Every rupee of legitimate business expense you fail to claim as a deduction is a rupee of tax you pay unnecessarily. Under Pakistan's Income Tax Ordinance 2001, businesses can legally reduce their taxable income through dozens of allowable deductions. At Kamboh Associates, we recover tens of thousands of rupees for clients every year simply by properly documenting and claiming the deductions FBR allows — but most business owners miss. Here is your complete 2026 guide.
What Are Tax Deductions for Businesses in Pakistan?
A tax deduction (also called an allowable expense or admissible deduction) is a business cost that FBR permits you to subtract from your gross revenue before calculating taxable income. The lower your taxable income, the lower your tax bill.
Formula: Gross Revenue − Allowable Deductions = Taxable Income × Tax Rate = Tax Payable
Under Section 20 of the Income Tax Ordinance 2001, expenditures are deductible if they are wholly and exclusively incurred for business purposes and are supported by proper documentation. FBR scrutinizes deduction claims during audit, so documentation is everything.
Key rule: Cash payments exceeding PKR 250,000 for a single transaction are disallowed as deductions under the Income Tax Rules. Always pay large expenses via bank transfer, cheque, or digital payment to protect your deduction claim.
1. Salaries, Wages & Employee Benefits
Employee compensation is almost always the single largest deductible expense for Pakistani businesses. Under Section 20, all of the following are fully deductible:
- Basic salaries and wages paid to employees
- Bonuses, commissions, and performance allowances
- House rent allowance (HRA) and utilities paid by employer
- Medical allowances and reimbursements
- Employer contributions to approved pension and gratuity funds
- EOBI (Employees' Old-Age Benefits) contributions
- SESSI / PESSI / Workers Welfare Fund contributions
Condition: To claim salary deductions, you must have properly deducted withholding tax on salaries and deposited it with FBR under Section 149. If you paid salaries without deducting WHT, FBR can disallow the entire salary deduction during audit.
2. Rent, Utilities & Office Expenses
Office / Shop / Warehouse Rent
Rent paid for business premises is fully deductible. The landlord must provide a signed rent agreement and you should pay by bank transfer. If rent exceeds PKR 20,000/month, the landlord's CNIC is required and WHT of 15% (filer) or 30% (non-filer) must be deducted.
Fully Deductible — with rent agreementUtilities — Electricity, Gas, Internet, Telephone
All utilities used for business operations are deductible. If your business is run from home, only the proportionate business-use portion can be claimed (typically 50-70% depending on actual usage).
Business portion deductibleOffice Supplies & Stationery
Printing, stationery, small office equipment, software subscriptions, and consumables used in the office are fully deductible when supported by receipts.
Fully Deductible3. Depreciation on Business Assets
When you purchase a business asset (vehicle, machinery, computer, furniture), you cannot deduct the full cost in year one. Instead, FBR allows annual depreciation deductions over the asset's useful life.
Method: Reducing Balance (declining balance) — applied annually on the written-down value of the asset.
| Asset Category | FBR Rate | Example (PKR 1M asset) |
|---|---|---|
| Buildings (Industrial) | 10% | PKR 100,000/year Y1 |
| Furniture & Fittings | 15% | PKR 150,000/year Y1 |
| Machinery & Plant | 15% | PKR 150,000/year Y1 |
| Computers & IT Equipment | 30% | PKR 300,000/year Y1 |
| Motor Vehicles | 20% | PKR 200,000/year Y1 |
| Intangibles (Patents, Goodwill) | 25% | PKR 250,000/year Y1 |
Vehicle depreciation cap: For non-commercial vehicles (cars, SUVs), FBR caps the depreciable cost at PKR 7,500,000 for 2026. If you purchased a vehicle for PKR 15 million, depreciation is still calculated on PKR 7.5 million only.
4. Marketing, Advertising & Business Promotion
All genuine marketing and advertising expenditures are deductible, including:
- Digital advertising — Google Ads, Facebook, Instagram, LinkedIn
- Print media, billboards, and TV/radio ads
- Website development and maintenance costs
- SEO services and content marketing
- Trade show participation and exhibition costs
- Promotional materials — brochures, samples, branded merchandise
- Social media management fees paid to agencies
There is no statutory cap on marketing deductions for most businesses — the expense simply needs to be genuine, business-related, and documented with invoices.
5. Professional Fees & Financial Charges
Legal & Accounting Fees
Fees paid to lawyers, tax consultants, chartered accountants, SECP agents, and other professionals for business-related work are fully deductible. This includes your annual tax return filing fee paid to Kamboh Associates.
Fully DeductibleBank Charges & Finance Costs
Bank service charges, LC (letter of credit) fees, and interest on business loans are deductible as financial charges. Mark-up on KIBOR-based business financing from conventional banks is also deductible under Section 23.
Fully DeductibleInsurance Premiums
Premiums for business insurance (fire, theft, liability, marine cargo, professional indemnity) are fully deductible. Life insurance premiums on key employees where the company is the beneficiary are also deductible.
Fully Deductible6. Travel & Transportation Expenses
Business travel within Pakistan and internationally is deductible when wholly for business purposes:
- Air, rail, and road fares for business travel
- Hotel accommodation during business trips
- Fuel and vehicle running costs for business vehicles
- Toll charges and parking fees
- Employee travel allowances (with supporting records)
Mixed-use vehicles: If a business vehicle is also used for personal travel, only the business-use proportion is deductible. FBR disallows personal travel expenses entirely. Maintain a vehicle log book showing business vs personal mileage.
7. Bad Debts, Repairs & Other Deductions
Bad Debt Write-Off (Section 29)
If a customer owes you money and you can demonstrate the debt is irrecoverable (evidence: legal notices, court orders, or insolvency), you can write it off and claim the deduction in that tax year. Debts already included in your income are eligible for bad debt deductions.
Repairs & Maintenance
Ordinary repairs and maintenance of business premises and assets are deductible. However, capital improvements (which extend the life or improve the value of an asset) must be depreciated, not expensed in one year.
Research & Development
Under Section 26, qualifying R&D expenditures can be either deducted in the year incurred or amortized over 10 years — whichever is more tax-efficient for your business.
What Is NOT Deductible in Pakistan?
| Expense | Status | Reason |
|---|---|---|
| Income tax payments | Not Deductible | Tax on income cannot reduce taxable income |
| Fines & penalties | Not Deductible | FBR, SECP, or court penalties are disallowed |
| Personal expenses | Not Deductible | Must be wholly business-related |
| Cash payments > PKR 250K | Disallowed | Section 21(l) of ITO 2001 |
| Capital expenditure | Not Immediate | Must be depreciated over asset life |
| Donations (unapproved) | Not Deductible | Only approved NPO donations qualify |
| Entertainment (excess) | Partially Allowed | Limited to 1% of turnover |
Documentation Required for Each Deduction
FBR auditors will ask for proof of every deduction you claim. Maintain these records for a minimum of 6 years:
- Invoices and receipts — for every expense above PKR 10,000
- Bank statements — showing all payments (to prove no cash payments >PKR 250K)
- Salary sheets — with employee CNIC, amount, and WHT deducted
- Rent agreement — signed, with landlord CNIC and NTN
- Asset register — listing all assets with purchase date, cost, and depreciation
- WHT challans — proof that withholding tax was deposited on vendor payments
- Travel records — itinerary, boarding passes, hotel bills with business purpose
Maximize Your Business Tax Deductions
Most Pakistani businesses overpay tax because they miss legitimate deductions. Kamboh Associates reviews your accounts and claims every allowable expense — saving you thousands every year.