Taxable income is calculated under five different types of income, as follows:
- Capital gains.
- Income from other sources, which includes income from dividends, royalties, profit on debt (interest), ground rent, sub-lease of land or building, lease of building inclusive of plant or machinery, prize money, winnings, etc.
Employee’s gross salary is Pakistan-source income and taxable in Pakistan if it is earned from employment exercised in Pakistan or if it is paid by or on behalf of the federal government, a provincial government, or a local authority.
Salary is the amount received by an employee from employment. It includes leave pay, payment in lieu of leave, overtime, bonuses, commissions, fees, gratuities, work condition supplements, monetary and non-monetary perquisites, any allowances, including those paid on a fixed basis or not exclusively spent on behalf of the employer, profits in lieu of or in addition to salary, pensions, annuities, and tax reimbursement. In addition, amounts or perquisites paid or provided by an associate of the employer, a third-party under an arrangement with the employer or associate of the employer, a past employer or a prospective employer, or payments to an associate of the employee are also to be considered as salary.
The extent of taxability and exclusions from income of some perquisites are discussed in the Deductions section.
Employee share scheme
The fair market value of the shares determined at the date of issue under an employee share scheme, including as a result of the exercise of an option or right to acquire the shares, as reduced by any consideration paid by the employee for the shares, shall be chargeable to tax as salary. However, where shares are issued to the employee subject to restriction on the transfer of such shares, no amount shall be included in salary of the employee until the earlier of the time the employee has a free right to transfer the shares or at the time when the employee disposes of the shares.
The value of the right or option to acquired shares under an employee share scheme is not chargeable to tax
An employee is taxed on the exercise of an option on the fair market value of the shares as reduced by the cost to the employee on acquisition. The gain on sale is taxed in the year of disposal, considering the fair market value at the time of exercise of the option as a cost of the employee.
Foreign-source income of returning expatriates
Foreign-source income of returning expatriates (citizens of Pakistan who were not resident in Pakistan during any of the preceding four tax years) shall be exempt from tax in the tax year of return and the succeeding tax year.
Income from property
Income from property for all taxpayers has been made subject to uniform taxation on a net income basis at the applicable rates. This means that the separate block rates for chargeability of tax on property income of individuals or AOPs are no longer applicable. In the case that rental income is computed on a net income basis, certain specific deductions are allowed, including expenditure for the purpose of administration and collection charges (up to a threshold of 4% of gross receipts).
WHT rates applicable in case of payment of rent of immovable property to individuals or AOPs are:
|Taxable income (PKR)||Tax on column 1 (PKR)||Tax on excess (%)|
|Over (column 1)||Not over|
These WHT rates shall increase by 100% in case the recipient of rental income is not an active taxpayer.
All payments made on account of rent of immovable properties shall be subject to the above WHT rates (if made to an individual or AOP), including in case of sub-lease.
Loss sustain under any heading of income is allowed to be set off against the person’s income under this heading.
Capital gains on the sale, exchange, or transfer of movable capital assets, except for securities traded at a stock exchange, are taxable at normal slab rates prescribed for individuals. Capital gain arising on these capital assets held for more than one year, which was earlier taxable to the extent of 75% of the total gain, is now fully taxable.
Capital gain on immovable properties
The gain arising on disposal of immovable properties is to be charged to tax at the following rates:
|Holding period||Tax (%)|
|Open plots||Constructed property||Flats|
|Where the holding period does not exceed one year||15.0||15.0||15.0|
|Where the holding period exceeds one year but does not exceed two years||12.5||10.0||7.5|
|Where the holding period exceeds two years but does not exceed three years||10.0||7.5||0|
|Where the holding period exceeds three years but does not exceed four years||7.5||5.0||0|
|Where the holding period exceeds four years but does not exceed five years||5.0||0||0|
|Where the holding period exceeds five years but does not exceed six years||2.5||0||0|
|Where the holding period exceeds six years||0||0||0|
Capital gains relating to disposal of immovable properties situated outside Pakistan will be taxed at applicable slab rates irrespective of holding period.
Purchase of immovable property exceeding PKR 5 million and any other asset exceeding PKR 1 million by way of other than a banking channel shall not be considered as an eligible cost for the purpose of computation of capital gain, and the related asset shall not be considered as an eligible depreciable asset. Moreover, such action would also invite penal consequences for the purchaser.
Purchase and sale of immovable property is subject to advance tax at a rate of 3%. The rate is subject to increase in case buyer or seller are not active taxpayers.
Capital gain on securities
Gain on disposal of listed securities is subject to tax rates based on the holding period for securities purchased post 1 July 2022. The rates are as follows:
|Holding period||Tax (%)|
|Less than one year||15.0|
|From one year to two years||12.5|
|From two years to three years||10.0|
|From three years to four years||7.5|
|From four years to five years||5.0|
|From five years to six years||2.5|
|More than six years||0|
The rate shall be 12.5%, irrespective of the holding period, for securities purchased on or before 30 June 2022. The rate shall be 0% for securities acquired before 1 July 2013.
A mutual fund, collective investment scheme, or real estate investment trust (REIT) scheme shall, at redemption of securities, deduct capital gain tax at a rate of 10% for stock funds in case of individual / AOP or a company. However, the rate shall be 25% for other funds in case of a company. In case of stock funds, if dividend receipts of the fund are less than capital gains, the rate of deduction shall be 12.5%. No tax shall be deducted if the holding period of a security is more than six years.
Loss on disposal of listed and other securities could earlier only be set off against capital gains (and not allowed to be carried forward). From tax year 2019 and onwards, such loss is now allowed to be carried forward and set off against future capital gains on such securities, up to a maximum of three tax years.
Capital gain on disposal of Special Convertible Rupee Accounts (SCRAs) and Roshan Digital Accounts (RDAs)
Foreign companies (not having PE in Pakistan) and non-resident individuals investing in Pakistan in debt instruments and government securities through SCRAs and RDAs are subject to a blanket 10% WHT rate on capital gain arising on disposal of these debt instruments and government securities. This deduction shall be full and final discharge of their tax liability.
Dividend income received from a company (including mutual funds and real estate investment trusts [REITs], etc.) is generally subject to final tax at the rate of 15%; however, a different rate would apply in the following cases:
- Dividend paid by Independent Power Producers (IPPs) where such dividend is a pass-through item under relevant energy agreements and is required to be reimbursed by the relevant agency at 7.5% (applicable WHT rate also 7.5%).
- Dividend from a company where no tax is payable by such company, due to exemption of income or carry forward of business losses or claim of tax credits at 25% (applicable WHT rate also 25%).
- Dividend received by a REIT scheme from a special purpose vehicle (SPV; as defined under Real Estate Investment Trust Regulations, 2015) at 0% (applicable WHT rate also 25%).
- Dividend received by any other person from an SPV (as defined under Real Estate Investment Trust Regulations, 2015) at 35% (applicable WHT rate also 35%).
Tax at the above-mentioned rates is withheld on payments of dividend. The WHT rates shall increase by 100% in case recipient of dividend is a resident but inactive taxpayer.
Interest income of individuals is subject to final tax of 15% where the total income earned in a tax year does not exceeds PKR 5 million. Where the interest income exceeds PKR 5 million, it would be subject to tax at normal slab rates applicable for individual. Income tax withholding in the instant case is fixed at 15% (increased by 100% in case recipient of interest income is a resident but inactive taxpayer).