Quick Answer

The Finance Act, 2026 amended the Second Schedule to the Income Tax Ordinance, 2001 by inserting a new exemption for private equity and venture capital funds (Clause 99C), adding eight organisations to Clause 57(4), rewriting the overseas-Pakistani profit on debt exemption in Clause 79, relieving high-volume exporters from super tax (Clause 104B), raising the trader threshold in Clause 115 to PKR 200 million, and withdrawing two Part IV exemptions.

Introduction

Pakistan's exemption regime does not live in the main body of the Income Tax Ordinance, 2001. It lives in a schedule at the back, and every June that schedule quietly moves. If you file returns, advise clients, or sit for a professional paper, the Second Schedule is where roughly three-quarters of every rupee of income tax relief in the country is granted. The Finance Act, 2026 rewrote parts of it again, and several of the changes are easy to miss because they are phrased as single-word substitutions rather than headline announcements.

At the Institute of Corporate and Taxation (ICT), we teach the Second Schedule the way it is actually used in practice: clause by clause, with the amending Finance Act named every time, because a clause number without its amending Act is a liability in front of a Commissioner. Students on our Certified Tax Advisor programme spend an entire module on nothing but Parts I to IV, and our taxation blog library tracks each Finance Act as it lands.

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What follows is a complete, verified map of what the Finance Act, 2026 did to the Second Schedule, what it cost the exchequer, and what you need to do about it before the filing deadline. Everything is sourced. Nothing is guessed.

What Is the Second Schedule to the Income Tax Ordinance, 2001?

The Second Schedule to the Income Tax Ordinance, 2001 is the statutory list of every exemption, reduced rate, reduced liability and procedural relief available under Pakistan's federal income tax law. It is divided into four Parts. Section 53 of the Ordinance gives the Second Schedule its legal force and empowers the Federal Government to amend it by notification in addition to amendment by Finance Act.

Each Part does a distinct job, and confusing them is the single most common error in exemption claims:

The distinction matters financially. A Part I exemption removes income from total income, so it never enters the computation. A Part IV exemption leaves the income fully taxable and only switches off a withholding or procedural obligation. Claiming the wrong one produces a demand notice, and our guide on how FBR notices work walks through the consequences.

What Exactly Changed in the Second Schedule Through the Finance Act, 2026?

The Finance Act, 2026 made 12 identifiable changes to the Second Schedule to the Income Tax Ordinance, 2001, spread across Parts I, II and IV. Two entirely new clauses were inserted, two clauses were omitted, and the remainder were substitutions that broaden or narrow existing relief. Part III was left untouched. Every change takes effect from 1 July 2026 for tax year 2027.

Here is the complete map:

Read that table alongside our Pakistan Budget 2026 tax changes explainer, which covers the slab and rate side of the same Finance Act.

Which New Exemptions Were Added to Part I in 2026?

Part I of the Second Schedule gained three things through the Finance Act, 2026: one wholly new clause (99C) covering private equity and venture capital funds, eight new organisations inside the Clause 57(4) table, and a rewritten eligibility test in Clause 79 for profit on debt earned by overseas Pakistanis. No Part I clause was omitted.

Part I is where the money is. According to the Federal Board of Revenue's Tax Expenditure Report 2026, exemption from total income accounted for PKR 437,996 million of revenue foregone in fiscal year 2024-25, which is 75.6% of all income tax expenditure. Any addition to Part I therefore has a real fiscal weight, which is why Parliament has been reluctant to expand it in recent years.

The three additions in summary:

1. Clause 99C — a fresh exemption for registered private equity and venture capital funds, conditional on a 90% distribution test.
2. Clause 57(4) — eight organisations moved into or added to the list whose income from voluntary contributions, house property and Federal Government securities is exempt.
3. Clause 79 — the exemption for profit on debt on rupee accounts fed exclusively by foreign remittances now attaches to the account type rather than the identity document held by the depositor.

