Income Tax Exemptions in Pakistan 2026 - What is Exempt from Tax

Not all income in Pakistan is taxable. The Income Tax Ordinance 2001 provides a range of exemptions and zero-rate treatments for specific types of income. Understanding which exemptions apply to you can legally reduce or eliminate your tax liability.

Complete List of Income Tax Exemptions in Pakistan 2026

1. Agricultural Income

Agricultural income is completely exempt from federal income tax under Article 142 and the Fourth Schedule of the ITO 2001. This includes income from crops, livestock reared on agricultural land, and forestry. However, provincial agricultural income tax may still apply (Punjab, Sindh, KP, and Balochistan each have their own agricultural tax). Agricultural income must still be declared in the return to explain source of funds.

2. IT Exports and Freelancer Income (Section 65F / Part I, Second Schedule)

Registered IT companies and freelancers who earn foreign exchange through export of IT services enjoy a zero-rated or reduced tax regime:

• IT companies registered with PSEB: 0% income tax on IT export income (foreign exchange remitted through banking channels)
• Freelancers receiving foreign remittance via banking channel: 0.25% final WHT on remittance (no income tax return liability if remittance is the only income)
• Applicable until June 30, 2026 — extended in Finance Act 2026

3. Zakat Deduction (Section 60)

Zakat paid during the tax year to authorised institutions is 100% deductible from taxable income. For 2026: If your taxable income is Rs. 2 million and you paid Rs. 200,000 as Zakat to an approved institution, your taxable income becomes Rs. 1.8 million. Keep receipts from authorised zakat institutions.

4. Charitable Donations (Section 61)

Donations to approved nonprofit organisations (NPOs) under Section 61 are deductible up to 30% of taxable income. The NPO must be registered under Section 2(36) and approved by FBR. Political donations are not eligible. Always obtain Form NPO-1 receipt from the organisation.

5. Basic Exemption Threshold — Salaried Persons

Income up to Rs. 600,000 per year is completely exempt from income tax for salaried individuals. No return obligation if total income is below this amount and you do not own property or vehicles.

6. Provident Fund Receipts (Section 156A)

Payments from approved provident funds (GPF for government employees, Statutory Provident Funds) are exempt from income tax when withdrawn under the normal conditions. However, premature withdrawals within 5 years may become taxable.

7. Gratuity Payments

Gratuity received from an approved gratuity fund is exempt up to Rs. 300,000 per year per the Second Schedule. Excess above Rs. 300,000 is taxable as salary income.

8. Long-Term Capital Gains

• Property held more than 6 years (open plot) or 4 years (constructed): 0% CGT
• PSX listed shares held more than 2 years: 0% CGT
• Equity mutual fund units held more than 1 year: 0% CGT

9. Prize Bonds Below Rs. 40,000

Prize bond winnings of Rs. 40,000 or less are exempt from WHT and income tax. Above Rs. 40,000, WHT at 15% (filer) or 25% (non-filer) applies as final tax.

10. Foreign Remittances (Section 111(4))

Foreign exchange remitted into Pakistan through normal banking channels cannot be asked about under Section 111 — FBR cannot question the source of remittance received through official banking channels. This is a significant protection for overseas Pakistanis and exporters.

11. Senior Citizens and Disabled Persons

Persons above 60 years of age or persons with disability certificates: 50% reduction in income tax liability under Clause 1A of Part III, Second Schedule.

12. Dividend from Listed Companies (for Individual Investors)

Dividend WHT of 15% (filer) is a final tax — no further income tax is due on dividend income for resident individual shareholders. The 15% WHT at source fully discharges the tax liability on dividends.

How to Claim Exemptions in Your FBR Return

Frequently Asked Questions