Updated Income Tax Ordinance sets withholding tax rates on bank deposits, government securities and other debt income

ISLAMABAD: The Federal Board of Revenue (FBR) has notified the tax rates applicable to profit on debt for Tax Year 2027, effective from 1 July 2026, through the updated Income Tax Ordinance, 2001, incorporating amendments introduced by the Finance Act, 2026.

The revised provisions under Section 7B of the Income Tax Ordinance prescribe separate tax rates on income earned from bank deposits, government securities and other debt instruments.

The updated rates will be used by banks, financial institutions and other withholding agents when deducting tax from payments of profit on debt during Tax Year 2027.

Tax rates on profit on debt for Tax Year 2027

The notified tax rates are as follows:

Source of profit on debt	Tax rate
Yield or profit paid by a banking company or financial institution on an account or deposit maintained with it	20%
Yield or profit on government securities paid to any person other than an individual under clause (c) of sub-section (1) of Section 151	20%
Profit on debt in all other cases	15%

Bank deposits and government securities

Under the updated law, a 20% tax will be deducted from the yield or profit paid by a banking company or financial institution on accounts or deposits maintained by customers.

The same 20% rate will apply to the yield or profit earned on government securities where the payment is made to any person other than an individual in accordance with clause (c) of sub-section (1) of Section 151 of the Income Tax Ordinance, 2001.

The revised provisions are intended to ensure consistent taxation of returns earned on deposits and government debt instruments by entities covered under the law.

Other profit on debt

For all other categories of profit on debt not specifically covered by the above provisions, the applicable tax rate has been fixed at 15%.

This rate applies to debt-related income that falls outside the categories of bank deposits and specified government securities.

Effective from 1 July 2026

The notified rates form part of the updated Income Tax Ordinance, 2001, as amended through the Finance Act, 2026, and are applicable for Tax Year 2027, beginning on 1 July 2026.

Banks, financial institutions and other withholding agents are required to deduct tax at the prescribed rates when making payments of profit on debt. Taxpayers should also take the revised rates into account when calculating their tax liabilities and preparing their income tax returns for Tax Year 2027.