Demystifying Tax Credits for Charitable Donations in Pakistan: Understanding the Calculations

In Pakistan, the government incentivizes charitable giving by offering tax credits to individuals and companies who donate to approved organizations. This article explains how to calculate your tax credit and the key terms involved.

What is a Tax Credit?

A tax credit directly reduces the amount of income tax you owe. Unlike a deduction, which lowers your taxable income, a tax credit provides reduction in your tax liability.

Calculating Your Tax Credit:

The amount of tax credit you receive depends on your taxable income and the amount you donate. The formula used for calculating the credit is:

(Tax Assessed Before Credit) / (Taxable Income) x (Lower of Donation Amount or Limit)

Here's a breakdown of the formula components:

• Tax Assessed Before Credit: This is the total income tax you owe before applying any tax credits.
• Taxable Income: This is your total income minus allowable deductions.
• Lower of Donation Amount or Limit: The lesser amount between your total charitable donations in the tax year (including the fair market value of any donated property) and the applicable donation limit.

Donation Limits:

• Individuals and Associations: 30% of your taxable income
• Companies: 20% of your taxable income

Important Note:

• Donations made to "associates" (related entities) have a lower limit: 15% for individuals and associations, and 10% for companies.
• The fair market value of donated property is determined at the time of donation.
• Cash donations must be made through a crossed cheque drawn on a bank to be eligible for the credit.

Stay tuned for the next article, which will list the organizations approved for receiving tax-deductible charitable donations in Pakistan.

This article was published at Unlocking Tax Benefits: A Guide to Tax Credits on Charitable Donations