FBR outlines rules for adjusting losses against taxable income and restrictions on set-off and carry-forward under the Income Tax Ordinance, 2001.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the rules governing the set-off of losses against income for Tax Year 2027, outlining how taxpayers can adjust losses under different heads of income in accordance with the Income Tax Ordinance, 2001.
The FBR has issued the updated version of the Income Tax Ordinance, 2001, incorporating amendments applicable up to June 30, 2026, which contains the relevant provisions governing the taxation framework for Tax Year 2027.
Section 56: Set-off of losses
Under Section 56 of the Income Tax Ordinance, 2001, a person who sustains a loss for a tax year under any head of income specified in Section 11 is generally entitled to set off that loss against income chargeable to tax under another head of income during the same tax year.
However, the law imposes specific restrictions on the adjustment of losses.
A loss cannot be set off against income chargeable under the head of salary.
Similarly, a business loss cannot be set off against income from property for the relevant tax year.
The provisions also address circumstances where a loss cannot be adjusted during the same tax year. Where a loss under a particular head of income is not eligible for set-off under Section 56(1), it generally cannot be carried forward to the following tax year unless the Income Tax Ordinance, 2001, specifically provides otherwise.
Business losses to be adjusted last
The FBR has also highlighted the prescribed order for adjusting losses where a taxpayer incurs losses under more than one head of income.
Where a person sustains a loss under the head of Income from Business as well as a loss under another head of income during the same tax year, the business loss is required to be set off last.
This requirement determines the sequence in which eligible losses are adjusted against taxable income and is intended to ensure that taxpayers follow the statutory mechanism when calculating their taxable income.
Section 56A: Losses of companies operating hotels
The Income Tax Ordinance also contains a specific provision under Section 56A dealing with losses incurred by certain public companies operating hotels.
Subject to Sections 56 and 57, a public company, as defined under the Companies Act, 2017, and registered in Pakistan, Gilgit-Baltistan or Azad Jammu and Kashmir, may set off a business loss against income from the relevant jurisdiction.
The provision applies to qualifying losses sustained from Tax Year 2007 onwards by eligible public companies operating hotels in Pakistan, Gilgit-Baltistan or AJ&K.
Under the provision, the relevant business loss may be set off against the company’s income in Pakistan, Gilgit-Baltistan or Azad Jammu and Kashmir, as applicable, subject to the conditions and limitations prescribed under the Income Tax Ordinance, 2001.
Rules clarify treatment of tax losses
The provisions governing the set-off of losses establish the circumstances in which taxpayers can adjust losses against taxable income and the restrictions applicable to different heads of income.
For Tax Year 2027, taxpayers therefore need to consider the relevant provisions of Sections 56 and 56A when determining whether a loss can be adjusted against income in the same tax year or carried forward for adjustment in a subsequent year.
The rules are particularly relevant for businesses and other taxpayers with losses under multiple heads of income, as the Ordinance prescribes both the eligible sources of income against which losses can be adjusted and the order in which certain losses must be set off.