If you’re a salaried individual in Pakistan, understanding your tax deductions and exemptions can help you save money and file your return with confidence. This blog explains what expenses can reduce your taxable income and which exemptions apply to your salary under the Income Tax Ordinance, 2001.
What Are Tax Deductions and Exemptions?
- A deduction reduces your taxable income (the amount on which tax is calculated).
- An exemption means certain income is not taxed at all.
Let’s explore the top deductions and exemptions available for salaried people in Pakistan.
Deductions Available to Salaried Individuals
1. Zakat (Section 60)
If you paid Zakat under the Zakat and Ushr Ordinance, you can deduct the full amount from your taxable income.
Zakat deductions reduce your income before tax is applied.
2. Donations to Approved NGOs (Section 61)
You can claim a tax credit for donations to government-approved charities or NGOs.
- Tax credit is the lesser of:
- The donation amount, or
- 30% of your taxable income
- If you donate to a related/associate NGO, the limit drops to 15%.
Keep donation receipts and ensure the NGO is on the FBR’s approved list.
3. Pension Fund Contributions (Section 63)
You can contribute to an approved pension fund (like a Voluntary Pension Scheme or VPS) and claim a deduction:
- Up to 20% of your taxable income
- Additional deduction allowed if you’re over 40 years old (with certain conditions)
In ITA No. 123/2021, the Appellate Tribunal ruled that voluntary contributions to pension funds—beyond what your employer contributes—are eligible deductions under Section 63.
4. Education Expenses (Section 62)
You can claim a tax credit for tuition fees paid for your dependent children.
- Allowed for up to two children
- Credit is calculated as:
- Lowest of:
- 5% of taxable income
- Tuition fee paid
- Rs. 75,000 per child per year
- Lowest of:
Keep tuition fee receipts and your child’s B-Form or proof of dependency.
Medical Allowance or Reimbursement
Medical expenses are treated in two ways:
- Reimbursement: If your employer pays your medical bills directly, it is fully exempt from tax.
- Medical Allowance: If you receive a fixed amount as a medical allowance and don’t get reimbursed, up to 10% of your basic salary is exempt.
Exceeding 10%? The rest is taxed as regular income.
Summary Table
| Deduction/Exemption | Limit | Law Section |
|---|---|---|
| Zakat | 100% of amount paid | Section 60 |
| Donations to NGOs | Up to 30% of taxable income | Section 61 |
| Pension Fund Contributions | Up to 20% of taxable income (more if 40+) | Section 63 |
| Education Expenses | Up to Rs. 75,000 per child | Section 62 |
| Medical Allowance (not reimbursed) | Up to 10% of basic salary | — |
| Reimbursed Medical Expenses | Fully exempt | — |
Final Thoughts
Understanding these deductions and exemptions can help you pay less tax legally. Always keep proper records like receipts, salary slips, and proof of payments to claim these benefits confidently.
For more help with income tax filing, contact our office. We offer expert legal advice to salaried individuals, freelancers, and business owners in Pakistan.
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