Avail tax credit on investment in both mutual fund and pension schemes and enhance the overall return on your savings.
What is a tax credit?
A tax credit is a kind of tax saving that you can get on your income tax for the year if you invest in mutual fund schemes, investment plans or pension schemes. This tax savings facility can be availed by both salaried and self-employed individuals in accordance with the Income Tax Ordinance, 2001.
The amount of tax credit that you will be entitled to will be adjusted from your payable annual income tax for the year thus giving you an overall tax saving. The following illustrations will help you understand how a tax credit is calculated.
On an Investment in a Mutual Fund Scheme
For example, if you are a salaried individual and your annual taxable income for the year is Rs. 4,000,000; your average tax rate will be 15%. If you invest, let’s say Rs. 800,000 in a mutual fund scheme, you will be entitled to a tax credit of Rs. 120,000. In the same case if you are self-employed, your tax credit will approximately be Rs. 144,500 (based on your annual tax rate of 18.06%).
On an Investment in a Pension Scheme
For example, if you are a salaried individual in your late 30s and your annual taxable income for the year is Rs. 4,650,000; your average tax rate will be 16.75%. If you invest, let’s say Rs. 930,000 in a pension scheme, you will be entitled to a tax credit of Rs. 155,750.
In the same case if you are self-employed, your tax credit approximately will be Rs. 183,500 (based on your annual tax rate of 19.73%).
The maximum tax benefit that an individual can get before the age of 41 is up to 20% of his or her annual taxable income times his or her tax rate.
But if you start investing at age 41 years or older, you become eligible for additional ‘catch-up’ rebates, which increase by 2% every year.
People who are over 45 years of age can claim a tax credit of up to 30% of the preceding year’s total taxable income.
The amount of tax credit that you can get on an investment in a pension scheme is dependent on a) the amount of investment you make and b) your annual taxable income.
Is there any condition on getting a tax credit?
The only condition is that you need to hold your investment for a period of at least two years (as per the Income Tax Ordinance), applicable on investments in a mutual fund scheme or investment plan.
In case of investment in a pension scheme, you need to hold your investment for at least one year to be eligible to claim a tax credit. However, if you withdraw any amount from your investment in a pension scheme before your preselected retirement date then a tax penalty will be charged which will be equivalent to your average tax rate of last 3 years.
How much tax credit can I get?
The amount of tax credit you can get is dependent on your income tax rate and the amount you wish to invest. Use our Tax Savings Calculator to find out how much tax credit you can get.
Can I avail the separate tax credit facility on investing in both mutual funds and pension schemes?
Yes, since mutual funds and pension schemes are two different types of investment schemes, you can avail a separate tax credit on each of the two.
How can I claim my tax credit amount?
In order to claim your tax credit amount you can do the following:
- If you are a salaried individual, you can inform your Human Resources (HR) or Finance Department about your investments and ask them to adjust your tax credit amount from the monthly income tax deductions made from your salary
- If you are a self-employed individual or a salaried individual filing your own personal income tax returns, you can adjust your tax payable and enclose a copy of your statement of investment along with your documents when you file your returns