Is profit on National Savings certificates, including Defence Savings and Regular Income Certificates, taxable?

What does the law say?

Profit on National Savings is not exempt as a general rule. Several provisions of the Income Tax Ordinance, 2001 cover it.

Section 151(1)(a) applies where “a person pays yield on an account, deposit or a certificate under the National Savings Scheme or Post Office Savings Account”. The payer must deduct tax at the rate in Division IA of Part III of the First Schedule from the gross yield, reduced by any Zakat paid by the recipient at the time of payment.

Division IA has three clauses. Clause (a) sets 20% for profit paid by a banking company or financial institution on an account or deposit with it. Clause (b) sets 20% for Government securities under section 151(1)(c) paid to a person other than an individual. Clause (c) sets “15% of the yield or profit in cases other than those mentioned in clauses (a) and (b).” National Savings yield under section 151(1)(a) is not named in clauses (a) or (b), so it falls in clause (c).

Section 7B imposes tax on every person, other than a company, who receives profit on debt from a payer in section 151(1)(a) to (d). Clause (a) of section 151(1) is the National Savings clause, so section 7B reaches this profit. Division IIIA of Part I sets the section 7B rate with the same three clauses, and clause (c) is again 15%.

Section 8 makes tax under section 7B a final tax on the amount taxed.

Does the law name Defence Savings or Regular Income Certificates?

The current section 151(1)(a) speaks generally of “an account, deposit or a certificate under the National Savings Scheme”. Before the Finance Act, 2003 substituted it, the clause referred to “a National Savings Deposit Certificate, including a Defence Savings Certificate”. Section 39(4A) still names “National Savings Deposit Certificates including Defence Savings Certificate”. Regular Income Certificates are not named anywhere in the Ordinance text. The Ordinance treats them by the general words of section 151(1)(a) if they are certificates under the National Savings Scheme; which products are part of that Scheme is decided outside this corpus.

Worked example (illustrative figures)

Nasreen, a retired nurse in Peshawar, is on the Active Taxpayers List. In tax year 2027 she receives Rs. 360,000 profit on National Savings certificates and has no Zakat deducted.

1. Rate under Division IA, clause (c): 15%.
2. Tax deducted: 15% x Rs. 360,000 = Rs. 54,000.
3. Profit received: Rs. 360,000 - Rs. 54,000 = Rs. 306,000.
4. Her profit on debt does not exceed five million rupees, so section 7B applies. The Rs. 54,000 is her final tax on that profit under section 8, and the profit is not added to her other taxable income.

If the same profit had come from a bank term deposit, clause (a) would apply: 20% x Rs. 360,000 = Rs. 72,000.

What if the certificates were bought before July 2001?

Section 239(14) says “Any yield from National Saving Schemes of Directorate of National Savings where investment was made on or before 30th June, 2001” continues to remain exempt. The same sub-section covers income from a Mahana Amdani Account where the monthly instalment does not exceed one thousand rupees. The payer must not deduct tax under section 151 from such yield, and the holder does not need an exemption certificate.

What if profit is paid late, in arrears?

Section 39(4A) deals with profit on National Savings Deposit Certificates, including Defence Savings Certificates, paid in arrears. Where the arrears push the person into a higher rate than if the profit had been paid in the year it relates to, the person may elect by written notice to the Commissioner to be taxed at the earlier year’s rate. Section 39(4B) says the election is made by the due date of the return for the year of receipt, or a later date the Commissioner allows in writing.

What if my profit is above Rs. 5 million, or I am not on the list?

Section 7B(3)(b) says the section does not apply to profit on debt that exceeds five million rupees. The deduction then becomes a minimum tax under section 151(3), and the profit is taxed under section 39 with your other income. For persons not on the Active Taxpayers List, the related page explains how the 15% rate is doubled to 30%.

Common mistakes

• Believing all National Savings profit is tax free. Only yield on investments made on or before 30 June 2001, and small Mahana Amdani Account income, keep the exemption under section 239(14).
• Applying the 20% bank rate. National Savings yield falls in clause (c) of Division IA, which is 15%.
• Treating Behbood certificates the same way. They have their own rules in the Second Schedule.

What to check in the official text

Read sections 7B, 8, 39(4A) and (4B), 151 and 239(14), and Division IA of Part III and Division IIIA of Part I of the First Schedule in the source PDF, since our site copy does not reproduce the schedules as tables. Profit rates, product terms and eligibility for particular National Savings certificates are set outside the Income Tax Ordinance and are not covered here.