TAX CREDITS AND REBATES UNDER INCOME TAX LAW
Income Tax Ordinance 2001 allows tax credit (reduction in tax liability) at the average rate of tax, in the following cases:
1. Section 61 – Charitable Donations:
Tax credit is allowed on donations paid or property given to;
a. any board of education or any university in Pakistan established by, or under a Federal or a Provincial law;
b. any educational institution, hospital or relief fund established or run in Pakistan by Federal Government or a local Government; or
c. any non-profit organization approved by the tax department.
Please note that tax credit under this head is allowed only if such donation is paid through a crossed checque and tax credit under this head cannot exceed 30% of the employee’s taxable income for the year.
2. Under Section 62 – Investment in Shares or Life Insurance Premium paid to a Life Insurance Company registered with SECP:
Individuals are allowed a tax credit in respect of:
I. life insurance premium paid; or
II. the cost of acquisition of new shares offered to the public by a public company listed on a stock exchange in Pakistan, provided the person is original allottee or shares are acquired from Privatisation Commission. In case of investment, shares must be held by the investor for a minimum period of twenty-four (24) months. If such shares are disposed off at any time before completion of the said period, tax liability in the period of disposal would be increased by the amount of tax credit previously allowed.
Please note that tax credit under this head shall be allowed on the lower of
(a) Rs. 1,000,000 or
(b) 20% of the taxable income for the year or
(c) total cost of acquisition of shares / premium paid.
3. Under Section 63 – Contributions to an Approved Pension Fund:
A salaried person is entitled to tax credit in respect of any contribution or premium paid in the year to an approved pension fund under the Voluntary Pension System Rules, 2005 being offered by Asset Management Companies. The amount of contribution for computing tax credit varies from case to case as it depends on the age of the person (base rate is 20% of the person’s taxable income, whereas, for a person joining the pension fund at the age of 41 years or above, it shall be increased by 2% per annum for each year of age exceeding 40 years). Maximum contribution eligible for tax credit is 50% of total taxable income of preceding year. However, such tax credit would not be available in case of transfer of the person’s
investment from one fund manager to another.
4. Under Section 64 – Mark up paid to a bank for Construction of New House or Purchase of a House:
Individuals are allowed a tax credit on a House Loan taken from a scheduled bank or non-banking finance institution regulated by the Securities and Exchange Commission of Pakistan or advanced by Government or the Local Government or a statutory body or a public company listed on a registered stock exchange in Pakistan, for construction of a new house or acquisition of a house.
Please note that tax credit under this head shall be allowed on the lower of (a) Rs. 750,000 or (b) 50% of the taxable income for the year or (c) actual mark up paid during the year.
Also, under part IX of the Second Schedule to the Income Tax Rules, 2002, a prescribed declaration (IT–3) regarding tax credits claimed during the tax year (July 2012 to June 2013) is required to be filed by salaried persons with their employers.
