FBR clarifies deduction rules for profit on non-performing debts and explains how recovered amounts are treated for tax purposes.

ISLAMABAD: The Federal Board of Revenue (FBR) has explained the tax treatment of profit accruing on non-performing debts of banking companies, development finance institutions, non-banking finance companies and modarabas for Tax Year 2027.

According to the Income Tax Ordinance, 2001, updated up to June 30, 2026, Section 30 allows a banking company, development finance institution, non-banking finance company (NBFC) or modaraba to claim a deduction for profit accruing on a non-performing debt.

The deduction is available where the profit is credited to a suspense account in accordance with the applicable Prudential Regulations issued by the State Bank of Pakistan (SBP) or the Securities and Exchange Commission of Pakistan (SECP).

The provision covers non-performing debts of banking companies, development finance institutions, NBFCs and modarabas, subject to the relevant regulatory requirements.

Tax treatment when profit is recovered

The FBR has also specified the treatment of profit that was previously deducted under Section 30 and is subsequently recovered.

Any such profit recovered by a banking company, development finance institution, NBFC or modaraba will be included in its taxable income under the head “Income from Business” in the tax year in which the recovery takes place.

The provision therefore allows the deduction while the profit remains associated with a non-performing debt and is credited to a qualifying suspense account. However, once the previously deducted profit is recovered, the amount must be brought back into business income in the tax year in which it is received.

The rules form part of the Income Tax Ordinance, 2001, as updated by the FBR up to June 30, 2026, for Tax Year 2027.