FBR outlines taxable income calculation, five heads of income and rules for resident and non-resident taxpayers.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained how taxable income is to be computed in Pakistan for Tax Year 2027 under the Income Tax Ordinance, 2001.
The FBR has issued an updated version of the Income Tax Ordinance, incorporating amendments up to June 30, 2026, and outlined the provisions governing taxable income, total income and the classification of income under different heads.
How taxable income is calculated
Under Section 9 of the Income Tax Ordinance, taxable income for a tax year is calculated by taking a person’s total income under Section 10 and deducting the total deductible allowances available under Part IX of Chapter III.
The deduction cannot result in taxable income falling below zero.
In simple terms, the law first determines a taxpayer’s total income and then allows specified deductible allowances to arrive at taxable income.
What is included in total income
Under Section 10, a person’s total income for a tax year comprises:
• Income under all heads of income for the year; and
• Income that is exempt from tax under any provision of the Income Tax Ordinance, 2001.
The inclusion of exempt income in total income does not mean that such income becomes taxable. Its treatment remains subject to the relevant exemption provisions of the Ordinance.
Five heads of income under the tax law
Section 11 classifies income under five heads for the purpose of calculating total income and imposing tax:
1. Salary
2. Income from Property
3. Income from Business
4. Capital Gains
5. Income from Other Sources
Income under each head is calculated by adding amounts derived during the tax year that are chargeable to tax under that particular head and deducting the allowances and deductions permitted under the law.
Where allowable deductions under a particular head exceed the income chargeable under that head, the taxpayer is treated as having incurred a loss equal to the excess amount.
Such losses are dealt with under the provisions contained in Part VIII of Chapter III of the Income Tax Ordinance.
Rules for resident taxpayers
The FBR has also clarified how Pakistan-source and foreign-source income is treated when calculating income under the different heads.
For a resident person, income under a head is calculated by taking into account both Pakistan-source and foreign-source income, subject to the relevant provisions of the Ordinance.
This means the tax computation for a resident taxpayer can extend beyond income generated within Pakistan where the law requires foreign-source income to be taken into account.
Rules for non-resident taxpayers
For a non-resident person, only Pakistan-source income is taken into account when computing income under a particular head.
The distinction between resident and non-resident taxpayers is therefore important in determining the income that falls within the scope of the Pakistani tax computation.
FBR sets framework for Tax Year 2027
The provisions provide the basic framework for determining taxable income for Tax Year 2027, taking into account income under the five heads, exempt income, allowable deductions, deductible allowances and applicable loss provisions.
The calculation ultimately determines the amount of income on which tax is imposed under the applicable provisions and tax rates of the Income Tax Ordinance, 2001.