Each is examined separately below. If you advise non-resident clients, read this section together with our double taxation relief guide, because treaty relief and Second Schedule relief are frequently claimed in the alternative rather than cumulatively.

What Is Clause 99C and Who Can Actually Claim It?

Clause 99C of Part I of the Second Schedule to the Income Tax Ordinance, 2001 (as inserted by the Finance Act, 2026) exempts income derived by a private equity and venture capital fund registered under the Private Funds Regulations, 2015, provided the fund distributes at least 90% of its accounting income for the year, reduced by accumulated losses and unrealised capital gains, to its unit holders, certificate holders or shareholders.

The clause carries an anti-abuse proviso that practitioners must read carefully. The exemption is not available where the fund was established to acquire a publicly listed company whose status has not been converted to a private limited company upon acquisition. The proviso exists to stop the vehicle being used as a tax-free wrapper for take-private transactions that never actually go private.

Eligibility checklist for Clause 99C:

Clause 99C effectively succeeds the older venture capital relief. Clauses 152 and 153 of Part I had exempted profits of venture capital companies and funds only for the period from 1 July 2022 to 30 June 2025, and that window has now closed. Investors structuring funds should read this alongside our corporate tax planning guide for 2026.

Which Eight Organisations Were Added to Clause 57(4)?

Clause 57(4) of Part I of the Second Schedule exempts income from voluntary contributions, house property and investments in Federal Government securities derived by organisations named in its table. The Finance Act, 2026 added eight organisations to that table and replaced one existing entry.

The organisations added are:

1. Pakistan Red Crescent Society
2. Shaheen Foundation PAF
3. Dawat-e-Hadiya
4. Sindh Institute of Urology and Transplantation
5. Employees Social Security Institutions of Provincial Governments
6. Workers Welfare Fund Organizations of Provincial Governments
7. Make-A-Wish Foundation
8. Quaid-i-Azam Mazar Management Board

In addition, "National Endowment Scholarship for Talent (NEST)" was substituted with "Pakistan Education Endowment Fund".

The technically important consequence concerns two of those names. Dawat-e-Hadiya and the Sindh Institute of Urology and Transplantation were previously covered under Clause 66 of Part I, where exemption is conditional on satisfying the requirements of Section 100C of the Income Tax Ordinance, 2001. Their inclusion in Clause 57 means their exemption is now governed by Clause 57 instead, so they no longer need to meet the Section 100C conditions. For a non-profit finance officer, that is the difference between an annual compliance certificate exercise and none at all.

Provincial distinction matters here. The entries for Employees Social Security Institutions and Workers Welfare Fund Organizations are drafted generically to cover all four provinces rather than naming Punjab, Sindh, Khyber Pakhtunkhwa and Balochistan bodies individually. Anyone advising an NPO should also review our SECP annual return filing guide, since exempt status does not remove corporate filing obligations.

How Was the Clause 79 Exemption for Overseas Pakistanis Rewritten?

Clause 79 of Part I of the Second Schedule exempts profit on debt derived from a rupee account held with a scheduled bank in Pakistan where the deposits are made exclusively from foreign exchange remitted into that account. The Finance Act, 2026 changed who qualifies. Eligibility no longer depends on the depositor holding a Pakistan Origin Card, NICOP or CNIC; it now depends on the type of account maintained.

The reference to non-resident individuals holding POC, NICOP or CNIC has been replaced with a person maintaining a Non-Resident Rupee Value Account (NRVA) or a Non-Resident Rupee Business Value Account (NRBVA) under the scheme introduced by the State Bank of Pakistan.

Before and after:

The shift is administratively significant. A bank can verify an account category from its own core system instantly; it cannot verify a POC in the same way. Moving the test to the account type makes the exemption machine-checkable, which fits the direction of travel described in our FBR digital transformation analysis.

There is also a measurable revenue story behind the amendment. Revenue foregone under Clause 79 rose from PKR 198.61 million in fiscal year 2023-24 to PKR 3,180.68 million in fiscal year 2024-25, a sixteen-fold increase that almost certainly prompted the redrafting. Overseas clients weighing their options should also read our tax filer status guide.

