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How to save Tax legally in Pakistan

How to save Tax legally in Pakistan

A couple of months back I read an article online which was titled how to save tax. Which is an interesting title but the essence of the blog post was to simply not pay tax because you won't be caught. Which is pretty insane advise to give on a serious blog post. 

This led me to this post on how you can save tax, be an active tax payer and be a good citizen at the same time. One would ask why should I pay tax in the first place? well, the answer is simple.

There is a high chance your salary is already paid to you after deducting tax, so if you are paying taxes already then why not reap the benefits of a tax payer.

Also at a certain point in life you are ought to pick up some good habits and mind-set which puts you in the right direction for future.

Managing finances, income and taxes are one of those. Learning two of the basic financial habits are a must for every one, savings and investments, both of which are briefly covered in the post. 

The world we live in, financial literacy is as important for anyone as counting digits. Unfortunately we are not taught how to manage finances, income, savings and investments in schools and colleges. Result is, a lot of financially challenged people who can do much better with very little effort and knowledge. 

Time for a little Math

For the sake of simplicity lets imagine Bashir who earns 100,000 thousand(1 Lac) Rs a month. At the time of writing Bashir will be paying 5000Rs as income tax per month.

Annual Income = 100,000 x 12 = 1,200,000 Rs.

Annual Tax= 5000 x 12 = 60000 Rs.

Bashir can save upto 40% tax which is 24000 Rs legally when his per month salary is 1 lac. 

Pakistani tax laws have 2 clauses which anyone and should use for both tax saving and saving money through investments.

  • Tax Credit for Investment in Shares and Life Insurance Premium u/s 62
  • Tax Credit for Contribution to Approved Pension Fund u/s 63

Investment in Shares and Life Insurance Section 62

When I first heard about shares my first reaction was its risky and not something for a person who doesn't have much time. A lot of books are written on this subject and its certainly not possible to cover investing strategies etc in a blog post. However the bottom line in stock investing is if the country is developing the stock prices are bound to go up if you are investing for long term. Every day rise and fall are ultimately normalized if you are in it for a longer time. 

However stocks are still intimidating for someone like me so what is the alternate? Mutual funds are a good and relatively safer alternate to stock market. Mutual funds are run by fund managers who invest in stock market on behalf of your money. 

The benefit is that fund managers can make an appropriate portfolio which means they distribute the money and buy shares of different companies in a diversified portfolio. So if one company is not doing well it doesn't affect too much. Its like putting the eggs in different baskets to if one breaks you don't loose it all.

The disadvantage of  mutual funds are their fees and they should be compared before choosing one.

Now back to Bashir and lets see how he can save money if he invests in mutual funds or Insurance.

If Bashir invests Rs 240,000 in a mutual fund, he will be able to save Rs 11,900.

240,000 is 20% of his annual income.

Investment in Pension Fund Section 63

Section 63 of tax laws state that if you invest money in a pension scheme you can have a maximum 20% of income as non-taxable. With a lot more people working in private sector and with a lot more companies not having pension/retirement benefits. It is a very good idea to put aside some money in a pension fund which ultimately grows as well and gives you ability to save tax.

Bashir can invest Rs 240,000 in a Pension fund and save Rs 11,900

So with an investment of Rs 240,000 x 2 = 480000 Bashir is able to save 11,900 x 2 =  Rs 23,800 anually