Is my pension taxable in Pakistan after the Finance Act 2025 changes, and what applies in tax year 2027?

What does the law say?

Pension is income under the head “Salary”, and since the Finance Act 2025 it is no longer exempt by default. Section 12(2)(f) of the Income Tax Ordinance lists “any pension or annuity, or any supplement to a pension or annuity” as part of salary. What changed is the exemption that used to sit on top of that rule.

Before 1 July 2025, two clauses in Part I of the Second Schedule kept most pensions out of tax:

• Clause (8) exempted any pension received by a citizen of Pakistan from a former employer, unless the person continued to work for that employer or its associate.
• Clause (9)(i) exempted pension for service in the Armed Forces of Pakistan or with the Federal or a Provincial Government.

Section 10 of the Finance Act 2025, in its amendments to the Second Schedule, says “clause (8) and sub-clause (i) of clause (9) shall be omitted”. The footnotes in the consolidated Ordinance record both omissions and reproduce the old wording.

In their place, the same Finance Act inserted section 12(2A) and a pension table as a proviso to clause (2) of Division I of Part I of the First Schedule. That is why headlines said “pension is now taxable” while most pensioners saw no deduction at all.

What rates apply to pension in tax year 2027?

The Ordinance as amended to 30 June 2026 keeps the Finance Act 2025 rule, so these rates govern tax year 2027 (1 July 2026 to 30 June 2027). The proviso states that for “pension received by an individual from a former employer in a tax year”, the rate is:

Pension received in the tax year	Rate of tax
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)(i) says pension “shall be charged to tax as a final tax” at these rates. It also says an individual who has attained the age of seventy years “shall not be charged to tax on pension income”.

How does it work in practice?

For most retirees the result is the same as before: no tax on the pension itself. A retired clerk, teacher or army havaldar receiving a pension well below Rs. 10 million a year falls in the 0% row.

Two groups are affected differently:

1. Pensioners under 70 receiving more than Rs. 10 million a year. Only the part above Rs. 10 million is taxed, at 5%. Section 149(1A) requires the person paying the pension to deduct tax on the amount over Rs. 10 million at the time of payment.
2. Pensioners who keep working for their former employer or its associate. Section 12(2A)(ii) takes their pension out of the pension table and charges it at the ordinary slab rates in clause (1) or (2) of Division I.

Worked example (illustrative figures)

Mrs. Rukhsana, a retired schoolteacher in Multan, receives a pension of Rs. 95,000 a month.

• Annual pension: Rs. 95,000 x 12 = Rs. 1,140,000
• This does not exceed Rs. 10 million, so row 1 of the pension table applies.
• Tax: 0% of Rs. 1,140,000 = Rs. 0

Mr. Shahid, a retired senior officer in Islamabad, aged 64, receives Rs. 950,000 a month.

• Annual pension: Rs. 950,000 x 12 = Rs. 11,400,000
• Amount exceeding Rs. 10 million: Rs. 11,400,000 - Rs. 10,000,000 = Rs. 1,400,000
• Tax: 5% of Rs. 1,400,000 = Rs. 70,000

The first Rs. 10 million of his pension carries no tax.

What if my situation is different?

What if I am 70 or older? Section 12(2A)(i) says an individual who has attained seventy “shall not be charged to tax on pension income”, and section 149(1A) limits the deduction duty to pensioners below seventy.

What if I receive a family pension after a public servant died in service? Clause (9)(ii) of the Second Schedule was not omitted. It still exempts pension granted under the relevant rules to the families and dependants of public servants or members of the Armed Forces who die during service.

What if I commuted part of my pension? Clause (12) of Part I of the Second Schedule still exempts “any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Board”. That lump sum is a different question from the monthly pension.

Common mistakes

• “Pension is now taxed at my old salary rates.” Not for an ordinary retiree. Slab rates apply to pension only under section 12(2A)(ii), where the person continues to work for the former employer or its associate.
• “5% is charged on the whole pension once it crosses Rs. 10 million.” The table charges 5% “of the amount exceeding rupees ten million”, not of the full amount.
• “Government pensions are still exempt under clause (9).” Sub-clause (i), which covered government and Armed Forces pensions, was omitted. Only sub-clause (ii), for families of those who die in service, remains.

What to check in the official text

Read section 12(2A) alongside the proviso to clause (2) of Division I of Part I of the First Schedule in the Ordinance amended to 30 June 2026. Check the Second Schedule, Part I, footnotes to clauses (8) and (9) for the wording that was removed. Section 12(2A)(i) is drafted as a single long sentence joining the Rs. 10 million rule and the age seventy rule, and the Ordinance does not define “former employer” for this purpose; read the full clause yourself rather than relying on a summary. Whether you must file a return is a separate question under the Ordinance’s filing provisions and is not answered by the pension table.