How to Calculate Tax on Bank Profits?

Understanding how Pakistan taxes Profit on debt or Bank Profits is crucial for both individuals and businesses receiving income from investments and deposits. This article explores the relevant sections of the Income Tax Ordinance (ITO) 2001, explaining who is liable for tax, tax calculation methods, and exemptions.

What is Profit on Debt?

The ITO defines “profit on debt” as income earned on various financial instruments, including:

  • Interest on bank accounts and deposits (National Savings Scheme and Post Office Savings Accounts)
  • Profit on government securities (National Savings Scheme)
  • Returns on investment in sukuks (Islamic bonds)
  • Interest on corporate bonds and debentures

Who Pays Tax on Profit on Debt?

The tax burden for profit on debt primarily falls on the payer of the income, not the recipient. This means banks, financial institutions, and government entities typically deduct tax at the source when making interest or profit payments.

Tax Withholding Rates & Tax Treatment:

The specific tax rate applied depends on the recipient’s category:

  • Individuals and Non-Companies: These entities face withholding tax rates as 15% (Tax Year 2024) now increased to 25% (Tax Year 2025).
  • Companies: Companies tax deducted at time of payment is not final/minimum tax but rather it is adjustable tax for companies .
  • Zakat Deduction: The payer can deduct the amount of Zakat (Islamic religious tax) paid by the recipient from the gross profit before applying withholding tax.
  • Profit on Debt Exceeding PKR 5 Million: where profit on debt exceeds 5 Million for a Tax Year it istaxed as normal income.
  • Non Residents: Tax on profit on debt is not applicable on non-residents.

In Nutshell:

Profit on debt taxation in Pakistan can be complex, with multiple withholding rates and exemptions. It’s important to consult with a tax professional to understand your specific situation, including your tax residency status, type of income, and potential exemptions. They can help you determine your tax liabilities, ensure compliance with regulations, and maximize any available tax benefits.

2 Comments

  1. NAVEED SAFDARsays:

    A very concise, well explained and informative article. However, following points may be elaborated, please: –
    “Profit on Debt Exceeding PKR 5 Million: where profit on debt exceeds 5 Million for a Tax Year it is”
    Non Residents: Tax on profit on debt is not applicable on non-residents.

    1. Profit on Debt Exceeding PKR 5 Million: where profit on debt exceeds 5 Million for a Tax Year it is taxed as normal income.

      Tax on profit on debt is not applicable on non-residents.
      A separate article is available on the same topic which explains the pre-requisites in detail Titled “Not All Profits Get Taxed in Pakistan: A Guide for Foreign Investors and Returning Pakistanis”

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