What Changed in Part II — Reduction in Tax Rates?

Part II of the Second Schedule reduces tax rates below the First Schedule benchmark. The Finance Act, 2026 amended two clauses in Part II: Clause 5AA, which was broadened, and Clause 24D, where the reduced minimum tax rate was doubled and the category of eligible goods was rewritten. Neither clause was omitted.

Clause 5AA — profit on debt from Federal Government instruments. The clause prescribes a 10% deduction under Section 152(2) on profit on debt from conventional or Shariah-compliant instruments issued by the Federal Government under the Public Debt Act, 1944, where the investment is purchased through a qualifying offshore or foreign currency route, and the deduction is a final discharge. The Finance Act, 2026 substituted "individual" with "person" and replaced the reference to a foreign currency account with FCVA, FCBVA, NRVA and NRBVA. Corporate and AOP investors can now access the same 10% treatment previously confined to individuals.

Clause 24D — reduced minimum tax for the supply chain. This is the change most likely to cost real money.

The replacement list covers pharmaceutical products, fertiliser, cigarettes, sugar, locally manufactured mobile phones, fresh and frozen food in canned or packaged form, electronics, beverages and dairy products, pasta, cereals, biscuits, nuts, snacks and similar packaged foods, condiments and baking items in bottled or packaged form, skincare, cosmetics, haircare, oral care and baby care, cleaning agents such as laundry detergents, dishwashing soaps and floor cleaners, toilet paper, paper towels, facial tissues and napkins, and trash bags, aluminium foil, air fresheners and insect sprays.

Distributors and wholesalers should model the impact now. Our business tax guide for Pakistan explains how minimum tax interacts with normal tax computation, and the Master Sales Tax course covers the sales tax registration status condition that Clause 24D still requires.

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What Changed in Part IV — Exemption from Specific Provisions?

Part IV of the Second Schedule disapplies named sections of the Income Tax Ordinance, 2001 to defined persons or transactions. The Finance Act, 2026 made five changes here: one new clause (104B), three substitutions widening existing relief (47B, 111AB and 114A), and one threshold increase (115). Two Part IV clauses were also omitted, covered in the next section.

Clause 104B — the exporter super tax relief. Section 4C super tax no longer applies to a person whose export proceeds realised for the tax year represent more than 80% of total turnover for that tax year. Read together with the restructured super tax table, where the residual rate for persons other than banks, Fifth Schedule persons and fertiliser sellers is 8% on income exceeding PKR 500 million, Clause 104B is the most valuable single relief added in 2026 for export-led manufacturers.

Clause 47B — funds and schemes. Section 151A, which deals with tax deduction on gains from disposal of debt securities, has been added to the list of provisions disapplied to National Investment Unit Trust, collective investment schemes, approved pension funds, approved income payment plans, REIT schemes including SPVs, recognised provident funds, approved superannuation funds and approved gratuity funds. The amendment closes a mismatch: Clause 99 of Part I already exempted the income of these vehicles, yet Section 151A withholding still bit because Clause 47B had never named it.

Clauses 111AB and 114A — account-based widening. Both clauses previously applied only to non-resident individuals holding POC, NICOP or CNIC who maintained an FCVA or NRVA. Both now refer to persons maintaining FCVA, FCBVA, NRVA or NRBVA, with the existing condition on Pakistan-source income retained in Clause 114A.

Clause 115 — the trader threshold. The turnover ceiling for an individual trader to remain outside Section 153 as a prescribed person doubled from PKR 100 million to PKR 200 million, while the definition of "trader" in clause (28D) was left unchanged. Retailers near the old ceiling should re-examine their withholding agent status against our withholding tax handling guide.

Which Second Schedule Exemptions Were Withdrawn in 2026?

Two clauses in Part IV of the Second Schedule were omitted by the Finance Act, 2026: Clause 46A, which had disapplied Section 153(3) to manufacturers of iron and steel products, and Clause 57, which had exempted companies operating Trading Houses from Section 153 withholding. No Part I, Part II or Part III clause was withdrawn.

