Karachi, June 30, 2025 – The Finance Act, 2025 has introduced a significant amendment by bringing pension income under the tax net, imposing both tax and surcharge on high-value pension receipts starting from the fiscal year 2025-26.
Under this change, a new sub-section 1A has been added to Section 149 of the Income Tax Ordinance, 2001. The provision mandates that any organization or person responsible for paying pension to a former employee—who is below 70 years of age and receives pension income exceeding Rs10 million in a tax year—must deduct income tax at the time of payment. The tax deduction applies only on the amount exceeding Rs10 million, and the applicable rate will be as per Division I of Part I of the First Schedule of the Ordinance. A surcharge under Section 4AB will also be applicable after adjustments for other deductions or tax credits under Sections 61 and 63.
For clarity, the tax rate structure is as follows:
• If pension income is up to Rs10 million, no tax shall be charged (0%).
• If pension income exceeds Rs10 million, a 5% tax shall be levied on the amount exceeding this threshold.
This measure aims to ensure equity in taxation by targeting exceptionally high pension income while leaving regular or moderate pensioners unaffected. The Finance Act also allows adjustment of tax withheld from former employees under other heads, along with consideration for any prior excess or short deductions.
In addition, Section 12 of the Income Tax Ordinance, 2001 has been revised to include sub-section 2A, specifically addressing pension income. According to this clause:
• If an individual over 70 years of age receives pension income, no tax will apply regardless of amount.
• If the pensioner continues employment with the former employer or a related entity, the pension income will be taxed under regular income slabs.
These changes are part of a broader tax reform initiative aimed at widening the tax base and ensuring high-income retirees contribute proportionately to national revenue, without burdening those with modest retirement income.