Do I show exempt pension, commutation and gratuity in my return and wealth statement?

What does the law say?

Three provisions of the Income Tax Ordinance, 2001 answer this together.

Section 10 (total income). The total income of a person for a tax year is the sum of “(a) person’s income under all heads of income for the year; and (b) person’s income exempt from tax under any of the provisions of this Ordinance.” Exempt income is therefore part of total income by definition.

Section 9 (taxable income). Taxable income is total income “under clause (a) of section 10”, reduced by deductible allowances. Only the heads part is taxed. The exempt part sits in total income without adding tax.

Section 116 (wealth statement). Section 116(2) says every resident individual filing a return shall furnish a wealth statement and wealth reconciliation statement for that year with the return. Section 116(1) lists what the statement covers: assets and liabilities (including foreign ones), those of a dependent spouse, minor children and other dependents, assets transferred, total expenditure, and “the reconciliation statement of wealth”.

Which retirement receipts are exempt?

Part I of the Second Schedule exempts two kinds of lump sum:

Clause	What is exempt
(12)	“Any payment in the nature of commutation of pension received from Government or under any pension scheme approved by the Board”
(13)(i)	Gratuity or commutation of an employee of the Government, a Local Government, or a statutory body or corporation, as receivable under the rules of service
(13)(ii)	Any amount from a gratuity fund approved under Part III of the Sixth Schedule
(13)(iii)	For any other employee, up to three hundred thousand rupees under a scheme for all employees approved by the Board
(13)(iv)	Anyone else: fifty per cent of the amount or seventy-five thousand rupees, whichever is less

Clause (13) does not apply to a payment not received in Pakistan, a non-regular director, a non-resident employee, or a second gratuity from the same or any other employer. Any gratuity not exempt is salary, because section 12(2)(a) names gratuity in the definition of salary.

Worked example (illustrative figures)

Case 1: exempt commutation. Mrs. Farzana retired as a government college lecturer in Hyderabad on 30 June 2026. In tax year 2027 she receives pension of Rs. 100,000 a month and, in August 2026, commutation of Rs. 4,800,000 from Government.

1. Pension received: Rs. 100,000 x 12 = Rs. 1,200,000.
2. Commutation: Rs. 4,800,000, exempt under clause (12).
3. Net assets at 30 June 2026: Rs. 7,500,000. Household expenses for the year: Rs. 1,400,000.
4. Net assets at 30 June 2027: Rs. 7,500,000 + Rs. 1,200,000 + Rs. 4,800,000 - Rs. 1,400,000 = Rs. 12,100,000.

Her wealth rose by Rs. 12,100,000 - Rs. 7,500,000 = Rs. 4,600,000. If she enters the commutation as an exempt inflow, the reconciliation balances. If she leaves it out, her stated sources explain only Rs. 7,500,000 + Rs. 1,200,000 - Rs. 1,400,000 = Rs. 7,300,000, leaving Rs. 12,100,000 - Rs. 7,300,000 = Rs. 4,800,000 with no stated source. That is the situation section 111(1) addresses: money or investment whose source is not explained is added to income “to the extent it is not adequately explained”.

Case 2: partly exempt gratuity. Mr. Butt retires from a private pharmaceutical company in Lahore with a Board-approved gratuity scheme for all employees. He receives Rs. 900,000.

1. Exempt under clause (13)(iii): the amount not exceeding Rs. 300,000, so Rs. 300,000.
2. Taxable under the head “Salary”: Rs. 900,000 - Rs. 300,000 = Rs. 600,000.
3. Section 10 total income includes both parts: Rs. 600,000 under the heads and Rs. 300,000 exempt.
4. In the wealth reconciliation the full Rs. 900,000 is the inflow that explains the larger bank balance.

What if my pension itself was not taxed?

The same logic applies. Section 12(2A)(i) charges pension at the pension table rates, which for tax year 2027 are 0% up to ten million rupees, and says an individual aged seventy or more is not charged on pension income. Pension that attracts no tax is still money received in the year, and the reconciliation needs it as a source for savings and spending. The text does not say which line of the return form it goes on; the form is outside this corpus.

What if I spent the lump sum straight away?

It still belongs in the reconciliation. Section 116(1)(d) covers “the total expenditures incurred by the person, and the person’s spouse, minor children, and other dependents”, and section 111(1)(c) covers a person who “has incurred any expenditure” without explaining its source. A wedding or Umrah paid from commutation shows as expenditure, with the commutation as its source.

Common mistakes

• Treating “exempt” as “unreported”. Section 10 puts exempt income in total income. Exemption decides tax, not disclosure.
• Assuming every gratuity is fully exempt. Only clause (13)(i) and (ii) exempt the full amount receivable.
• Leaving out a dependent spouse’s assets. Section 116(1)(b) covers them; the Explanation limits a spouse’s assets to a dependent spouse.
• Waiting too long to correct. Section 116(3) closes revision once the audit notice it names is received, and in any case after five years from the return due date.

What to check in the official text

Read sections 9, 10, 12(2), 111(1) and 116 in the official text, and clauses (12) and (13) of Part I of the Second Schedule in the official PDF. Clause (12) and clause (13)(iii) depend on schemes “approved by the Board”; which schemes are approved is not in this corpus. The prescribed return and wealth statement forms, and the portal fields where exempt income is entered, are also outside this corpus.