What is Taxable Income?

What is Taxable Income?

Focus on the word TAXABLE INCOME in the basic sentence below:

For each Tax Year, the government imposes Income Tax at a specified rate on every Person who has Taxable Income.

The discussion below will develop an understanding of the word TAXABLE INCOME.

The Taxable Income is the Income of a person on which the person pays Income Tax; whereas, the Exempt Income is the Income of a person on which he has to pay no Tax. The Taxable Income becomes very important to understand because Income Tax is calculated on Taxable Income. The Taxable Income depends on the value of Total Income a person derives, and the value of Deductible Allowances.

Technically, the Taxable Income is defined as under:

The Taxable Income[1] of a person for a Tax Year is the Total Incomeunder all heads of Income of the person for the year reduced (but not below zero) by the total Deductible Allowances.

Taxable Income = Total Income – Deductible Allowances

In the equation, Total Income means:

The Total Income[2] of a person for a Tax Year is the sum of his

1.       Income under all heads of income; and

2.       Income exempt from tax.

Therefore,

Total Income = Income under all heads + Exempted Income

The Income Tax Ordinance, 2001 provides us classification of Income into five heads:[3]

(1)      Salary,

(2)      Income from property,

(3)      Income from Business,

(4)      Capital gains, and

(5)      Income from other sources.

Exempted Income is the Income on which a person has to pay no Income Tax. One example of exempted Income is Agricultural Income. A person deriving Agriculture Income does not pay Income Tax under the provision of Income Tax Ordinance, 2001.

The overall relationship between Total Income, Taxable Income, and Exempt Income is shown in the diagram below.

Example

Mr. Arslan Aslam has Total Incomeof Rs. 2,600,000. Deductible allowances in his case are valued at Rs. 720,000. What is his Taxable Income?

Solution

Mr Arslan Aslam
Tax Year : XXXX
Computation of Taxable Income
Particulars	Rs.
Total Income	2,600,000
Less: Deductible Allowances	720,000
Taxable Income	1,880,000

Another classification of Income is Pakistan-Source Income, and Foreign-Source Income. This classification is used to differentiate the Tax liability of Resident and Non-Resident Person. A Non-Resident Person has to pay Tax on both the Pakistan-Source Income and Foreign-Source Income. On the other hand, a Resident Person pays Tax on his Pakistan-Source Income only.

Pakistan-Source Income

The Pakistan-Source Income[4] includes the income which a person earns in Pakistan without regard to location of receiving the income.

[1]See Section 9

[2] See Section 10

[3] See Section 11

[4] See Section 2(40)