How much tax is charged on a pension above Rs 10 million a year, and who deducts it?

What does the law say?

Three provisions of the Income Tax Ordinance, 2001 decide this.

Section 12(2A)(i) says pension under section 12(2)(f) is “charged to tax as a final tax at the rates specified in the proviso to clause (2) of Division I of Part I of the First Schedule” where the amount an individual receives from a former employer for a tax year exceeds ten million rupees. The same clause says an individual who has attained seventy is not charged on pension income.

The pension table in that proviso sets the rates for tax year 2027 (1 July 2026 to 30 June 2027):

Pension received in the tax year	Rate of tax
Does not exceed ten million rupees	0% of the amount
Exceeds ten million rupees	5% of the amount exceeding ten million rupees

Section 149(1A) handles collection. Any person responsible for paying pension to a former employee who is below seventy, where the payment in the tax year exceeds ten million rupees, must at the time of payment deduct tax “from the amount which is over and above rupees ten million” at the rate in Division I. The deduction is made after adjusting tax already withheld from the former employee under other heads and admissible tax credits, on documentary evidence, and it also corrects any earlier excess, shortfall or failure to deduct.

How does it work in practice?

The payer, usually the pension disbursing office or the former employer’s pension fund, tracks how much pension it has paid you in the tax year. Nothing is deducted while the running total stays at or below Rs. 10,000,000. Once payments cross that figure, tax is deducted from the part above it.

Section 149(1A) also mentions tax “deducted under section 4AB”, the surcharge. Section 4AB charges a surcharge on individuals whose taxable income exceeds ten million rupees, but its proviso, as substituted by the Finance Act 2026, says that for an individual deriving income chargeable under the head “Salary”, “no surcharge shall be payable”. Pension is salary under section 12(2)(f).

Because the tax is final, section 114(1)(ae) still requires a return of income for the year: it covers “every person whose income for the year is subject to final taxation”.

Worked example (illustrative figures)

Brigadier (retd.) Kamran, 67, lives in Rawalpindi and receives a pension of Rs. 1,000,000 a month. He does no work for his former employer.

1. Annual pension. Rs. 1,000,000 x 12 = Rs. 12,000,000.
2. Amount above the threshold. Rs. 12,000,000 - Rs. 10,000,000 = Rs. 2,000,000.
3. Tax for the year. 5% x Rs. 2,000,000 = Rs. 100,000.
4. Effective rate on the whole pension. Rs. 100,000 / Rs. 12,000,000 = about 0.83%.

When is it deducted? Section 149(1A) says tax is deducted “at the time of payment” from the amount over ten million rupees. If each monthly payment is Rs. 1,000,000, the running total reaches Rs. 10,000,000 with the April payment (July to April is ten months). The May and June payments are entirely above the threshold, so 5% x Rs. 1,000,000 = Rs. 50,000 would be deducted from each, Rs. 100,000 in total. The Ordinance does not prescribe a monthly spreading method, so a payer that estimates the annual pension and spreads the tax across the year would be following a practice the text neither requires nor forbids.

A second figure. A pension of Rs. 15,000,000 would bear 5% x Rs. 5,000,000 = Rs. 250,000.

What if I turn seventy during the year?

Section 12(2A)(i) removes pension from charge for an individual “who has attained the age of seventy years”, and section 149(1A) applies only to a former employee “below the age of seventy years”. The text does not say how a birthday in the middle of a tax year is handled, so this page does not settle that point.

What if I receive pension from two former employers?

The table and section 12(2A)(i) speak of the amount received “from a former employer”. The text does not say whether two pensions from two different employers are added together for the ten million test. See the related page on two pensions.

Common mistakes

• Charging 5% on the whole pension. The table taxes only “the amount exceeding rupees ten million”.
• Expecting slab rates. The ordinary Division I slabs apply to pension only where you still work for the former employer or its associate, under section 12(2A)(ii).
• Assuming a final tax means no return. Section 114(1)(ae) requires one where income is subject to final taxation.
• Expecting a deduction after seventy. Section 149(1A) is limited to former employees below seventy.

What to check in the official text

Read section 12(2A), section 149(1A), section 114(1)(ae) and section 4AB with its proviso, then the proviso to clause (2) of Division I of Part I of the First Schedule in the official PDF, because our site copy of the Ordinance does not reproduce rate tables. Note that section 149(1A) refers to “the rate provided in Division I” without naming the proviso; the only Division I rate written for pension is the 5% in the pension table.