Withholding tax rates on interest income for 2021-2022 have been notified by the Federal Board of Revenue.
These rates are applicable to various types of income, ensuring that the tax collection process is in accordance with the provisions of the Income Tax Ordinance, 2001. Let’s explore the key changes and implications of these updated rates.
Background: Withholding Tax on Interest Income
Withholding tax, as regulated by Section 151 of the Income Tax Ordinance, 2001, mandates that any entity making payments of profit or yield is responsible for deducting tax from the gross amount of the profit or yield paid. This withholding tax is applicable at the time when the profit or yield on debt is credited to the recipient’s account or is actually paid. The recently updated rates for withholding tax on interest income for the year 2021-2022 provide a framework for this taxation.
New Withholding Tax Rates
The updated withholding tax rates on interest income are categorized as follows:
1. Profit/Yield from National Saving Schemes and Post Office Savings Account
According to Section 151(1)(a) of the Income Tax Ordinance, 2001, the tax rate for profit or yield on account, deposit, or certificates under the National Saving Schemes or Post Office Savings Account is set at 15 percent of the gross yield or profit paid. However, this rate increases to 30 percent for individuals or entities not appearing on the Active Taxpayers List (ATL).
2. Profit on Debt Paid by Banking Companies or Financial Institutions
Section 151(1)(b) establishes that the tax rate for profit on debt paid by banking companies or financial institutions on account or deposit maintained is also 15 percent of the gross yield or profit paid, with a 30 percent rate for those not on the ATL.
3. Profit on Securities Issued by Government Entities
For profit on securities issued by federal, provincial, or local government entities (excluding those covered in Section 151(1)(a)), Section 151(1)(c) prescribes a tax rate of 15 percent on the gross yield or profit paid. This rate escalates to 30 percent for individuals or entities not appearing on the ATL.
4. Profit on Bonds, Certificates, Debentures, and Other Instruments
Section 151(1)(d) covers profit on bonds, certificates, debentures, securities, or other instruments (excluding loan agreements with banking companies or development financial institutions). The tax rate remains consistent at 15 percent of the gross yield or profit paid, increasing to 30 percent for individuals or entities not on the ATL.
5. Return on Investment in Sukuks
Section 151(1A) addresses the deduction of tax from the gross amount of return on investment in sukuks. The tax rates under Division IB of Part III of the First Schedule are specified for this purpose. The rates are as follows:
25 percent for sukuk holders who are companies.
12.5 percent for individual or association of persons sukuk holders when the return on investment exceeds one million.
10 percent for individual or association of persons sukuk holders when the return on investment is less than one million.
Exceptions
It’s important to note that these tax rates do not apply to companies or when profit on debt is taxable under Section 7B of the Income Tax Ordinance, 2001.
The updated withholding tax rates on interest income for 2021-2022 aim to streamline tax collection and ensure transparency in financial transactions. These rates help the FBR fulfill its revenue collection targets while facilitating taxpayers in meeting their tax obligations.
Taxpayers are encouraged to refer to official documents and guidelines from the FBR for the most accurate and up-to-date information on withholding tax rates. Staying informed about these rates is crucial for individuals, businesses, and financial institutions to ensure compliance with tax regulations and accurate financial planning.
