Tax Depreciation in Pakistan for FY2026: A Complete Guide by a Sialkot Tax Consultant

Every business that owns machinery, vehicles, furniture, or office equipment eventually asks the same question: how much of that cost can be written off against taxable profit each year? The answer lies in tax depreciation Pakistan rules under the Income Tax Ordinance, 2001. Furthermore, with Tax Year 2026-27 already underway, many manufacturers and exporters — especially in Sialkot’s surgical instruments, sports goods, and leather industries — are re-checking their fixed asset registers to make sure they are claiming every rupee they are legally entitled to.

As a Sialkot tax consultant, Trusty Consulting regularly reviews client fixed asset schedules and finds the same errors repeated year after year: wrong rates, missed initial allowance, and depreciation claimed on assets that were already sold. Therefore, this guide walks through the complete framework — from the legal basis in Section 22, to the Third Schedule rate table, to the practical mistakes local businesses make — so that your FY2026 tax depreciation calculation is accurate and defensible.

Table of Contents

1. What Is Tax Depreciation?
2. Legal Basis for Tax Depreciation Pakistan: Section 22
3. How the Written Down Value (WDV) Method Works
4. Tax Depreciation Pakistan: Step-by-Step Guide
5. Third Schedule Part I: Depreciation Rates for FY2026
6. Initial Allowance: An Extra First-Year Deduction
7. Accelerated Depreciation for Alternate Energy Projects
8. Special Rules and Restrictions
9. Amortisation of Intangibles
10. Real Stories from Sialkot
11. Common Mistakes Businesses in Sialkot Make
12. Frequently Asked Questions

What Is Tax Depreciation?

Tax depreciation is the deduction a business is allowed to claim, under tax law, for the gradual wear and tear of assets used in earning business income. In addition, it is different from the depreciation figure shown in your company’s financial statements.

Accounting Depreciation vs. Tax Depreciation

Accounting depreciation follows International Financial Reporting Standards and can use any method a company’s policy allows, such as straight-line or reducing balance, over the asset’s estimated useful life. Tax depreciation, however, follows only the method and rates fixed by the Federal Board of Revenue under the Third Schedule to the Income Tax Ordinance, 2001. Consequently, the two figures rarely match, and businesses must maintain a separate tax fixed-asset register purely for return-filing purposes.

Legal Basis for Tax Depreciation Pakistan: Section 22 of the Ordinance

Section 22 of the Income Tax Ordinance, 2001 is the governing provision for tax depreciation Pakistan. It states that a person is allowed a deduction for the depreciation of depreciable assets used in the person’s business during the tax year.

A depreciable asset, in simple words, is any tangible movable property, immovable property (other than raw land), or structural improvement that:

• Has a normal useful life exceeding one year;
• Is likely to lose value through normal wear and tear or obsolescence; and
• Is used wholly or partly to earn taxable business income.

However, if a deduction for the entire cost of an asset has already been allowed in the year of purchase under some other provision, that asset cannot also be depreciated under Section 22.

How the Written Down Value (WDV) Method Works

Unlike straight-line depreciation, Pakistani tax law uses the written down value (WDV) — also known as the declining or reducing balance method. Under this approach, the prescribed rate is applied each year to the asset’s remaining tax value, not its original cost. As a result, the deduction is largest in the early years and gradually shrinks over the asset’s life, though it technically never reaches zero.

The written down value at the start of a tax year is calculated as follows:

• For an asset acquired during the year: cost of the asset, minus any initial allowance already claimed.
• For an asset held from a previous year: cost, minus all depreciation (including initial allowance) claimed in earlier years.

Tax Depreciation Pakistan: Step-by-Step Calculation Guide <a name=”step-by-step”></a>

1. Identify the asset category. Match the asset to its class in Part I of the Third Schedule (building, machinery, vehicle, computer hardware, etc.).
2. Determine the cost. Use the actual purchase cost, including incidental costs of acquisition, but excluding land for immovable property.
3. Deduct initial allowance, if eligible. For qualifying plant and machinery used for the first time, subtract the 25% initial allowance under Section 23 before applying the normal rate.
4. Apply the prescribed WDV rate. Multiply the resulting written down value by the applicable percentage from the rate table below.
5. Carry forward the new WDV. Subtract the depreciation claimed from the opening WDV to get next year’s opening balance.
6. Track disposals separately. If an asset is sold during the year, stop claiming depreciation on it and instead calculate any gain or loss on disposal.
7. Compile the fixed asset schedule. Summarise every asset class in a schedule that supports the depreciation figure declared in the income tax return filed through IRIS.

Third Schedule Part I: Depreciation Rates for FY2026

The following tax depreciation Pakistan rates, prescribed under Part I of the Third Schedule to the Income Tax Ordinance, 2001, remain applicable for Tax Year 2026-27:

Class of Asset	Rate (% of WDV)
Buildings (general rate, not otherwise specified)	5%
Factory, workshop, cinema, hotel, hospital buildings	10%
Residential quarters for labour	10%
Furniture, including fittings	10%
Machinery and plant (general rate)	10%
Computer hardware, printers, monitors and allied items	30%
Technical or professional books	20%
Ships — new	5%
Ships — second-hand (up to 10 years old)	10%
Ships — second-hand (10 years or older)	20%
Motor vehicles (all types)	20%
Aircraft, aero-engines and aerial photographic apparatus	30%
Ramp for persons with disabilities (up to Rs. 250,000)	100%

In addition, mineral oil concerns and offshore installations follow a separate, specialised set of rates under the same Schedule.

Initial Allowance: An Extra First-Year Deduction

Furthermore, Section 23 of the Ordinance grants an initial allowance — an additional one-time deduction over and above normal depreciation — when an eligible depreciable asset is placed into service in Pakistan for the first time. Under Part II of the Third Schedule, the current rate is 25% of the cost of plant and machinery.

