Section 156 Prize Bond Tax in Pakistan: Implications for Filers and Non-Filers

Prize bonds found much popularity as an investment tool in Pakistan; people can invest in prize bonds and have chances to win cash awards while keeping their invested amount as safe as their pocket money. However, recent changes in the laws and rules of the Federal Board of Revenue (FBR) have made the taxation on prize bond winnings an area of consideration. This has been further made clear by the recent change which I consider most relevant to the case, which has been the introduction of Section 156 Tax of the Income Tax Ordinance 2001 which deals with the taxation of prize bond prizes. In this blog post, we will explain the different components of Section 156 tax of the Income Tax Ordinance and see how it affects both filers and non-filers in Pakistan.

What is Section 156 Tax?

The rules of taxation of prize bond wins are described in section 156 tax of the Income Tax Ordinance, 2001. Under the provision, each individual who is in possession of a prize for a prize bond is liable to pay tax on the amount of the prize. This tax is paid at the time of issuing the award; therefore, the winner is paid the total award amount less the amounts to be used to pay tax. The tax on prize bonds is paid through deductions, and the Section 156 tax is held by the authorities before the prize bond is awarded to the winner. This is because the tax rates for prize bond winnings are also different and depend on the winner’s filing of taxes.

Taxation on Prize Bond Winnings: Filer vs Non-Filer

Section 156 tax is the latest TAX weapon in the government’s arsenal to ensure more and more individuals and companies put themselves on the right side of the law and start paying taxes. The tax issue for the prize bond winners introduces some differentiation between the filer and the non-filer.

1. Withholding tax on Prize Bond winner for non-filers

A non-filer simply means an individual who does not file income tax returns with the FBR. This may be because that individual has not developed adequate knowledge in taxation, has not been keen on learning and understanding the laws of the land on taxation, or else his or her income is below the set limit where one is legally bound to file a return.

• Tax Rate for Non-Filers: Non-filers pay higher taxes on their prize bond winnings.
• On the basis of the latest available tax laws, if any participant is a non-filer he will have to pay 30% tax with regard to prizes.

For instance, if someone who has not filed his Return acquires a prize bond of Rs. 1,000,000 then a 30% tax is deducted from his prize which is Rs. 300,000 leaving him with Rs. 700,000. This encourages those out of compliance to come out of the shadows and pay their taxes because they are stuck with a higher tax rate if they don’t.

2. Tax on Prize Bond Winnings for Filers

A filer the same as the taxpayer is one who submits the income tax returns with the FBR most frequently. Individuals filing taxes enjoy certain concessions that other individuals do not get such privileges regarding taxation laws including tax rates, the number of exemptions they can enjoy, and any tax credit that they can enjoy.

• Prize bond tax deduction rate for filer: The filers are given a preference for a lower tax rate amount for their prize bond winnings according to Section 156 tax. 
• According to the revised legal requirements, a filer is obliged by law to injure 15% tax from the amount earned in the form of winnings.

For instance, if the filer wins the prize bond 100 or above Rs. 1,000,000 prize money, the tax deduction would be Rs.150,000, which is 15% of the Winning, Leaving the winner with Rs.850,000. This lower tax rate should make sure that nobody avoids paying taxes by contributing to the formal economy instead they get rewarded for paying their taxes to the government.

How is the Tax Collected?

The tax on prize bonds is usually paid when the relevant money prize is being paid out. This means that whenever an individual receives a prize, then the prize center usually under the National Saving Department will retain the corresponding tax amount and then pay the balance amount to the winner. It is an efficient process and enables the taxes to be paid at the source without inconveniencing the winner with extra procedures.

Importance of Filing Income Tax Returns

Because of the huge disparity in the tax percentage between those who file and those who do not file their income tax returns, it is important for individuals to file their income tax returns religiously. Being a tax filer not only reduces your tax liability on prize bond winnings but also offers several other benefits, such as:

1. Right to pay a reduced amount of tax for other sources of income.
2. The ability to get tax refunds if the amount paid over exceeds the number allowed.
3. Credibility and trust are specifically important when handling money-oriented dealings like commerce or asking for credit.
4. The ones which may be bars or restrictions on facilities they might receive from the government such as bursaries or loans.

When you file your tax returns you also benefit the national economy and help the government generate more revenues for development and enhancement of public services.

Why Should You File Your Tax Returns?

1. Avoid Higher Taxes: For the record, non-filers also pay high taxes on the amount of money they win through prize bonds as pointed out earlier. You can be exempted from further huge deductions by filing your tax returns and therefore it would be better off if the jackpot prize money is taxed at the lower rate.
2. Legal Obligation: Basically there are rules which call for candidates who earn a certain amount of money to file income tax returns. If such a requirement is not met, then there will be so many penalties fines, and other legal consequences that accompany such incidences.
3. Financial Growth and Access: Tax filers are able to access and transact in the official financial system, financing, and investment that is unavailable to non-filers.

Explore: What is Capital Gain Tax and How it Work?​

Conclusion

Consequently, section 156 tax of the Income Tax Ordinance 2001 is used effectively to assign tax on prize bond winnings flowing in Pakistan. The different tax rates between filers and those who do not file clearly reflect the government’s fight against tax evasion. For the people who do not file tax returns, a higher tax rate on the prize bond winnings acts as a discouragement, to force them to file for their tax returns. On the other hand, the filers are charged a low tax rate to encourage those who have the ability to meet their tax obligations. When you have filed your taxes, it is evident that you not only minimize your tax contribution but also widely get an opportunity to benefit from various financial resources for the development of the country. Thus, no matter if you are an avid user of prize bonds or dreaming of becoming a filer, it is possible to mention the accelerating advantages of maintaining legal compliance with tax rules. You can visit the PK TAX CALCULATOR website and use our Prize bond tax calculator for accurate calculation of your online prize bond tax. File your returns today to have a better experience financially in the future.