds and are not declared

If gifts are taxable, they are added to total income and taxed at the applicable individual slab rates.

Documentation Required for Gifts
To avoid tax on legitimate gifts, it is essential to maintain proper records:

• Gift deed or affidavit mentioning details of donor and recipient

• CNIC copies of both parties

• Proof of bank transfer (in case of cash gifts)

• Valuation certificate for property or vehicle

• Declaration in wealth statement of both donor and recipient

Failure to provide documentation may result in gifts being treated as undeclared income.

Taxation of Gifts Given
There is no tax on the donor when giving a gift. However:

• Donor must reduce the value of gifted asset or cash from their net wealth

• If property is gifted, Capital Value Tax (CVT) and stamp duty may still apply

• Gifts given to non-family members or employees may be scrutinized during audits

Capital Gains Implication on Gifted Assets
Under Section 37(4), if an asset is transferred as a gift and later sold, the recipient will be subject to Capital Gains Tax (CGT) based on the original cost and holding period.

Example:
If a father gifts a plot purchased in 2010 for Rs. 500,000 to his son in 2023, and the son sells it in 2025 for Rs. 2 million, CGT will be calculated based on the original purchase cost (Rs. 500,000) and holding period starting from 2010.

Anti-Avoidance Rule – Sham Transactions
FBR may disregard a gift if:

• No real transfer occurred (book entry only)

• The gift was used to evade tax

• There is no gift deed or bank evidence

Such transactions are treated as income or concealed assets, and tax along with penalty may be imposed.

Tax Credit for Donations (Section 61)
Under Section 61, individuals and companies donating to approved institutions are allowed a tax credit against their taxable income.

Eligibility Criteria:

• Donation must be made to an approved non-profit organization (NPO) listed in Second Schedule

• Donation must be made through a bank

• Taxpayer must be a filer

Amount of Credit:

• Individuals and AOPs: Up to 30% of taxable income

• Companies: Up to 20% of taxable income

Calculation:
Tax Credit = (Donation Amount ÷ Taxable Income) × Tax Payable

Example:

• Taxable income = Rs. 2,000,000

• Tax = Rs. 165,000

• Donation = Rs. 200,000 (10% of income)

• Credit = (200,000 ÷ 2,000,000) × 165,000 = Rs. 16,500

Approved Institutions for Donation
A list of organizations eligible for donation-based tax credit is published by FBR each year. These typically include:

• Edhi Foundation

• Shaukat Khanum Memorial Trust

• Indus Hospital

• Layton Rahmatulla Benevolent Trust (LRBT)

• SOS Children’s Villages

• Akhuwat

• Pakistan Red Crescent Society

• Trusts and foundations registered under Section 2(36) of the Income Tax Ordinance

Zakat Deductions (Section 60)
Zakat payments are fully deductible from total income under Section 60, provided:

• The recipient is eligible (as per Zakat Ordinance)

• Zakat is paid to recognized institutions

• Proper receipt or deduction certificate is available (e.g., bank deduction)

Corporate Donations and Business Expenses
Companies donating to approved charities may:

• Claim tax credit under Section 61

• Record donation as a business expense if related to CSR

• Must ensure donations are not to associated persons, or they may be disallowed

Filing and Disclosure of Gifts and Donations
Gifts and donations must be:

• Reported in annual income tax return

• Declared in the wealth statement and asset reconciliation

• Supported with receipts, valuation certificates, and bank transfers

Non-disclosure may result in:

• Audit selection

• Disallowance of tax credits

• Penalty up to Rs. 25,000 or higher

Gifts and Inheritance – Difference in Tax Treatment
Gifts:

• Taxable unless exempt by relationship or documentation

• Must be declared in wealth statements

• May attract capital gains upon disposal

Inheritance:

• Not taxable under any head

• Fully exempt under Clause 56 of Part I of Second Schedule

• Must be supported by inheritance certificate or legal decree

Tax Planning Tips for Gifts and Donations

• Always execute a gift deed and register high-value gifts

• Use bank transfers instead of cash for documentation

• Donate only to FBR-approved institutions

• Claim tax credits under Section 61 after verifying donation receipts

• Keep CNICs and relationship proof for tax-exempt gifts

• Time large gifts to match wealth growth and avoid mismatch in reconciliation

Common Mistakes to Avoid

• Giving or receiving undocumented gifts

• Claiming donation credits for cash payments

• Forgetting to declare gifts in the wealth statement

• Misreporting relationship status for gift exemptions

• Assuming all donations are tax deductible without checking FBR’s approved list

FAQs on Gift and Donation Taxation

Q. Are all gifts taxable in Pakistan?
A. No. Gifts from close family members (parents, children, siblings, spouse) are exempt if documented.

Q. Is Zakat deductible from taxable income?
A. Yes. Zakat paid under the Zakat Ordinance or to eligible institutions is fully deductible.

Q. Can I claim tax credit on cash donations?
A. No. Donations must be made via banking channels to be eligible for tax credit.

Q. Do I pay tax on inheritance?
A. No. Inheritance is completely tax-exempt under Pakistani law.

Q. How are gifted properties taxed when sold?
A. The recipient will be liable for capital gains tax based on the original purchase cost and holding period from the original owner.

Q. Can companies deduct donations as business expenses?
A. Only if the donation relates to business activities or approved CSR schemes and not given to associated persons.

Conclusion
Gifts and donations can be powerful tools for financial planning, generosity, and tax savings—when managed correctly. While gifts from close family members and inheritances are largely tax-exempt, others may be taxable if proper documentation is not maintained. Donations to approved charities can lead to substantial tax credits, provided they are made through formal channels. Filing accurate declarations and retaining supporting evidence is crucial to ensure tax compliance and minimize audit risks.