Understanding Taxation on Gratuity and Pension in Pakistan

Navigating the Maze: A Comprehensive Guide to the Second Schedule Exemptions and Tax Concessions in Pakistan

The Second Schedule of the Income Tax Ordinance, 2001, plays a crucial role in shaping your tax burden in Pakistan. It offers a myriad of exemptions and concessions on various income categories, easing the financial pressure on individuals and specific groups. This article delves deep into Part I of the Second Schedule, providing an in-depth analysis of the numerous exemptions from total income.

1. Pensions:

• Citizen’s Pension: Any pension received by a Pakistani citizen from a former employer (except when still working for them) qualifies for exemption, with the benefit applying to the higher pension in case of multiple pensions.
• Public Service & Armed Forces Pensions: Pensions granted for services rendered by members of the Armed Forces, Federal or Provincial Governments, and relevant family/dependent pensions in case of service-related death are exempt from tax.
• Commutation of Pension: Payments received from the government or approved pension schemes in lieu of future pension installments also fall under this exemption category.

2. Gratuity & Commuted Pension:

• Retiree Benefits: An employee’s retirement gratuity or commuted pension received from the government, local government, statutory bodies, or approved corporations is exempt up to specified limits.
• Private Sector Gratuity: The exemption extends to approved gratuity funds and other employer-specific schemes up to certain amounts.
• General Limit: In cases not covered by specific schemes, individuals can claim exemption on 50% of the receivable amount or Rs. 75,000, whichever is less.

Important Exceptions:

• The exemptions don’t apply to payments received outside Pakistan, director gratuities from companies they aren’t regular employees of, non-resident individuals, or employees who have already received gratuities elsewhere.

Here are some additional takeaways:

• The Second Schedule offers significant tax relief for various income sources, including pensions, gratuities, and commuted pensions.
• Specific requirements and limitations apply to each exemption category.
• Claiming the correct exemptions minimizes your tax burden and fosters financial well-being.

Understanding these exemptions ensures you claim all legal deductions and optimize your tax liabilities. Remember, consulting a tax professional can provide further guidance specific to your individual circumstances.