Businesses often invest heavily in assets that are not physical but still hold tremendous value — such as patents, software, franchises, and trademarks. These assets, commonly known as intangibles, play a vital role in driving income and long-term business growth.
Recognizing their importance, the Income Tax Ordinance, 2001, through Section 24, lays out the detailed framework for claiming amortization deduction during the tax year 2025-26.
Let’s break this down step by step so taxpayers and businesses can understand what the law says, why it matters, and how to apply it in practice.
What Does Section 24 Say?
The law allows a person to claim an amortization deduction for the cost of intangibles if:
1. The intangible is wholly or partly used during the tax year in deriving business income chargeable to tax.
2. The intangible has a normal useful life exceeding one year.
This means if your company uses a software system, a trademark license, or a franchise agreement to generate income, you may be entitled to claim deductions for its cost over its useful life.
How Is the Deduction Calculated?
The law provides a simple formula:
Amortization Deduction = Cost of the Intangible ÷ Normal Useful Life (in years)
For example, if a business acquires software worth Rs. 3 million with a useful life of 10 years, it can claim Rs. 300,000 annually as an amortization deduction.
But what if the useful life cannot be determined? The law says such intangibles should be treated as if they had a 15-year useful life.
Partial Use or Shorter Periods
In many cases, intangibles may not be used throughout the entire year or may be used partly for business and partly for other purposes. Section 24 addresses this by introducing a proportional calculation.
• If used partly for business: Only the fair proportion attributable to taxable income can be deducted.
• If used for part of the year: The deduction is adjusted based on the number of days the intangible was actually in use.
This ensures fairness while preventing excessive claims.
What Happens on Disposal of Intangibles?
Businesses sometimes sell or transfer intangibles like patents or franchises. Section 24 provides clear rules:
• If the sale value exceeds the written-down value, the excess will be treated as taxable business income.
• If the sale value is lower, the difference will be allowed as a deduction.
The written-down value is calculated as the original cost minus the amortization already claimed.
What Qualifies as an Intangible?
The law defines intangibles broadly to include:
• Patents, designs, trademarks, and copyrights.
• Scientific or technical knowledge.
• Computer software and motion picture films.
• Franchises, licenses, and export quotas.
• Any expenditure that provides an advantage for more than one year (except land or depreciable assets).
However, self-generated goodwill is not considered an intangible for tax purposes.
Why Does This Matter for Businesses?
For companies, claiming amortization deductions on intangibles reduces taxable income, thereby lowering the tax liability. This is particularly beneficial for technology firms, pharmaceutical companies, and businesses that rely heavily on intellectual property.
Think of it this way: just as machines and buildings depreciate over time, intangibles also lose value as they are used. The tax law acknowledges this economic reality and provides relief to taxpayers.
Key Takeaways for Taxpayers
1. Maintain Proper Documentation: Keep contracts, invoices, and valuation reports related to intangibles.
2. Identify Useful Life: Where possible, establish the expected useful life of the intangible to avoid defaulting to the 15-year rule.
3. Review Partial Use: If an intangible is only partly used for taxable supplies or services, ensure fair apportionment in claims.
4. Track Disposal Carefully: If selling or transferring intangibles, calculate the gain or loss accurately for tax reporting.
Q&A
• Q: Can I claim amortization if I buy software for one year only?
A: No. The intangible must have a useful life exceeding one year to qualify.
• Q: What if my business uses an intangible for only six months?
A: You can still claim the deduction, but it will be proportionately reduced based on usage days.
• Q: Are brand logos created in-house considered intangibles?
A: No, self-generated goodwill or similar assets are excluded.
Conclusion
The inclusion of Section 24 in the Income Tax Ordinance, 2001 ensures that businesses receive fair tax treatment for their investments in intangibles. By spreading out the cost over the useful life of such assets, the law provides a balanced approach, supporting both compliance and financial planning.
For tax year 2025-26, businesses are advised to carefully review their intangible assets, calculate amortization deductions accurately, and consult professionals where needed. After all, proper handling of intangibles can mean significant tax savings and stronger compliance with the law.
Disclaimer: This article is for informational purposes only and summarizes provisions of Section 24 of the Income Tax Ordinance, 2001 as applicable for tax year 2025-26. It should not be considered legal, accounting, or professional tax advice. Businesses and individuals dealing with intangibles are advised to consult a qualified tax professional or review official notifications issued by the Federal Board of Revenue (FBR) for specific guidance.