Profit on debt refers to any interest, yield, or return earned on financial instruments, loans, bonds, or deposits. In Pakistan, the Income Tax Ordinance, 2001 governs taxation on such profits, including tax deductions, withholding tax, exemptions, and special provisions.
Definition of Profit on Debt
According to Section 46 of the Income Tax Ordinance, 2001, profit on debt includes:
- Interest on loans, bonds, certificates, and savings instruments.
- Yield on debt securities, such as treasury bills and Sukuks.
- Discount income from zero-coupon bonds.
- Service fees related to credit facilities.
- Finance lease payments, including Islamic financing arrangements.
Tax Rates on Profit on Debt
As per Division IIIA of Part I of the First Schedule, tax on profit on debt is applied as follows:
- Up to Rs. 5,000,000 → 10%
- Between Rs. 5,000,000 and Rs. 25,000,000 → 12.5%
- Above Rs. 25,000,000 → 15%
These rates apply to individuals and associations of persons (AOPs) but not companies, as they are taxed separately.
Withholding Tax on Profit on Debt (Section 151)
Financial institutions, banks, and companies paying profit on debt must deduct tax at source at the following rates:
- 15% on general profit on debt.
- 10% for debt instruments issued by the Federal Government.
- 12.5% for mutual funds if profit exceeds Rs. 2.5 million.
- 25% for companies receiving profit from entities with tax exemptions.
The withholding tax is final for non-filers, while filers can adjust it against total tax liability.
Tax Deduction Limits on Foreign Profit on Debt (Section 106A)
Foreign-controlled resident companies (excluding banks and insurance firms) can claim limited deductions on foreign profit on debt based on the formula:
[B – (A+B) × 0.15]
- A = Taxable income before depreciation and amortization.
- B = Foreign profit on debt claimed as a deduction.
A company cannot claim excessive deductions beyond prescribed limits.
FBR Profit on Debt Tax Calculator
FBR Profit on Debt Tax Calculator
Tax Liability: 0 PKR
Withholding Tax: 0 PKR
Foreign Profit Deduction (Section 106A)
Allowable Deduction: 0 PKR
5. Exemptions & Special Provisions
- Non-residents investing in Pakistan Investment Bonds (PIBs), treasury bills, and foreign currency accounts receive exemptions or lower tax rates.
- Profit on debt earned by charitable institutions is exempt from tax.
- Sukuk holders investing through Special Purpose Vehicles (SPVs) are taxed at 10%-25% based on entity type.
- Government-backed loans have reduced tax obligations.
How to Declare Profit on Debt in Tax Returns
- Use IRIS Portal (iris.fbr.gov.pk) to report profit on debt under “Income from Other Sources”.
- If tax has already been deducted at source, claim adjustment or refund.
- Maintain certificates from banks and financial institutions for verification.
Understanding tax on profit on debt helps individuals and businesses optimize tax savings while ensuring compliance with FBR regulations. Taxpayers should consult a tax professional or visit FBR’s website for up-to-date rules on deductions, exemptions, and tax credits.
