Eligible taxpayers can claim a tax credit on qualifying pension fund contributions under Section 63 of the Income Tax Ordinance, 2001.
The Federal Board of Revenue (FBR) has allowed a tax credit for contributions made to an approved pension fund for Tax Year 2027, subject to the conditions and limits prescribed under the Income Tax Ordinance, 2001.
The FBR has issued the Income Tax Ordinance, 2001, updated up to June 30, 2026, which contains provisions governing tax credits for contributions to approved pension funds under Section 63.
Under Section 63, an eligible person earning income chargeable to tax under the head “Salary” or “Income from Business” is entitled to a tax credit for a tax year in respect of contributions or premiums paid during that year to an approved pension fund under the Voluntary Pension System Rules, 2005.
How pension fund tax credit is calculated
The amount of the tax credit is determined using the following formula:
(A/B) × C
Under the formula:
• A represents the amount of tax assessed on the individual for the tax year before allowing any tax credit under the relevant provisions.
• B represents the individual’s taxable income for the tax year.
• C represents the lesser of the total contribution or premium paid during the year, or 20 per cent of the eligible person’s taxable income for the relevant tax year.
This means the tax credit is calculated based on the qualifying pension contribution within the limits prescribed by the law.
Additional pension contribution provision
Section 63 also contains specific provisions for individuals who joined a pension fund at the age of 41 or above during the first 10 years beginning July 1, 2006.
Under the provision, such an eligible person was allowed an additional contribution of 2 per cent per annum for each year of age exceeding 40, subject to the limits specified in the law.
The provision stated that the total contribution allowed to such an individual could not exceed 50 per cent of the total taxable income of the preceding year.
A further proviso provided that the additional contribution of 2 per cent per annum for each year of age exceeding 40 was allowed up to June 30, 2019, subject to the condition that the total contribution allowed could not exceed 30 per cent of the total taxable income of the preceding year.
Transfer of existing pension balances excluded
The FBR’s updated ordinance also clarifies that the transfer of existing balances by members of an approved employment pension or annuity scheme or an approved occupational savings scheme into individual pension accounts maintained with one or more pension fund managers does not qualify for a tax credit.
Accordingly, the tax credit is linked to qualifying contributions or premiums actually paid during the relevant tax year rather than the transfer of existing pension balances.
For Tax Year 2027, taxpayers seeking to claim the credit must therefore meet the eligibility requirements and remain within the calculation formula and contribution limits prescribed under Section 63 of the Income Tax Ordinance, 2001.