A Guide to Section 40 of the Income Tax Ordinance 2001
While understanding your income under Section 39 of the Pakistani Income Tax Ordinance is crucial, knowing what expenses you can deduct from that income is equally important. This is where Section 40 comes in, acting as your guide to claiming legitimate deductions against your “Income from Other Sources.”
What Expenses Can You Deduct?
Section 40 allows you to deduct various expenses incurred while generating income covered under “Income from Other Sources.” However, there are limitations:
- Only relevant expenses: Deductions are only allowed for expenses directly related to earning income under this head, excluding capital expenditures (explained later).
- Paid during the tax year: The expenses must be paid within the same tax year for which you’re claiming the deduction.
Specific Deductions to Remember:
- Zakat on Profit on Debt: If you receive profit on debt (like interest income), and have paid Zakat on it as required by the Zakat and Ushr Ordinance, you can deduct that Zakat payment.
- Depreciation and Initial Allowance: For income generated using plant, machinery, or buildings (e.g., rental income), you can claim depreciation deductions as per Section 22 and initial allowances as per Section 23.
What Can’t be Deducted?
- Expenses already deducted under other heads: If an expense has already been deducted under another head of income (e.g., salary), you cannot claim it again under “Income from Other Sources.”
- Capital expenditures: Expenses with a normal useful life exceeding one year are considered capital expenditures and cannot be deducted under Section 40. Examples include purchasing land or constructing a building.
Implications and Benefits:
- Reduced tax liability: Understanding allowable deductions helps you minimize your tax burden by lowering your taxable income.
- Transparency and fairness: Claiming legitimate deductions ensures fair taxation and prevents double counting of expenses.
- Responsible tax management: Knowing the rules encourages responsible tax planning and compliance.