Income Tax Rules 2002 specify five categories of eligible entertainment expenditure, subject to business-related conditions and restrictions under Section 21(d).

The Federal Board of Revenue (FBR) has allowed businesses to claim conditional deductions for entertainment expenditure against business income during Tax Year 2027, subject to prescribed legal requirements.

According to the Income Tax Rules, 2002, updated on September 15, 2026, entertainment expenses are deductible under specified conditions in accordance with Section 21(d) and Section 20 of the Income Tax Ordinance, 2001.

The rules cover five categories of eligible entertainment expenditure:

1. Expenses incurred outside Pakistan on entertainment connected with business transactions or allocated as head office expenditure.

2. Entertainment expenses in Pakistan for foreign customers and suppliers.

3. Entertainment of customers and clients at business premises.

4. Entertainment expenses during meetings of shareholders, agents, directors or employees.

5. Entertainment provided at the opening of business branches.

Conditions for claiming entertainment expenses

The FBR has clarified that businesses can claim deductions only for entertainment expenditure relating to persons directly connected with their business.

Furthermore, expenditure must satisfy the conditions prescribed under sub-section (1) of Section 20 of the Income Tax Ordinance, 2001.

The rules define entertainment as the provision of meals, refreshments and reasonable leisure facilities in accordance with established business traditions and prevailing norms and customs in Pakistan.

The provisions apply to Tax Year 2027, covering the period from July 1, 2026, to June 30, 2027.

Businesses must therefore ensure that entertainment expenditure falls within the specified categories and meets the prescribed conditions to qualify for tax deductions.