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Tax Credits:: A Tax Liability B Tax Income C Investment
Tax Credits:: A Tax Liability B Tax Income C Investment
Tax Credits:: A Tax Liability B Tax Income C Investment
Tax Credits:
A Tax Credit is an incentive which grants the taxpayers to deduct their tax liability which they
owe to the government. Tax credit are the adjustments which reduces the tax liability of
taxpayers.
Tax credit is allowed on Investments, on the purchase of stocks, shares, bonds etc.
Tax Credit is calculated by the following formula:
A/B x C
Where;
A = TAX LIABILITY
B = TAX INCOME
C = INVESTMENT
Illustration:
Suppose Mr. A has a Tax liability of 5000, his taxable income is 150,000 and he has made an
investment in an insurance company of 60000. Calculate the tax credit amount.
By putting values in formula;
= 5000/150000 x 60000
= 2000
2000 is the tax credit which has been given to Mr. A for his investment of 60000
Now his tax liability would be:
= 5000 – 2000
= 3000
Tax Deduction:
Deductions reduces the taxable income of taxpayers.
For example, Zakat given to registered organizations through FBR (like Eidhi, Shaukat Khanum)
can be claimed as deduction which will lower the taxable income by the amount given for zakat.
Deduction on Educational expense:
Following are the rules for deduction on educational expenses.
1. No of children x Rs.60000
2. Taxable income x 20%
3. Education expense x 5%
From above three, by calculation, whichever would be the lower amount would be deducted
from taxpayer’s taxable income.
Illustration:
Mr. A is a taxpayer whose taxable income of 120000. He has 4 children out of which 3 are
studying. Educational expenses are 9000 per child for their studies.
We would calculate for the deduction as per rules as follows:
1) 4 x 60000 = 240000
2) 120000 x 20% = 24000
3) 27000 x 5% = 1350
The lowest amount that is of educational expenses is 1350 which shall be deducted from the
taxable income of the taxpayer.