Pensions are an important source of income for retired individuals, providing financial security during their golden years. However, one of the concerns for many retirees is whether their pension income is taxable or exempt from income tax. So the question is Pension Exempted from Income Tax in Pakistan? The answer is in Pakistan, pensions are not completely exempt from income tax, but there are certain exemptions and deductions available based on the type of pension received.
Gratuity and Commuted Value of Pension:
Gratuity is a lump sum payment made to an employee by an employer as a form of gratitude for their services. Commuted value of pension, on the other hand, is a lump sum amount paid to an employee in lieu of a portion of their future pension payments. In Pakistan, gratuity and commuted value of pension are exempt from income tax up to a certain limit. For gratuity, the exemption limit is 50% of the individual’s average salary of the last ten years of service, while for the commuted value of pension, the exemption limit is 50% of the pension.
Pensions Under EOBI:
Employees’ Old Age Benefits Institution (EOBI) is a social insurance scheme in Pakistan that provides pensions and other benefits to employees who have completed their retirement age. For pensions received under EOBI, there is a fixed tax credit available. This tax credit is equal to 5% of the pension received, subject to a maximum of PKR 75,000 per annum. This tax credit reduces the taxable income and therefore reduces the tax liability for the pensioners.
Other Pensions:
For pensions received from other sources, such as private pensions, the full amount of the pension is taxable as per the individual’s tax bracket. The pensioners are required to report their pension income in their tax returns and pay income tax accordingly. However, they can also claim deductions for medical expenses and charitable donations as per the provisions of the Income Tax Ordinance, 2001.
Conclusion:
In conclusion, pensions are not completely exempt from income tax in Pakistan, but there are certain exemptions and deductions available based on the type of pension received. Gratuity and commuted value of pension are exempt from income tax up to a certain limit, while for pensions received under EOBI, there is a fixed tax credit available. For other pensions, the full amount is taxable as per the individual’s tax bracket. It is important for pensioners to understand the tax laws and exemptions related to their pension income to minimize their tax liability and plan their finances accordingly. It is also recommended to consult a tax expert for personalized advice based on their individual circumstances.