Income Averaging for Authors Receiving Lump Sum Royalties
Section 89 of the Income Tax Ordinance, 2001 provides a tax relief mechanism for authors of literary or artistic works who receive lump sum royalty payments after long periods of creative work.
Key Provision:
If an author takes more than 24 months (i.e., two years) to complete a work, and receives a lump sum royalty after completion, they can choose to spread that income equally over the current tax year and the preceding two tax years.
This rule helps authors avoid being unfairly taxed at a higher slab rate in a single year due to the lump sum nature of their income.
Example:
Scenario:
Ms. Ayesha, a Pakistani novelist, spends 3.5 years writing her book. In 2025, she receives a lump sum royalty of PKR 3,000,000.
Under Section 89, she can elect to distribute this income as:
2025: PKR 1,000,000
2024: PKR 1,000,000
2023: PKR 1,000,000
This way, she avoids higher tax rates in 2025 and benefits from income averaging over 3 years.
📚 Frequently Asked Questions (FAQs)
Section 89 – Income Tax Relief for Authors in Pakistan
1. What is Section 89 of the Income Tax Ordinance, 2001?
Section 89 allows authors of literary or artistic works to spread lump sum royalty income over three tax years if the work took more than 24 months to complete.
2. Who can benefit from Section 89 tax relief in Pakistan?
Authors of books, novels, research papers, or other creative works who receive a one-time royalty after working on their project for over two years.
3. What type of income qualifies under Section 89?
Only lump sum royalties received for literary or artistic works completed over a period exceeding 24 months.
4. Can poets and playwrights also benefit from this provision?
Yes. Section 89 applies to all authors, including poets, novelists, playwrights, and even screenwriters, as long as the work qualifies as literary or artistic.
5. Is this tax relief automatic or elective?
It is elective, meaning the author must choose (elect) to apply Section 89 by informing the tax authorities at the time of filing the income tax return.
6. What is the benefit of distributing lump sum income over 3 years?
It helps avoid a higher tax rate in a single year and spreads the income to lower brackets over three tax years, thereby reducing overall tax liability.
7. How is the royalty income divided?
Equally—1/3 of the total lump sum is reported in each of the current tax year and the two previous tax years.
8. Can a self-published author claim this relief?
Yes. As long as the royalty qualifies and the project duration exceeded 24 months, self-published authors are eligible.
9. Is the 24-month period strictly from the first to final draft?
It is based on the actual time taken to complete the work. Supporting evidence like contracts, timelines, or manuscript records may be required if audited.
10. Does Section 89 apply to translations or compilations?
Yes, if the work is original or substantially revised and qualifies as a creative literary or artistic piece.
11. What if I received royalties in installments instead of a lump sum?
Section 89 specifically applies to lump sum receipts. If royalties are paid over multiple years, normal tax treatment will apply.
12. What documents are needed to claim this relief?
You should retain royalty contracts, publisher agreements, bank statements, and manuscript timelines to support your claim in case of an audit.
13. Can foreign royalties be declared under Section 89?
Yes, as long as the income is declared in Pakistan and all conditions under Section 89 are fulfilled.
14. Do I need to file revised returns for past two years?
Yes. If you elect to spread the income under Section 89, you will need to revise your income tax returns for the prior two tax years to reflect 1/3 income in each.
15. Is there a time limit to elect Section 89 treatment?
The election should be made at the time of filing the return for the year in which lump sum royalty was received.
16. Can artists and musicians use this section?
Yes, if their work qualifies as literary or artistic and meets the time duration and royalty criteria.
17. Does FBR issue any separate notification for Section 89?
No separate notification is needed. It is a self-election by the taxpayer under the provisions of the Income Tax Ordinance.
18. Will Section 89 impact tax deductions or credits?
No, this section affects only the reporting timeline of income. Other deductions or credits remain subject to normal eligibility.
19. Can tax consultants help file this properly?
Yes. It’s advisable to consult a qualified tax advisor or chartered accountant to correctly file the returns and apply Section 89.
20. What happens if I forget to apply Section 89?
You may miss the benefit and be taxed fully in one year. However, revised returns may be filed within the statutory time limit to claim it, subject to FBR approval.
Disclaimer
This blog post is intended for general informational and educational purposes only. It does not constitute legal, tax, or financial advice. For personalized guidance, consult a qualified tax consultant or lawyer licensed in Pakistan. The author and publisher do not accept any liability for actions taken based on this content.
