Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
DEDUCTIBLE ALLOWANCES:
A Sec 2(16), “Deductible Allowance” means an allowance that is deductible from total income under Part IX (i-e.
deductible allowances) of Chapter III (i-e. Tax on taxable income);
A Reduction in taxable income (only NTR).
TAX CREDITS: Reduction in tax liability (only NTR).
TAX EXEMPTIONS: Income on which tax is not paid.
REDUCTION IN TAXABALE INCOME (DEDUCTIBLE ALLOWANCES)
1 Zakat (Sec-60): Chapt # 4 ICAP Book
i Deductible from total income if paid under Zakat and Ushr Ordinance, 1980.
ii Where the Zakat has been deducted out of the profit on debt (which is chargeable under the head “income
from other sources” and falls under NTR), such Zakat shall not be deducted out of the total income, rather,
it shall be allowed as a deduction while computing income from other sources.
iii Zakat > total income, excess amount shall not be refunded or C/F
iv Zakat deducted on dividend can be adjusted against other head of income e.g. salary, business income and
etc.
v Zakat deducted on profit on debt (for individual & AOP taxable under SBI) can be adjusted against other
head of income e.g. salary, business income and etc.
Important Note:
A Zakat paid to relatives/friends/poor people or institutes/organizations shall not be allowable deduction.
A If nothing is mentioned in the question then it would be assumed that Zakat is paid under Zakat and Ushr
Ordinance and is deductible.
2 Worker’s Welfare Fund (Sec-60A): (2% of total income) Chapt # 4 ICAP Book
i Deductible allowance if paid under:
A Workers’ Welfare Fund Ordinance, 1971 or
A Any law relating to the Workers’ Welfare Fund enacted by Provinces.
ii WWF payable also admissible expense in the cases where accrual basis of accounting is employed;
iii Exception:
Deduction is not allowed where any amount is paid to provinces by trans-provincial organizations (a
person having operations in more than one province).
3 Worker’s Participation Fund (Sec-60B): (5% of annual profit before tax) Chapt # 4 ICAP Book
i Deductible allowance if paid under:
A Companies Profit (Workers’ Participation) Act, 1968;
A Any law relating to the Workers’ profit participation Fund enacted by Provinces.
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
ii Exception:
Deduction is not allowed where any amount is paid to provinces by trans-provincial organizations (a
company having operations in more than one province).
4 Education expenses (Sec-60D): Chapt # 4 ICAP Book
i An individual allowed in respect of education expense if his taxable income<1,500,000;
ii Deduction allowed shall be lower of:
-5% of tuition paid by the individual
-25% of taxable income
-Rs. 60,000*number of children of the individual
iii Deduction can be claimed by either parents making the payment on furnishing NTN/Name of educational
institution;
iv Any allowance or part of an allowance that is not able to be deducted for the tax year shall not be carried
forward to a subsequent tax year.
v Allowance shall not be taken into account for computation of tax deduction from Salary under section 149.
Example
Determine the amount of deductible allowance that a resident individual can claim on account of
education expenses, if his taxable income for the year was Rs. 800,000 and he paid monthly fee of Rs. 6,000
per child for his three children
Solution:
Deduction allowed shall be lower of:
-5% of tuition paid by the individual i.e.(6000*3*12*5%=10,800)
-25% of taxable income i.e. 800,000*25%=200,000
-Rs. 60,000*number of children of the individual i.e. (60,000*3=180,000)
Therefore, the amount allowed is Rs. 10,800.
REDUCTION IN TAX LIABILITY (TAX CREDITS)
5 Full Time Teacher Allowance (Clause 2, Part III, 2nd Schedule): Chapt # 5 ICAP Book
i In case of full time teacher, reduction in tax liability by 25% (in respect of only salary income only);
ii This allowance is for;
-Full time teacher of approved university/institution by HEC
-Researcher of non profit educational/research institution
-Not involved in managerial/administrative job e.g. principal, headmaster, Vice chancellor and etc.
Exception:
This clause shall not apply to teachers of medical profession who;
i derive income from private medical practice or
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
ii receive share of consideration received from patients.
Example
Mr. B has disclosed the following information for the Tax Year 2025;
i Taxable salary as full time teacher from an approved non profit educational institution Rs.
2,200,000.
ii Taxable other sources Rs. 300,000.
Calculate tax liability.
Solution
MR B
TAX YEAR 2025
Rupees
Taxable salary-full time teacher 2,200,000
Taxable other source 300,000
Total taxable income 2,500,000
Tax liability- salaried case
Tax on Rs. 2,500,000 180,000+25%*300,000 255,000
255,000
Less: full time teacher allowance (W-1) (45,000)
Net tax liability 210,000
W-1
Taxable salary-full time teacher 2,200,000
Tax liability
Tax on 2,200,000 30,000+15%*1,000,000 180,000
Full time teacher allowance@ 25% 45,000
Important Note:
A Always apply "Salaried Person Tax Rates" for the purpose of calculation of full time teacher allowance i.e.
25% of tax liability relating to salary income.
