Islamabad, August 2, 2025 – The Federal Board of Revenue (FBR) has announced that pension income will now be taxable under the new rules introduced in the Finance Act, 2025. These changes apply from the tax year 2025-26 and are explained in Income Tax Circular No. 1 of 2025-26, issued by the FBR.
Earlier, pension payments from former employers were exempt from tax under clauses (8) and sub-clause (i) of clause (9) of the Income Tax Ordinance, 2001. However, these clauses have now been removed, making such pension income chargeable to tax.
According to Section 12(2)(f) of the Ordinance, if a person under the age of 70 receives pension income exceeding Rs10 million per year, it will be subject to a final tax of 5%. However, if the pensioner is 70 years or older, or if the annual pension amount is less than Rs10 million, no tax will be charged.
If a person is receiving a pension but still works for the same employer or a related company, the income will be taxed at normal slab rates, as per Division I of Part I of the First Schedule of the Ordinance. In such cases, the employer is responsible for deducting tax under Section 149, and also collecting a surcharge at 9% under Section 4AB if applicable.
Meanwhile, private pensions managed by Pension Fund Managers under the Voluntary Pension Scheme Rules 2005, and other pensions not paid by a former employer, will continue to be taxed under Section 39 of the Ordinance.
However, certain pension-related payments will still remain exempt. These include commuted pensions, gratuity, and 50% of the available balance in a pension account, provided specific conditions are met. These exemptions are preserved under clauses in Part I of the Second Schedule of the Ordinance.
With this new framework, the FBR aims to bring clarity and consistency in the taxation of pension income, ensuring fair tax contribution while protecting low-income and old-age pensioners. The FBR has urged taxpayers and employers to review these changes and comply with the new tax obligations starting this financial year.