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.
Related allowable expenses can be deducted except in case of ‘income from property’ (other than where an individual having property income exceeding PKR 4 million has opted for taxation on a net income basis), ‘income from salary’, as well as revenues streams subject to tax under the presumptive tax regime (e.g. dividends, interest, prize money).
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, whether of a revenue or capital nature. It includes leave pay, payment in lieu of leave, overtime, bonuses, commissions, fees, gratuities, work condition supplements, monetary and non-monetary perquisites, any allowance except those granted to meet expenses wholly and necessarily incurred in the performance of the employee’s duties of employment, 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.
Salaried individuals employed by the oil exploration and production sector are exempt from tax for a period of three years from the date of their arrival in Pakistan, though such exemption has been challenged by the department before higher courts in certain cases.
Diplomats and individuals entitled to United Nations (Privileges and Immunities) Act 1948 are exempt from tax on their salaries.
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 derived by an individual is a separate block of income and taxable on a gross basis (without deduction of any expenses). Income from property shall be subject to tax as follows:
|Taxable income||Rate of tax|
|Where the gross rent does not exceed PKR 200,000||0%|
|Where the gross rent exceeds PKR 200,000 but
does not exceed PKR 600,000
|5% of the amount exceeding PKR 200,000|
|Where the gross rent exceeds PKR 600,000 but
does not exceed PKR 1,000,000
|PKR 20,000 + 10% of the amount exceeding PKR 600,000|
|Where the gross rent exceeds PKR 1,000,000 but
does not exceed PKR 2,000,000
|PKR 60,000 + 15% of the amount exceeding PKR 1,000,000|
|Where the gross rent exceeds PKR 2,000,000 but
does not exceed PKR 4,000,000
|PKR 210,000 + 20% of the amount exceeding PKR 2,000,000|
|Where the gross rent exceeds PKR 4,000,000 but
does not exceed PKR 6,000,000
|PKR 610,000 + 25% of the amount exceeding PKR 4,000,000|
|Where the gross rent exceeds PKR 6,000,000 but
does not exceed PKR 8,000,000
|PKR 1,110,000 + 30% of the amount exceeding PKR 6,000,000|
|Where the gross rent exceeds PKR 8,000,000||PKR 1,710,000 + 35% of the amount
exceeding PKR 8,000,000
However, individuals deriving income from property exceeding PKR 4 million can opt to claim deductions specified under section 15A and pay tax as per PIT rates (see the Taxes on personal income section).
Capital gain on immovable properties
Capital gains on the sale, exchange, or transfer of movable capital assets are taxable. However, gains on the sale of capital assets held for personal use by a person or any member of a person's family who is dependent on the person, assets on which a person is entitled to depreciation or amortisation, stock in trade (not being stocks and shares), consumables, and raw materials held for business purposes are exempt from levy of tax.
Capital gain on the sale of immovable property (open plots as well as constructed property) is subject to tax on the basis of its holding period in the manner explained below:
|Description||Rate of tax|
|Where the holding period of open plot does not exceed one year||A|
|Where the holding period of open plot exceeds one year but does not exceed eight years||A x ¾|
|Where the holding period of open plot exceeds eight years||0|
|Description||Rate of tax|
|Where the holding period of constructed property does not exceed one year||A|
|Where holding period of constructed property exceeds one year but does not exceed four years||A x ¾|
|Where holding period of constructed property exceeds four years||0|
The capital gains worked out in the above manner are subject to tax at the following rates:
|Description||Rate of tax|
|Where the gain does not exceed PKR 5 million||5%|
|Where the gain exceeds PKR 5 million but does not exceed PKR 10 million||10%|
|Where the gain exceeds PKR 10 million but does not exceed PKR 15 million||15%|
|Where the gain exceeds PKR 15 million||20%|
Purchase of immovable property exceeding PKR 5 million and any other asset exceeding PKR 1 million other than through a banking channel shall not be considered as an eligible cost for the purpose of computation of capital gain as well as the related asset shall not be considered as an eligible depreciable asset. Moreover, such action would also invite penal consequences for the purchaser.
Capital gain on securities
Capital gains on the sale of securities (listed as well as other specified securities) are exempt if the instrument is acquired before 1 July 2013. Capital gains on such instruments are subject to tax as follows:
|Holding period||Tax rates for persons appearing on the ATL (%)|
|Securities acquired before 1 July 2016||Securities acquired after 1 July 2016|
|Less than 12 months||15.0||15.0|
|12 months, but less than 24 months||12.5||15.0|
|24 months or more||7.5%||15.0|
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.
Dividend income is generally subject to final tax at 15%; however, a different rate would be apply in the following cases:
- Dividend paid by Independent Power Purchasers 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%.
- 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%.
Resident individuals are subject to Pakistan tax (at tax rate applicable to dividend income in certain situations) with respect to attributable income earned from a controlled foreign company (CFC), on a deeming basis, even in cases where the same is not distributed by such company. However, no further tax is payable at the time of actual distribution.
Interest income (for individuals and association of persons) is subject to final tax at the following rates:
|Description||Tax rate (%)|
|Where interest income does not exceed PKR 5,000,000||15.0|
|Where interest income exceeds PKR 5,000,000 but does not exceed PKR 25,000,000||17.5|
|Where interest income exceeds PKR 25,000,000 but does not exceed PKR 36,000,000||20.0|
Interest income exceeding PKR 36 million would be subject to tax at the applicable slab rates, with tax already deducted considered as minimum tax.