The Clause 46A omission illustrates a drafting principle worth teaching. The clause had become largely redundant because Section 153(3) already treats deducted tax as adjustable for manufacturer companies and listed companies. Withdrawal therefore changes the position only for non-corporate iron and steel manufacturers, who now sit in a minimum tax regime rather than an adjustable one. Sole proprietors and AOPs in that sector should recompute their expected liability immediately.

Withdrawals of this kind are consistent with the direction the government has committed to. Elimination of tax exemptions is one of the core objectives of Pakistan's USD 7 billion Extended Fund Facility with the International Monetary Fund, which is the structural reason the Second Schedule shrinks a little further most years. Businesses reviewing exposure should read our common tax mistakes for Pakistani businesses.

How Does the Section 7E Judgment Interact with the Second Schedule?

Section 7E of the Income Tax Ordinance, 2001, which taxed deemed rental income on immovable property, was struck down by the Federal Constitutional Court of Pakistan before the Finance Act, 2026 was passed. The Act then omitted Section 7E and its rate provision. Every Second Schedule clause that had granted a carve-out from Section 7E is consequentially spent.

The Federal Constitutional Court held on 7 May 2026 in C.P.L.A. 1442-K/2022 that Section 7E, introduced by the Finance Act, 2022, is unconstitutional. The short order recorded that Section 7E "is ultra vires the Constitution and is accordingly struck down, being void ab initio". Section 7E had imposed tax on deemed rental income of residents owning immovable property with a fair market value exceeding PKR 25 million, at 20% on 5% of fair market value, subject to exclusions.

What this means in the return:

The refund gap is the live issue. Claims must be pursued under the general refund machinery of the Ordinance, within limitation, and it is prudent to await the detailed judgment before revising returns. Property clients should read this with our capital gain tax guide for 2026 and our real estate tax guide.

How Much Do Second Schedule Exemptions Actually Cost Pakistan?

The Federal Board of Revenue quantifies the cost of every Second Schedule clause annually in its Tax Expenditure Report. For fiscal year 2024-25, total income tax expenditure was PKR 579,698 million, of which exemption from total income under Part I accounted for PKR 437,996 million. That single Part carries three-quarters of the entire income tax relief bill.

The FBR's own definition sets the frame. Its Tax Expenditure Report 2026 describes a tax expenditure as "a departure from the benchmark, a targeted policy preference that reduces the tax liability" of specific taxpayers, transactions or sectors.

Income tax expenditure by category, fiscal year 2024-25 (PKR million):

The largest individual clauses:

For context, total federal tax expenditure across all three taxes was PKR 2,352.81 billion, equal to 2.07% of GDP and 20.04% of FBR collection, with sales tax at PKR 1,273.98 billion and customs duty at PKR 499.14 billion. Anyone preparing for professional papers will find our Income Tax Ordinance 2001 compliance guide a useful companion to these figures.

Are You Reading the Right Second Schedule? The SRO 1495 Trap

Pakistan's income tax law contains two documents called the "Second Schedule", and in September 2026 both were in the news at once. The Second Schedule to the Income Tax Ordinance, 2001 contains exemptions. The Second Schedule to the Income Tax Rules, 2002 contains return forms. They are unrelated, and conflating them produces confident, wrong advice.

On 3 September 2026 the FBR issued SRO 1495(I)/2026, amending the Income Tax Rules, 2002 by adding Parts II-ZE, II-ZF, II-ZG and II-ZH to the Second Schedule after Part II-ZD, ahead of the 30 September 2026 filing deadline. Nothing in that SRO grants or removes an exemption. It changes return form parts.

The practical warning: when an AI assistant, a WhatsApp forward or a hurried colleague tells you "the Second Schedule changed in September 2026", ask which one. Practitioners preparing filings should work from our tax year 2026 return documents checklist rather than social media summaries.

