An income tax is a governmental tax placed on the earnings of people and enterprises.

What exactly is income tax?

Income tax is a proportion of money that people or corporations must pay the government depending on their earnings (income) in a particular year.

Who Is Responsible for Paying Income Tax?

Individuals and businesses in Pakistan who earn a particular amount of money are liable for income tax. Individuals who work, own a business or generate money through investments or rental properties fall into this category.

Taxable Income:

The amount of income on which you must pay taxes is referred to as “taxable income.” According to Pakistani tax laws, in order to calculate taxable income, you must deduct various expenses and deductions from your total income.

Tax Slabs:

Income tax is not levied at the same rate for everyone. It is instead divided into various “tax slabs,” each with its own tax rate. The higher your income, the higher the tax rate on the share of your income that falls inside that particular bracket.

Filing Income Tax Return:

Individuals in Pakistan are required to file an income tax return every year. This is a form where you declare your income, deductions, and tax liabilities. Based on this return, the government determines how much tax you owe or if you are eligible for a tax refund.

Withholding Tax:

In some cases, individuals may not need to file an income tax return separately if their employer deducts taxes directly from their salary. This is known as “withholding tax.”

Importance of Paying Taxes:

Income tax is essential for the government to generate revenue. This revenue is then used to provide public services, build infrastructure, support social welfare programs, and fund various government activities for the benefit of the country and its citizens.

Tax Filing Deadline:

The government sets a deadline for filing income tax returns, usually around the end of the financial year or shortly after it. It’s crucial to file your taxes on time to avoid penalties and to stay compliant with the tax laws.

Let’s differentiate between taxable and exempted income, understand the rate of income tax, and define net income:

Taxable income is the portion of your total income that is subject to income tax. It includes all incomes, profits, and gains that are not tax-exempt. Simply put, it is the money you make on which you must pay income tax. Deducting permitted deductions and exemptions from your total income yields taxable income.

Exempted income, on the other hand, is the portion of your overall income that is not taxed. The government exempts certain forms of income, which means you do not have to pay taxes on that income. Exempted income in various nations can include gifts, specific allowances, agricultural revenue up to a particular threshold, and so forth.

Rate of Income Tax:

Rate of Income Tax: The rate of income tax is defined as the percentage of your taxable income that you must pay as income tax. Income tax rates vary according to the country’s tax legislation and income tax brackets or slabs. Higher-income levels typically have higher tax rates, whereas lower-income levels typically have lower tax rates. Governments utilize progressive tax rates to ensure that higher-income earners pay a greater share of their income in taxes.

Net Income:

Net income is the amount you have left after deducting all the allowable expenses, deductions, and exemptions from your total income. It is the actual income you receive in your hands after paying all the necessary taxes. Net income is also known as “take-home pay” or “after-tax income.” It’s the money you can use for your day-to-day expenses, savings, or investments.

To summarize:

• Taxable Income: The part of your total income on which you need to pay income tax.
• Exempted Income: The part of your total income that is not subject to income tax.
• Rate of Income Tax: The percentage of your taxable income that you must pay as income tax, which can vary depending on your income level.
• Net Income: The amount of income you receive after deducting taxes, exemptions, and deductions from your total income.