Too much tax was deducted from my salary; how do I get a refund?

Why does over-deduction happen?

Section 149 of the Income Tax Ordinance, 2001 makes an employer deduct tax at the employee’s average rate “on the estimated income of the employee chargeable under the head ‘Salary’ for the tax year”. An estimate can be wrong. Common reasons are leaving a job mid-year, an expected bonus that is not paid, or a pay cut.

Section 149(1) also lets the employer make adjustments during the year for “any excess deduction or deficiency arising out of any previous deduction”. So the first place an over-deduction can be corrected is the employer’s own later deductions in the same tax year. Once the year ends, or once you have left that employer, the correction has to come through your return.

What does the law say about refunds?

Section 168(2) and (5). Tax deducted from salary is allowed as a tax credit in the tax year of deduction. A credit, or part of a credit, that cannot be used against the tax for that year “shall be refunded to the taxpayer in accordance with section 170”.

Section 170, the application route.

• Sub-section (1): a taxpayer who has paid tax in excess of the amount properly chargeable “may apply to the Commissioner for a refund of the excess”.
• Sub-section (2): the application must be in the prescribed form, verified in the prescribed manner, and made within three years of the later of the date the assessment order for that tax year was issued or the date the tax was paid.
• Sub-section (3): the Commissioner first applies the excess against other income tax due from you, then against other outstanding tax liabilities, and refunds the remainder.
• Sub-section (4): the Commissioner must serve a written order within sixty days of receiving the application, after giving you an opportunity of being heard.
• Sub-section (5): you can appeal against that order, or against the failure to pass one within sixty days.

Rule 71 of the Income Tax Rules, 2002 says the application must be in the proforma in Part VI of the First Schedule to those Rules.

Section 170A, the electronic route. Commencing from tax year 2021, the Board “may process and issue refund to the taxpayer who has filed the return of income without requiring refund application”, to the extent the credit is verified by the Board’s computerised system. The amount is transferred electronically to the taxpayer’s notified bank account.

Section 171, delay compensation. Where a refund is not paid within three months of the date it becomes due, the Commissioner pays compensation at KIBOR plus 0.5 per cent per annum for the period after those three months. A proviso suspends this while a claim believed to be inadmissible is being investigated.

How does it work in practice?

The common thread is the return. Section 170A applies only to a taxpayer “who has filed the return of income”, and a section 170 claim is measured against the tax properly chargeable, which the return declares. A salaried person who is owed a refund therefore has a reason to file even if not otherwise required to.

In the return you declare your salary for the year, work out the tax at the salary rates, and claim credit for all tax deducted. If the credit is larger, the difference is the refund.

Worked example (illustrative figures)

The name and amounts are made up. The tax is from the tax year 2027 salary table.

Ali, a site engineer in Peshawar, leaves his job on 31 December 2026 and has no income afterwards in tax year 2027

His employer estimated a full year’s salary of Rs. 150,000 x 12 = Rs. 1,800,000.

• Estimated annual tax: Rs. 6,000 + 11% x Rs. 600,000 = Rs. 72,000
• Monthly deduction: Rs. 72,000 / 12 = Rs. 6,000
• Deducted July to December: 6 x Rs. 6,000 = Rs. 36,000

His actual salary for tax year 2027 is 6 x Rs. 150,000 = Rs. 900,000.

• Actual tax: 1% x (Rs. 900,000 - Rs. 600,000) = Rs. 3,000
• Credit under section 168: Rs. 36,000
• Excess: Rs. 36,000 - Rs. 3,000 = Rs. 33,000

Ali files his tax year 2027 return by 30 September 2027 declaring Rs. 900,000 of salary and Rs. 36,000 of tax deducted. Under section 168(5) the Rs. 33,000 goes to refund. If the Board issues it under section 170A, it is credited to his notified bank account. If not, he can apply under section 170, within three years of the later of the assessment order date or the date the tax was paid.

If Ali owed any other income tax, section 170(3) says the Commissioner would first set the Rs. 33,000 against that before paying out the balance.

What if my employer can still fix it?

If you are still with the same employer and the tax year has not ended, section 149(1) allows the employer to adjust the excess in later deductions. For example, if an expected bonus was cancelled in March, the April to June deductions can be reduced to reflect the lower estimate.

Common mistakes

• “Refunds are only for businesses.” Section 170 applies to any taxpayer who paid more than the amount properly chargeable.
• “I did not file, so FBR will refund automatically.” Section 170A applies only to a taxpayer who has filed a return.
• “There is no time limit.” Section 170(2)(c) sets three years.
• “The refund is paid in full no matter what.” Section 170(3) nets it against other tax you owe first.

What to check in the official text

Read sections 168, 170, 170A and 171, and rule 71 of the Income Tax Rules, 2002 for the application form. Chapter XVIB of the Rules, amended to 24 November 2023, describes the Centralized Income Tax Refund Office, which pays sanctioned refunds. The Board’s rules for the automatic process under section 170A, and any notifications after 24 November 2023, are not in this corpus.