However, initial allowance does not apply to:

• Buildings (this category was withdrawn by the Finance Act, 2019);
• Road transport vehicles, unless plying for hire;
• Furniture, including fittings;
• Plant or machinery previously used in Pakistan (i.e., second-hand assets); and
• Immovable property or structural improvements.

Importantly, initial allowance is claimed once, in the year the asset first enters use, and reduces the cost before the normal WDV rate is applied for that same year.

Accelerated Depreciation for Alternate Energy Projects

Companies investing in solar, wind, or other alternate energy generation plant and machinery benefit from a far more generous incentive. Under Section 23B, a First Year Allowance of 90% of the eligible asset’s cost is allowed, in place of the normal initial allowance, encouraging industrial units — including Sialkot’s growing number of solar-powered export factories — to shift toward renewable energy.

Special Rules and Restrictions

A few restrictions frequently trip up taxpayers when applying tax depreciation Pakistan rules, so Sialkot tax consultant teams pay close attention to them during return preparation:

• Withholding tax link: Since the Finance Act, 2025 amendment, depreciation cannot be claimed on the cost paid to a seller for a capital asset if the withholding tax deductible under Sections 152 or 153 was not actually deducted and deposited into government treasury. In other words, unverified withholding compliance can permanently block depreciation.
• Passenger vehicle cost cap: For a passenger transport vehicle not plying for hire, the cost eligible for depreciation is capped at Rs. 7.5 million, regardless of the actual purchase price.
• Partial business use: Where an asset is used partly for business and partly for personal purposes, the deduction is restricted to a fair proportion of business use.
• Total deductions cannot exceed cost: The combined depreciation and initial allowance claimed over an asset’s life can never exceed its original cost.
• Disposal of assets: No depreciation is allowed in the year an asset is disposed of. If the sale proceeds exceed the written down value, the excess is taxed as business income; if proceeds are lower than the WDV, the shortfall is allowed as a deduction.
• Leasing companies and banks: Depreciation claimed by leasing companies, modarabas, investment banks, or development finance institutions on leased assets can only be set off against the related lease rental income.

Amortisation of Intangibles

Depreciation under Section 22 applies only to tangible and immovable assets. For intangible assets — such as patents, trademarks, licences, or franchise rights with a useful life exceeding one year — Section 24 instead allows amortisation on a straight-line basis, spread evenly over the intangible’s normal useful life. Where the useful life cannot be reasonably determined, the law deems it to be fifteen years.

Real Stories from Sialkot

Rana Precision Surgicals, a mid-sized surgical instruments exporter on Sialkot’s Daska Road, imported new CNC grinding machines worth Rs. 18 million in early Tax Year 2026-27. Their in-house accountant claimed the standard 10% depreciation but did not realise that a further 25% initial allowance was available in the very first year, since the machines were being used for the first time in Pakistan. When the owner brought the return to Trusty Consulting for a second opinion, the correction alone reduced taxable profit by an additional Rs. 4.5 million — a saving that funded the following season’s raw material purchase.

Similarly, Iqbal Sports Traders, a sports goods exporter near Sialkot’s Kashmir Road, sold an old delivery truck for Rs. 900,000 — well above its written down value of Rs. 300,000. The owner was surprised to learn that the Rs. 600,000 difference had to be added back as taxable business income under Section 22(8), rather than treated as a tax-free capital receipt. Consequently, planning ahead for asset disposals, not just asset purchases, has become part of every annual review Trusty Consulting now conducts for its Sialkot clients.

Common Mistakes Businesses in Sialkot Make

• Applying the wrong asset class rate, especially confusing “machinery and plant” (10%) with “computer hardware” (30%).
• Forgetting to claim the 25% initial allowance on new plant and machinery.
• Continuing to claim depreciation on assets that were sold, scrapped, or exported during the year.
• Ignoring the Rs. 7.5 million cap on non-commercial passenger vehicles.
• Failing to keep withholding tax evidence for large asset purchases, risking disallowance under the new Section 22 proviso.

Frequently Asked Questions

Q1. Which method does Pakistan use for tax depreciation?
Pakistan uses the written down value (declining balance) method under Section 22, not the straight-line method commonly used in accounting.

Q2. Can I claim depreciation and initial allowance in the same year?
Yes. For eligible plant and machinery used for the first time, initial allowance (25%) is claimed first, and the normal depreciation rate is then applied to the reduced written down value in that same year.

Q3. Is depreciation available on land?
No. Land is not a depreciable asset under the Ordinance, since it does not lose value through wear and tear.

Q4. What happens if I sell a depreciated asset?
No depreciation is allowed for that year on the asset sold. Any excess of sale proceeds over written down value is taxed as income; any shortfall is allowed as a deductible loss.

Q5. Do I need a professional Sialkot tax consultant to prepare my depreciation schedule?
While it is possible to prepare a basic schedule in-house, the interaction between initial allowance, WDV carry-forward, disposal rules, and the new withholding tax restriction makes professional review worthwhile for most manufacturing and export businesses.

Get Your FY2026 Depreciation Schedule Reviewed

Getting tax depreciation Pakistan rules right is not just about compliance — it directly affects how much tax your business pays every year. Whether you run a factory in Sialkot’s export zone or a trading business anywhere else in Pakistan, Trusty Consulting can review your fixed asset register, recalculate your Third Schedule rates correctly, and make sure your FY2026 return claims every deduction you are legally entitled to.

As a trusted Sialkot tax consultant, our team at Trusty Consulting has helped exporters, traders, and service businesses across Sialkot fix costly depreciation errors before filing season. Reach out on WhatsApp at 03296325872 to get your fixed asset schedule reviewed today.