How Do You Claim a Second Schedule Exemption in IRIS 2.0?

Claiming an exemption is a disclosure exercise, not an omission exercise. Exempt income must still be reported in the return of income, entered in the exempt column rather than left out, and supported by evidence that the clause conditions were met during the tax year. Silent omission is the most common cause of a Section 122 amendment notice.

Step-by-step process:

1. Identify the correct Part and clause. Confirm whether relief sits in Part I, II, III or IV, because the return field differs for each. Use the FBR's consolidated Ordinance rather than a secondary summary.
2. Confirm the amending Act. Write the citation in full form, for example "Clause 104B of Part IV of the Second Schedule to the Income Tax Ordinance, 2001 (as inserted by the Finance Act, 2026)".
3. Test every condition for the whole tax year. Distribution percentages, registration status and turnover thresholds are annual tests, not point-in-time tests.
4. Log in to IRIS 2.0 and open the return for the relevant tax year. Our IRIS 2.0 login and filing guide covers the interface.
5. Enter the amount in the exempt or fixed/final tax column, not in the normal-tax column and not as a blank.
6. Reconcile with the wealth statement where the taxpayer is an individual, since exempt income still increases net assets. See our wealth statement guide.
7. Where a Part IV clause switches off a withholding section, obtain the exemption certificate from the Commissioner if the section requires one, and give a copy to every withholding agent.
8. Retain the evidence file for the statutory record retention period, indexed by clause number.

A note on certificates: the Finance Act, 2026 authorised the Commissioner to issue an exemption certificate for the whole tax year to collective investment schemes and REIT schemes including SPVs that distributed 90% or more of accounting income in accordance with Clause 99 of Part I for the immediately preceding tax year, and to approved non-profit organisations under Section 2(36), which removes the mid-year renewal problem those entities faced. Practical filing drills for exactly this workflow form part of the Advance Taxation and Litigation programme.

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Who Gains and Who Loses from the 2026 Amendments?

The Finance Act, 2026 Second Schedule changes redistribute relief rather than expand it. Exporters, fund vehicles, overseas account holders and mid-sized traders gain. Non-corporate iron and steel manufacturers, Trading House companies and the packaged-goods supply chain lose. Salaried individuals and pensioners are unaffected by the Second Schedule changes specifically.

Two points of nuance. First, the exporter gain in Clause 104B is partially offset elsewhere in the Act, because the tax deduction rate on realisation of export proceeds under Section 154 rose from 1% to 1.25%. Second, the Clause 115 gain removes withholding agent status but does not remove the obligation to file, a distinction covered in our guide on who must file an income tax return.

Common Mistakes Practitioners Make with Second Schedule Claims

Second Schedule errors cluster into a small number of repeat patterns. Recognising them is worth more than memorising clause numbers, because the FBR's compliance systems now cross-match declarations automatically and a wrongly classified exemption surfaces quickly.

The seven recurring errors:

On the last point, the Finance Act, 2026 tightened the non-filer position materially. The Tenth Schedule exclusion for capital gains on securities under Section 37A was omitted, so tax collected under Section 37A increases by 100% for persons not on the Active Taxpayers List, while the separate higher-rate category for late filers under Rule 1A was abolished. Read our Active Taxpayers List explainer alongside our non-filer tax rates guide before finalising any return.

What Should You Do Before 30 September 2026?

The statutory deadline for filing income tax returns for tax year 2026 is 30 September 2026. The Finance Act, 2026 changes apply from tax year 2027, so the filing due this month runs on the pre-amendment law while your planning for the current year must run on the new law. Both exercises need to happen in parallel.