6 Foreign Tax Credit (Sec 103) Chapt # 13 ICAP Book
i Foreign source income of resident is exempt in Pakistan if;
-If there is "Tax Treaty"
- Short Term Resident
- Returning Expatriate
- Foreign source salary (if tax paid outside Pakistan / person is outside at year end)
ii If foreign source income is taxable in Pakistan, foreign tax credit is available that is lower of;
- Foreign Income Tax Paid
- Pakistan tax payable computed as follows:
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
iii Pakistan tax payable =A/B*C
A=tax liability before foreign tax credit
B= taxable income
C= Foreign source income
iv A foreign tax credit shall be allowed only if the foreign income tax is paid within two years after the end of
the tax year in which the foreign income to which the tax relates was derived by the resident taxpayer.
And if not paid within two years, then tax credit allowed in Pakistan shall be treated as tax payable by the
person.
v Foreign tax means levy of tax and deposited in foreign country as tax rather than as penalty /fine;
Important Note:
A Foreign tax credit shall not be available for FTR income e.g. Foreign dividend.
A If a taxpayer has foreign income under more than one head of income, then foreign tax credit shall be
computed for each head of income separately by applying the above principle.
A If tax credit exceed tax liability, then such excess amount shall not be refunded or carried forward.
7 Tax Credit/Rebates on Donations (Section 61) Chapt # 11 ICAP Book
i Tax credit/rebate available to a person if donation is paid through banking channel/in kind to;
-Any board of education or university in Pakistan established under any Law (Federal or Provincial)
- Educational institution/hospital established/run by FG/PG/LG
- NPO or any person eligible for tax credit under section 100C of the ITO, 2001.
- Entities/Organizations/Funds mentioned in 13th schedule.
ii Eligible amount for tax credit lower of;
-Actual donation amount/FMV of property at the time it is given
- 30% of taxable income in case of individual/AOP (15% if donation is given to associate)
- 20% of taxable in case of company (10% if donation is given to associate)
iii Tax credit formula =A/B*C
A=tax liability before rebate on donation
B= taxable income
C= eligible amount
iv Tax rebates/credit>tax liability, then no refund, no C/F
Donation In Kind: (Rule 228 of the Income Tax Rules, 2002.)
a) Imported Items:
Value for custom duty+all duties/charges
b) Local Items:
Purchase price + all duties/charges
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
c) Used Depreciable Items:
Tax written down value (WDV) i.e. Cost - Tax depreciation
d) Other Items:
FMV as determined by the Commissioner.
e) Motor Vehicle:
i Imported
A In case of new vehicle CIF value (cost, insurance and freight) + all charges/duties
A In case of used vehicle import value (adopted by Custom Authorities) + all charges/duties
A Value adopted in 1st year reduced by 10% on straight line for each successive year upto maximum 5 years.
Example:
import price 500,000
Other duties/charges 100,000
Total value 600,000
Donation value shall be 600,000 if donated in the same year
If donation is made after 3 years
Total value 600,000
Less: 10% of value*3 (180,000)
Donation value 420,000
If donation is made after 6 years
Total value 600,000
Less: 10% of value*5 (300,000)
Donation value 300,000
ii Local Purchase
New Purchase
A In case of new vehicle invoice value + all charges/duties
A Value adopted in 1st year reduced by 10% on straight line for each successive year upto maximum 5 years.
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
Used vehicle Purchased
A In case of used vehicle (old upto 5 years) original cost - 10% for each following year
A In case of used vehicle (old more than 5 years) 50% of original cost or purchase price paid by the donor,
whichever is high
Example:
Original cost 1,000,000
Purchase price 550,000
Used for 4 years
Value for donation:
Original cost - 10% of original value*4 600,000
Used for 6 years
Value for donation (higher of):
50% of Original cost 500,000
Or
Purchase price 550,000
8 Tax Credit For Contribution To An Approved Pension Fund (Section 63) Chapt#11 ICAP Book
i Tax credit/rebate available to only eligible resident person;
ii Tax credit/rebate available only if;
-Premium/contribution paid to the approved pension fund under the Voluntary Pension System Rules,
2005
-Person deriving salary/business income
iii Eligible amount for tax credit lower of;
-Actual premium/contribution paid
- 20% of taxable income
iv Tax credit formula =A/B*C
A=tax liability
B= taxable income
C= eligible amount
v Transfer of balance from one account to another shall not qualify for such credit
vi Tax rebates/credit>tax liability, then no refund, no C/F
vii Eligible person who hold NTN/CNIC
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
9 Tax Credit For Point Of Sale Machine (Section 64D) Chapt # 11 ICAP Book
i Tax credit/rebate available only to such person who is required to integrate with FBR's computerized
system for real time reporting of sale/receipt.
ii Tax credit/rebate for a tax year in which machine is installed/integrated/configured shall be lower of;
-Purchase cost of POS machine
-Rs. 150,000 per machine
iii ‘Point Of Sale (POS) Machine’ means a machine meant for processing and recording the sale transactions
for goods or services, either in cash or through credit and debit cards or online payments in an internet
enabled environment.
