When filing your taxes in Pakistan, it’s important to understand where your income comes from — whether it’s Pakistan-source income or foreign-source income. These categories matter because different tax rules apply to each.
What is Pakistan Source Income?
According to Sections 101–102 of the Income Tax Ordinance, 2001, Pakistan-source income includes any income that comes from:
- Employment performed in Pakistan
- Business carried on (fully or partly) in Pakistan
- Property located in Pakistan
- Capital gains from assets situated in Pakistan
This income is taxable in Pakistan, whether you’re a resident or not.
What is Foreign Source Income?
Foreign-source income is any income that does not meet the criteria for Pakistan-source income. It usually includes:
- Salary earned while working abroad
- Profits from a foreign business
- Rent from property outside Pakistan
- Dividends or interest from foreign banks or investments
Who Pays Tax on Foreign Income?
Only Pakistan tax residents are taxed on their worldwide (including foreign) income. Non-residents are only taxed on Pakistan-source income.
Foreign Tax Relief for Residents
If you are a resident and you’ve already paid foreign income tax on your salary or income abroad, you may be eligible for tax relief in Pakistan:
1. Salary Income
- If your foreign-source salary is already taxed abroad, and you’re a Pakistan resident, it is exempt from tax in Pakistan.
2. Other Foreign Income
- For other types of foreign-source income (like business or rent), if it’s taxed abroad and also taxable in Pakistan, you get a foreign tax credit.
Credit allowed = The lower of:
- Foreign tax paid, or
- Tax payable in Pakistan on the same income
Exemption for Short-Term Foreign Residents
A person who is not a citizen of Pakistan and becomes a resident only because of a job in Pakistan (and stays for less than 3 years) can claim an exemption on foreign income, unless:
- The income is from a business in Pakistan, or
- The foreign income is brought into Pakistan
What About Tax Treaties?
Pakistan has tax treaties with over 66 countries, including the UK, UAE, USA, Canada, and others. These treaties are designed to:
- Avoid double taxation (so you don’t pay tax on the same income in both countries)
- Decide which country has the right to tax certain types of income
Tax treaties override local law when there is a conflict — but only if the treaty applies to the type of income and taxpayer involved.
Final Tip
If you’re earning abroad or receiving foreign income, always keep:
- Proof of foreign tax paid
- Bank records and salary slips
- Any relevant treaty clauses you rely on
This will help when filing your return or applying for a tax exemption or credit in Pakistan.