Is army, government and private-company pension all taxed the same way now?

What does the law say?

The monthly pension of a retired soldier, civil servant or bank officer is now taxed under the same rule. Section 12(2)(f) of the Income Tax Ordinance, 2001 treats “any pension or annuity” as salary, and section 12(2A), inserted by the Finance Act, 2025, sets how that pension is charged. It draws no line between the Armed Forces, government and a private employer. It speaks only of “the amount received by an individual from a former employer”.

Under section 12(2A)(i), pension is charged as a final tax at the rates in the proviso to clause (2) of Division I of Part I of the First Schedule, and an individual who has attained the age of seventy years is not charged to tax on pension income. For tax year 2027 (1 July 2026 to 30 June 2027) the table is:

Amount of pension received	Rate
Does not exceed Rs. 10 million	0% of the amount
Exceeds Rs. 10 million	5% of the amount exceeding Rs. 10 million

Section 12(2A)(ii) adds one exception that also applies to every sector: if the pensioner “continues to work for former employer or its associate”, the pension is taxed at the ordinary rates in clause (1) or (2) of Division I.

What changed in 2025?

Until the Finance Act, 2025, armed forces and government pension had its own exemption. Clause (9) of Part I of the Second Schedule had two sub-clauses. Sub-clause (i) exempted pension “received in respect of services rendered by a member of the Armed Forces of Pakistan or Federal Government or a Provincial Government”. Clause (8) separately exempted pension from any former employer to a citizen of Pakistan.

Section 10 of the Finance Act, 2025 provides that “clause (8) and sub-clause (i) of clause (9) shall be omitted”. Both general pension exemptions ended together, and section 12(2A) took their place for all former employers.

What survives is sub-clause (ii) of clause (9): pension “granted under the relevant rules to the families and dependents of public servants or members of the Armed Forces of Pakistan who die during service”. That is a family pension for deaths in service, not a retirement pension.

What about injury and invalid pensions?

These lost their separate exemptions much earlier. The footnotes to Part I of the Second Schedule record that the Finance Act, 2006 omitted:

• clause (10), pension granted to a public servant for injuries received in the performance of duties;
• clause (11), pension granted to a public servant invalidated from service on account of bodily disability;
• clause (14), pension granted to Armed Forces personnel for injuries received in the performance of their duties;
• clause (15), pension granted to Armed Forces personnel invalidated from service on account of bodily disability attributable to, or aggravated by, such service.

No clause in the current Part I replaces them for the pensioner personally, so such a pension falls under section 12(2A) with every other pension.

Where do real differences remain?

The monthly pension is treated alike, but some lump sums paid at retirement are not:

Payment	Armed Forces and government	Private employer
Commutation of pension	Clause (12): exempt if received from Government	Exempt under clause (12) only under a pension scheme approved by the Board for that clause; otherwise clause (13) limits
Gratuity or commutation under clause (13)	Sub-clause (i): the amount receivable under the service rules (also covers Local Government and statutory bodies)	Sub-clauses (ii) to (iv): approved gratuity fund, up to Rs. 300,000 under a Board-approved scheme, or the lesser of 50% or Rs. 75,000
Leave encashment preparatory to retirement	Clause (19): exempt for the Armed Forces and Federal or Provincial Government employees	Not covered by clause (19)

Worked example (illustrative figures)

Four people retire and no longer work for their former employers. The pension amounts are invented; the rates are the tax year 2027 pension table.

Retiree	Former employer	Pension in tax year 2027	Tax
Subedar (retd) Ghulam Abbas, Jhelum, age 58	Pakistan Army	Rs. 1,440,000	Rs. 0
Shahida, Peshawar, age 62	Provincial Government	Rs. 2,160,000	Rs. 0
Arif, Karachi, age 63	A private bank	Rs. 4,500,000	Rs. 0
Waseem, Lahore, age 65	A listed company	Rs. 12,500,000	Rs. 125,000

Waseem’s figure:

1. Amount above Rs. 10 million: 12,500,000 - 10,000,000 = Rs. 2,500,000
2. Tax at 5%: 2,500,000 x 5% = Rs. 125,000

If Waseem’s pension had come from the Army or a provincial government instead, the calculation would be the same. If he were seventy or older, section 12(2A)(i) would charge nothing.

Common mistakes

• Treating army or government pension as exempt under clause (9). Sub-clause (i) of clause (9) was omitted by the Finance Act, 2025. Only sub-clause (ii), family pension after death in service, remains.
• Relying on the old injury or invalid pension clauses. Clauses (10), (11), (14) and (15) were omitted in 2006.
• Assuming all retirement benefits are now treated alike. Commutation, gratuity and leave encashment still depend on who the employer was, under clauses (12), (13) and (19).

What to check in the official text

Read section 12(2) and (2A) of the Income Tax Ordinance, 2001 as amended to 30 June 2026, and the proviso to clause (2) of Division I of Part I of the First Schedule for the pension table. In Part I of the Second Schedule, read clause (9) with its footnotes, the footnotes recording the omitted clauses (10), (11), (14) and (15), and clauses (12), (13) and (19). Section 10 of the Finance Act, 2025 is the amending text. Service pension rules of the Armed Forces or any government are not part of this corpus.