Unlocking Tax Benefits: A Guide to Tax Credits on Charitable Donations

In Pakistan, the government incentivizes charitable giving by offering tax credits to individuals and companies who donate to approved organizations. This article explains how to calculate the tax credit you can claim and defines key terms related to the process.

Tax Credit Calculation:

The tax credit you receive for charitable donations is determined by a formula:

(A / B) x C

Here’s a breakdown of the variables:

  • A: This represents the total tax assessed on your income for the tax year before any tax credits are applied.
  • B: This signifies your taxable income for the tax year.
  • C: This is the lesser of two amounts:
    • The total amount of your charitable donations in the tax year, including the fair market value of any donated property.
    • A specific percentage of your taxable income:
      • Individuals & Associations: 30% of your taxable income
      • Companies: 20% of your taxable income

Important Note:

  • There’s a limitation on tax credits for donations to “associates,” defined as entities with related ownership or control to the donor. For donations to associates, the maximum credit is reduced to:
    • Individuals & Associations: 15% of your taxable income
    • Companies: 10% of your taxable income

Fair Market Value:

The fair market value refers to the estimated price a willing buyer would pay to a willing seller for the donated property in an open market transaction. This value is used to determine the tax credit for property donations.

Cash Donations:

To qualify for the tax credit, cash donations must be made through a crossed cheque drawn on a bank. This ensures proper documentation and traceability of the donation.

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