Action checklist:

1. File the tax year 2026 return on the law as it stood for that year. Do not apply Clause 99C, Clause 104B or the raised Clause 115 threshold to tax year 2026.
2. Check the return form parts. Confirm your software or IRIS session reflects the parts added by SRO 1495(I)/2026.
3. Recompute tax year 2027 advance tax. Exporters should model the Clause 104B super tax relief against the higher Section 154 rate; distributors should model Clause 24D at 0.5%.
4. Reassess withholding agent status. Traders between PKR 100 million and PKR 200 million turnover exit the Section 153 prescribed person net from tax year 2027.
5. Apply for whole-year exemption certificates where you operate a collective investment scheme, REIT or approved NPO.
6. Review Section 7E positions. Identify amounts paid under the struck-down provision and preserve refund claims within limitation.
7. Verify ATL status for every entity before filing, given the withdrawal of the Section 37A carve-out.
8. Update engagement letters and computation templates with the new clause citations.

Deadlines shift in Pakistan more often than practitioners would like, and our Pakistan tax calendar is updated as extensions are notified. For step-by-step return preparation, see our guide on filing an income tax return in Pakistan.

Expert Tips, Best Practices and What Comes Next

Three habits separate practitioners who handle the Second Schedule well from those who do not: they cite in full, they test conditions annually, and they read the Part heading before the clause text. Adopting all three costs nothing and prevents most exemption disputes before they start.

Best practices worth institutionalising:

On direction of travel, three signals are worth tracking. The Finance Act, 2026 established a National Faceless Centre for algorithm-based audit, assessment and appeal, with officer identity kept confidential, which means exemption claims will increasingly be reviewed by systems rather than by officers who can be persuaded informally. Banking companies and Electronic Money Institutions must now upload specified financial information to the Central Data Hub for account holders whose aggregate deposits or withdrawals exceed PKR 100 million in a reporting period. And Pakistan's tax expenditure at 2.07% of GDP already sits below the comparable-economy peer average of 2.31%, so the room for new exemptions is narrow.

Professionals who want to work systematically through this material will find the Certified Tax Advisor course covers Parts I to IV in sequence, while the AI-Driven CFO Masterclass addresses the automated compliance environment these amendments assume. Students weighing career routes should read our CA vs ACCA vs tax consultant comparison.

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Why Choose ICT for Second Schedule and Pakistan Taxation Training?

The Institute of Corporate and Taxation (ICT) teaches Pakistani tax law from the statute outward rather than from summary notes inward, which is the only method that survives contact with a real assessment. Our Second Schedule teaching is built clause by clause, Part by Part, with every citation given in full form including the amending Finance Act, because that is the standard a Commissioner, an Appellate Tribunal Inland Revenue bench and a professional examiner all apply.

What distinguishes the approach at ICT:

Our taxation portfolio runs from Pakistani federal law through international specialisations. The Certified Tax Advisor programme builds the core, Advance Taxation and Litigation adds appellate practice, and Master Sales Tax covers the indirect side that most exemption disputes eventually touch. Professionals targeting overseas markets can add UK Taxation, USA Taxation, UAE Taxation or Saudi Taxation.

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If you are still deciding, our complete guide to choosing a taxation institute in Islamabad sets out the questions worth asking any provider, including ours.

Conclusion

The Second Schedule to the Income Tax Ordinance, 2001 changed in 12 identifiable ways through the Finance Act, 2026. Two new clauses were added, 99C for private equity and venture capital funds and 104B for high-volume exporters. Eight organisations joined Clause 57(4). Three clauses shifted from an identity-based test to an account-based test for non-residents. The trader threshold in Clause 115 doubled to PKR 200 million. Minimum tax under Clause 24D doubled to 0.5%. Two Part IV clauses were withdrawn. Section 7E, and every carve-out that referenced it, is gone.

The single recommendation that matters most: cite every clause in full, with its Part and its amending Finance Act, and test its conditions for the whole tax year rather than at a point in time. Nearly every exemption dispute in Pakistan traces back to a failure in one of those two disciplines.

Your logical next step is to run the checklist in the section above against your own or your clients' position before 30 September 2026, then rebuild your tax year 2027 projections on the amended clauses. If you want to work through the Second Schedule systematically, with live IRIS practice and current-year material, explore ICT's taxation courses or speak to an advisor directly.

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