When preparing your tax return, understanding the distinction between Total Income and Taxable Income is essential. These two terms often cause confusion but play a key role in determining how much tax you are required to pay under Pakistan’s tax laws.
Total Income
Total Income refers to the complete amount of income you earn during a tax year before applying any exemptions, allowances, or deductions. Under Section 11 of the Income Tax Ordinance, 2001, total income is calculated by aggregating income under the following heads:
- Salary
- Business or Profession
- Property
- Capital Gains
- Income from Other Sources
Example:
If you earn Rs. 900,000 as salary, Rs. 200,000 from a rental property, and Rs. 50,000 from dividends, your Total Income will be Rs. 1,150,000.
Taxable Income
Taxable Income is the portion of your total income that remains after applying relevant exemptions, deductions, and allowances as specified under Part I and Part II of the Second Schedule to the Income Tax Ordinance.
These may include:
- Zakat
- Charitable donations to approved institutions
- Contributions to pension or retirement funds
- Applicable tax credits
Example:
From a total income of Rs. 1,150,000, if you claim deductions of Rs. 100,000 for charitable donations and Rs. 50,000 for retirement contributions, your Taxable Income will be Rs. 1,000,000.
Judicial Insight
The Sindh High Court in PLD 2018 Karachi 123 held that exemptions and deductions must be interpreted strictly against the taxpayer and liberally in favor of the state. This means that unless you clearly meet the criteria for a deduction or exemption, you cannot claim it.
Importance of Understanding the Difference
The distinction between total income and taxable income is crucial because:
- Filing based on total income without applying deductions can lead to overpayment.
- Failing to understand what qualifies as a deduction or exemption can result in penalties or disallowance during an audit.
- Accurate classification ensures compliance with the tax law and may reduce your overall tax liability.
Conclusion
Total income is your complete earnings from all sources, whereas taxable income is what remains after lawful adjustments. Knowing the difference is key to filing a correct and beneficial tax return.
If you are uncertain about which deductions apply to you or how to calculate your taxable income correctly, consult a qualified tax advisor or legal expert to ensure full compliance with Pakistan’s tax regulations.