The Income Tax Ordinance, 2001 allows a tax credit for people who contribute to a pension fund during the tax year 2025-26. Section 63 of the updated law explains how this benefit works for salary earners.
An eligible person earning income under the head “Salary” or “Business” can claim a tax credit for contributions made to an approved pension fund under the Voluntary Pension System Rules, 2005.
The tax credit is calculated with the formula:
(A/B) × C
• A = the tax assessed before any credits.
• B = the person’s taxable income.
• C = the lesser of:
o the actual contribution to the pension fund during the year, or
o 20% of taxable income for that year.
For individuals who join a pension fund at the age of 41 or above (during the initial ten years from July 1, 2006), an extra 2% contribution per year of age beyond 40 was allowed. However, limits apply to ensure contributions do not exceed a certain percentage of taxable income.
It is important to note that moving balances from other approved pension or savings schemes into a personal pension account does not qualify for this tax credit.
This provision helps salary earners save for retirement while receiving a tax benefit at the same time.
(This article is for general information only. It should not be considered tax or legal advice. For personal guidance on pension contributions and tax credits, please consult a qualified tax professional or the relevant authority.)