Karachi, June 11, 2025 – In a significant fiscal development, the federal government has proposed an income tax on pension income exceeding Rs10 million annually as part of the Finance Bill, 2025.
The move is aimed at enhancing revenue collection from high-income individuals while maintaining relief for average pensioners.
Under the new provision introduced in the Income Tax Ordinance, 2001, any person receiving pension, annuity, or a commuted pension from a former employer, and whose total pension income surpasses Rs10 million in a tax year, will now be subject to a 5% income tax on the amount exceeding that threshold. This provision applies to pensioners under the age of 70 years.
According to the bill, tax authorities have also mandated that the person or institution responsible for paying the pension income must deduct the tax at source from any amount above the Rs10 million mark. This deduction is to be made in accordance with the rates outlined in Division I of Part I of the First Schedule of the Ordinance. Moreover, the tax deducted will consider adjustments for amounts previously withheld under other heads, including credits allowed under Sections 61 and 63 of the Ordinance.
In cases where discrepancies arise—such as excess deductions, deficiencies, or failures to deduct during the year—taxpayers and employers are required to furnish documentary proof to claim or reconcile such adjustments. The aim is to ensure transparent accounting and proper compliance with the updated tax provisions.
As per the new tax card, individuals receiving pension income below Rs10 million will continue to enjoy a 0% tax rate, ensuring protection for the majority of retirees. However, for those with high-value pension packages, the 5% tax on the surplus amount reflects the government’s broader intent to target untaxed or undertaxed wealth, especially where retirement benefits are substantial.
This measure is part of the government’s wider strategy in the FY2025-26 budget to broaden the income tax base without impacting lower- and middle-income earners. The imposition of tax on high pension income is expected to contribute modestly to overall revenue, while reinforcing the principle of progressive taxation.