Understanding Tax Credit on Bahbood Savings Certificates and Similar Accounts in Pakistan

Tax credits are a great way to reduce your overall tax liability, especially when it comes to specific savings accounts like the Bahbood Savings Certificates, Pensioners’ Benefit Accounts, and Shuhada Family Welfare Accounts. These accounts, as outlined in Clause 6 of Part III and Clauses 36A and 103 of Part IV of the Second Schedule of the Income Tax Ordinance, 2001, offer special tax benefits. Here’s a comprehensive guide to help you understand how these tax credits work.

What Income is Taxable?

1. Profit from National Savings Certificates
   The income you earn from Bahbood Savings Certificates, issued by National Savings Centers, is subject to a fixed 15% tax rate. Unlike other forms of income, normal income tax slabs do not apply to the profit earned on these certificates. Additionally, National Savings Centers withhold tax at the time of payment.

2. Pensioners’ Benefit Accounts and Shuhada Family Welfare Accounts
   Profit from these accounts, which are also managed by National Savings Centers, is not taxed according to the usual income slabs. However, withholding tax is still deducted on this income, ensuring that tax is applied at source.

How Does the Tax Credit Work?

For individuals who earn income from Bahbood Savings Certificates or similar accounts, the average rate of tax on total income—including income from these accounts—is calculated. If this average tax rate exceeds 5%, you are eligible for a tax credit. This credit reduces the effective tax rate on your savings income to 5%.

Formula for Average Tax Rate:
Average Tax Rate=A/B
Where:

• A is the total tax liability before applying the tax credit.
• B is the total taxable income.

Example to Illustrate the Tax Credit

Let’s consider the case of Mr. A:

• Income from Business: PKR 900,000
• Profit from Bahbood Savings Certificate: PKR 1,000,000
• Total Taxable Income: PKR 1,900,000

Tax Liability (Non-Salaried Case) According to the Tax year 2025 Rates:

1. Tax on PKR 1,600,000: PKR 170,000
2. Tax on PKR 300,000 @ 30%: PKR 90,000
   Total Tax Liability: PKR 260,000

Tax Credit Calculation:

• Average Tax Rate: (260,000 / 1900,000) ×1,000,000=136,842
• Tax at 5% on Bahbood Certificates: PKR 50,000
• Tax Credit: 136,842−50,000=86,842

Final Tax Liability:
260,000−86,842=173,158

This example shows how the tax credit works to reduce the overall tax burden on income from Bahbood Savings Certificates and similar accounts.

Key Takeaways

• Tax credits on Bahbood Savings Certificates and related accounts ensure that the effective tax rate remains at a maximum of 5% on the profit from these accounts.
• The tax credit is especially beneficial for those relying on National Savings products to generate income.
• Understanding the way these credits apply can help you maximize your savings while minimizing your tax liability.