iv Tax rebates/credit>tax liability, then no refund, no C/F
10 Tax Credit For Certain Persons (Section 65F) Chapt # 11 ICAP Book
i Tax credit/rebate available only to;
- Persons engaged in coal mining projects in Sindh supplying coal exclusively to power generation projects;
(This tax credit shall be restricted to this income only and would not be extended to any other income of
the person (e.g. profit on debt, income from other source etc.);
-A startup as defined in Clause (62A) of Section 2 for the tax year in which the startup is certified by the
Pakistan Software Export Board and for the following two years;
ii Tax credit/rebate equal to;
-100% of tax payable including minimum tax and final taxes
iii Tax credit is available subject to fulfillment of following conditions;
- Annual return of income has been filed;
-Tax required to be deducted or collected has been deducted or collected and deposited in the government
treasury;
-Withholding tax statements for the immediately preceding tax year have been filed; and
-Monthly sales tax returns for the tax periods corresponding to the relevant tax year have been filed.
iv “Startup” means,—
- a business of a resident individual, AOP or a company that commenced on or after first day of July, 2012
and the person is engaged in or intends to offer technology driven products or services to any sector of the
economy provided that the person is registered with and duly certified by the Pakistan Software Export
Board (PSEB) and has turnover of less than one hundred million in each of the last five tax years; or
- any business of a person or class of persons, subject to the conditions as the Board with the approval of
Federal Minister-in-charge may, by notification in the official Gazette, specify.
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
11 Tax Credit For Specified Industrial Undertakings (Section 65G): Chapt # 11 ICAP Book
i Tax credit/rebate available only to eligible persons;
ii Eligible Persons means;
(a) Green field industrial undertaking engaged in:
- the manufacture of goods or materials or the subjection of goods or materials to any process which
substantially changes their original condition or
- Ship building
Note: In case of greenfield industrial undertaking it is provided that the said tax credit would be
available to such undertakings which :
-are incorporated between 30 June 2019 and 30 June 2024 and
-are not formed by the splitting up or reconstitution of an undertaking already in existence.
Greenfield industrial undertaking” means-
(a) a new industrial undertaking which is:
- setup on land which has not previously been utilized for any commercial, industrial or
manufacturing activity and is free from constraints imposed by any prior work;
- built without demolishing, revamping, renovating, upgrading, remodeling or modifying any
existing structure, facility or plant;
- not formed by the splitting up or reconstitution of an undertaking already in existence
- using any process or technology that has not earlier been used in Pakistan and is so approved
by the Engineering Development Board; and
(b) is approved by the Commissioner
(b) 'Industrial undertaking set up by the 30th day of June 2023 and engaged in the manufacture of plant,
machinery, equipment and items with dedicated use (no multiple use) for generation of renewable energy
from sources like solar and wind for a period of five years beginning from the date such industrial
undertaking is set up.
iii Tax credit/rebate;
- allowed equal to 25% of eligible investment amount;
-allowed against normal/minimum/final tax regime tax;
iv Eligible investment means:
- any investment made in the purchase and installation of new machinery, buildings, equipment, hardware
and software except self-created software and used capital goods.
v If tax credit> tax payable, then excess C/F for 2 subsequent tax years.
12 Miscellaneous Provisions and Tax Credits for Members of AOP (Sec-65) Chapt#11 ICAP Book
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
i Where the above mentioned tax credits are allowed to a person who is also a member of an association of
persons who is chargeable to tax u/s 92(1), the amount of taxable income shall include the share of person
in the profit of the AOP (which is otherwise exempt) and tax payable shall be an
amount payable on taxable income including shares in the profit of AOP.
ii if tax credit > then taxable income, then excess amount shall not be C/F or C/B.
iii If person is member of AOP, and tax rebates/credit> tax liability, then
-Person can claim the un adjusted amount i.e. excess of rebates over tax liability against income of AOP of
the same year on furnishing written agreement between person and AOP regarding it with income tax
return
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Chapter # 11 (Part B) CAF-02- Tax Practices Class Lectures By:
Losses, Deductible Allowances, Updated For Autumn 2025 M. Rameez Asif, ACA
Tax Credits And Exemptions
13 Sequence Of Deductible Allowance & Tax Credits:
Total Taxable Income (Only NTR) A XXXX
(Pak Source + Foreign Source)
Less Deductible Allowances
Zakat under Zakat and Usher Ordinance (XXXX)
WPPF (XXXX)
WWF (XXXX)
B XXXX
Less Straight Deductions From Taxable Income
B will be used for Eligible amount
Education Expense Computation (XXXX)
Taxable Income (Only NTR) C XXXX
Tax Liability-Normal-Including surcharge @ 10%
in case income is > 10 million (Tax On C) D XXXX
Less: Tax Credits:
Foreign Tax Credit (Average rate =D/C) (XXXX)
Tax Liability (Net of foreign tax credit) E XXXX
Less: Tax Credit On:
Donations C will be used for Average Rate= (XXXX)
Approved Pension Plan Eligible amount E/C (XXXX)
Net Tax F XXXX
Less: Tax credit on point of sale machine (XXXX)
Less: Full Time Teacher Allowance (XXXX)
XXXX
Less: Tax deducted at source/advance taxes paid (XXXX)
Net Tax Payable/(Refundable) XXXX
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