PENSION INCOME ABOVE PKR 10 MILLION? HERE’S YOUR COMPLETE TAX GUIDE

Overview:

The Pakistani government made significant changes to the taxation of pensions and annuities during the 2025–2026 budget cycle. According to the new regulations, high-value pension income for people under 70 is taxable if it surpasses a specific amount. The Finance Act of 2025 formalized changes to the Federal Board of Revenue’s (FBR) jurisdiction under the Income Tax Ordinance, 2001.

By including wealthier retirees in the tax system, the reform seeks to increase the tax base while maintaining relief for the majority of retirees. This is a big change for retirees, financial advisors, and pension fund managers because high-paying pensions are no longer always exempt.

Who Is Affected: Qualifications

Only pension or annuity payments from previous employers or authorized pension or annuity plans are subject to the tax under the new system. According to the FBR guidelines, which are detailed in the Finance Act 2025 commentary, the eligibility and threshold are:

• A pension (or commuted pension/annuity) that a person under 70 years old receives during a tax year.
• Pension income exceeds PKR 10 million annually during that tax year.
• Regardless of age, an annual pension up to PKR 10 million is completely exempt (for retirement pensions).
• Even if their annual pension exceeds PKR 10 million, pensioners who are 70 years of age or older are completely exempt.

There are some significant exclusions and disclaimers. For example, pension income may be subject to regular progressive slab rates rather than the recently implemented flat-tax system if a pensioner continues to work for their previous employer (or an affiliated company).

Additionally, pension income from non-government or non-approved pension plans, or voluntary pension schemes (VPS), is classified as “other sources of income” and may be subject to various tax regulations.

The New Framework for Calculating Taxes

The Finance Act 2025 amendments state that the first PKR 10 million received annually by a pensioner under 70 is exempt (0% tax). A flat final tax of 5% is applied to the excess amount over PKR 10 million if the annual pension exceeds that threshold.

Additionally, when paying a pension exceeding PKR 10 million to a pensioner under the age of 70, the payer (employer, pension-paying institution, or pension fund manager) must withhold tax at source in accordance with the amended provision, specifically the addition of sub-section 149(1A) to the Income Tax Ordinance.

Nevertheless, the drafting seems to contain some ambiguity. Instead of the unique 5% final tax rate specified for pension-income excess, the withholding provision refers to “rates provided in Division I of Part I of the First Schedule,” which typically houses the progressive slab rates. (busyassociates.com) Tax experts are concerned that withholding might unintentionally be made at higher progressive rates, necessitating pensioners to later claim refunds. Many anticipate that the FBR will address this issue through a circular or amendment.

For instance, how taxes are calculated

Assume a 65-year-old pensioner gets PKR 15,000,000 a year.

• The first PKR 10,000,000 is tax-free.
• The excess amount is PKR 5,000,000 (15,000,000 minus 10,000,000).
• Excess tax at 5% → 5,000,000 × 5% = PKR 250,000

Therefore, PKR 250,000 would be the pensioner’s tax obligation for that year. If there is no other income and the pension is the only source subject to taxation under this rule, then that is their final tax on pension income.

The pensioner’s liability is settled at the time of payment if the pension-paying organization withholds that sum at the source. The pensioner may need to submit a return in order to receive a refund if withholding was done incorrectly at higher slab rates.

Under the new system, there would be no tax if the same 65-year-old had received exactly PKR 10,000,000, or less, in pension for the year.

According to the exemption for senior citizens (70+), no tax would be applied if the pensioner was 72 years old, even if their pension exceeded PKR 10 million.

Impact on Finances: What This Means for Pensioners

The impact will be minimal for many retirees, particularly those with modest pensions. For the majority, the exemption up to PKR 10 million annually will maintain tax-free status. However, this change adds an ongoing expense for high-earning pensioners, especially those with generous pension plans.

Additionally, tax liability may lower net pension cash flow, which may have an impact on some people’s investment, budgeting, and retirement planning choices. Furthermore, unless there are exemptions or exceptions, the tax is “final” and does not mix with slab-based taxation of other forms of income.

Additionally, the withholding mechanism transfers the burden of compliance to pension-paying organizations, which may result in issues with timing or refunds if withholding is applied incorrectly.

In general, the modification brings Pakistan’s tax system closer to a progressive model, even for pensions, based on the idea that higher benefits ought to contribute to the tax burden.

Deadlines and Requirements for Compliance

As part of the Finance Act 2025, the new regulations go into effect for the 2025–2026 tax year.

When payments to people under 70 exceed the exemption threshold, pension-paying institutions must withhold the tax at the source.

Pensioners who are impacted should confirm that the right amount has been deducted. Pensioners may need to file returns to request refunds under the special pension-income regime (5% on excess) if withholding is at higher slab rates because of ambiguity. Before assuming slab rates apply, a number of tax advisories advise waiting for an official explanation from FBR.

Techniques for Tax Optimization and Planning

These actions can aid in impact management for retirees or their financial advisors:

• Calculate your annual pension income by keeping track of the total pension payments anticipated for a fiscal year to determine whether you will surpass the PKR 10 million threshold.
• Work with the pension-paying organization to arrange for the application of 5% withholding on excess instead of slab-rate withholding.
• Carefully consider the timing and type of pension receipts when planning withdrawals or commutations, as commuted pensions or annuities under approved schemes may have different tax treatment.
• Diversify your sources of income. If your pension income is high, using savings accounts, interest-bearing accounts, or other investment vehicles may be tax-efficient options. However, you should always take your overall tax liability into account under other headings.
• Keep accurate records: pension-income statements, annual pension receipts, and withholding tax certificates are necessary for filing and any refund claims.

Common Questions and Myths

Many question if all pensioners are subject to this tax. The response is no. You are still exempt if your yearly pension is less than PKR 10 million or if you are 70 years of age or older. Pensioners with low and medium incomes are unaffected.

Multiple pensions or pensions plus salary are another area of confusion. Pension income may be combined with salary and subject to regular slab rates rather than the flat 5% final tax scheme in situations where a pensioner is reemployed with the same employer (or related entity).

This has also been misconstrued by some as a “wealth tax” on total pension assets. The threshold refers to annual receipts rather than total assets because the rule only applies to pension income received in a tax year, not to the total accumulated pension fund or asset value.
Lastly, even though section 149(1A) of the law requires withholding, there is a coding inconsistency that refers to slab rates instead of the special 5% rate—a peculiarity that many tax experts expect FBR to explain. Pensioners should exercise caution until then.

Conclusion and What You Should Do Next

If you receive pension in Pakistan and are below 70 years old, run the numbers for the coming tax year. If total pension payments will exceed PKR 10 million, expect a 5% tax on the excess. Reach out to your pension-paying institution to confirm withholding practices. Hold onto all pension payment records and withholding certificates. If withholding is excessive (e.g., at slab rates), consider filing for refund. For further clarity or official documentation, consult the text of the Finance Act 2025 and the amended sections of the Income Tax Ordinance 2001 (particularly section 149(1A) and the proviso to Division I, Part I of the First Schedule).

In short: this change brings a slice of retirement incomes into the tax net — but only for high pension earners under 70; for most retirees, exemption remains. Plan accordingly.