Karachi, September 13, 2024 – The Federal Board of Revenue (FBR) has announced the tax credit benefits available for contributions made to approved pension funds during the tax year 2024-25. The FBR, in its updated Income Tax Ordinance, 2001 (valid as of June 30, 2024), highlighted the details under Section 63, which governs contributions to pension funds.
Eligibility and Scope:
As per Section 63, individuals classified as “eligible persons” under sub-section (19A) of Section 2 of the Ordinance, and who derive income chargeable under the heads “Salary” or “Income from Business,” are entitled to a tax credit. This tax credit applies to contributions made during the tax year to an approved pension fund under the Voluntary Pension System Rules, 2005.
The goal of the tax credit is to incentivize long-term savings through pension funds by offering tax relief on contributions made by individuals, helping them secure financial stability for retirement.
How the Tax Credit is Calculated:
The FBR has provided a specific formula for calculating the tax credit:
(A/B) x C, where:
• A represents the amount of tax assessed before any tax credit allowances.
• B is the taxable income of the person for the relevant tax year.
• C is the lesser of:
o The total contribution made to the pension fund during the year; or
o 20% of the individual’s taxable income for the year.
Additionally, individuals who joined the pension fund at or after the age of 41 (within the first 10 years starting from July 1, 2006) are eligible for an extra 2% contribution per year, exceeding the age of 40. However, the total contribution cannot exceed 50% of the taxable income of the preceding year. It is also noted that this additional contribution provision expired on June 30, 2019, limiting the allowance to 30% of the total taxable income of the preceding year thereafter.
Limitations:
The FBR clarified that any transfer of existing balances from approved employment pension schemes, annuity schemes, or occupational saving schemes to individual pension accounts managed by pension fund managers will not qualify for a tax credit under this section.
This initiative is designed to encourage individuals to build personal savings for retirement while enjoying tax relief, thereby promoting financial security in later years.
The FBR continues to refine its tax regulations to encourage savings and investments in long-term financial instruments such as pension funds, providing individuals with incentives to plan for their future.
