Are you a Pakistani employee who is about to retire or is already retired and wondering how your gratuity and pension will be taxed? This article will provide you with a comprehensive understanding of how gratuity income and pension are taxed in Pakistan.
What is Gratuity?
Gratuity is a lump sum payment made by an employer to an employee as a token of appreciation for the services they have provided towards the company. It is usually paid at the time of retirement, death, or termination of service. Gratuity is calculated based on the employee’s final or highest salary and the period of service over and above six months.
Taxation of Gratuity in Pakistan
The taxation of gratuity in Pakistan depends on the type of employer and the gratuity scheme. The following is a breakdown of how gratuity is taxed in Pakistan:
- Government Employees: Gratuity is fully exempt for government employees.
- Approved Gratuity Scheme: Gratuity is exempt up to PKR 300,000 for employees covered under an approved gratuity scheme.
- Unapproved Gratuity Scheme: Gratuity is exempt up to PKR 75,000 or 50% of the amount receivable, whichever is lower, for employees covered under an unapproved gratuity scheme.
- Approved Gratuity Fund: Gratuity received from an approved gratuity fund is fully exempt.
What is Pension?
Pension is a retirement benefit that is paid in installments over a period of time. It is a fixed amount paid by the employer to the employee after they retire. Pension is calculated based on the employee’s final salary and the period of service.
Taxation of Pension in Pakistan
Pension income is exempt from taxation in Pakistan except in a few scenarios:
- Double Pension: If a person is receiving more than one pension, only the higher pension will be exempt.
- Re-Employment: If a pensioned person starts a job with the same organization or any of its associated organizations, the pension becomes taxable.
However, these conditions do not apply if the pensioner is over and above the age of sixty years.
Optimizing Your Gratuity and Pension for Taxation Purposes
To optimize your gratuity and pension for taxation purposes, consider the following tips:
- Understand the taxation rules: Understanding the taxation rules for gratuity and pension can help you plan your retirement finances and avoid surprises later on.
- Plan ahead: If you are covered under an unapproved gratuity scheme, consider reducing the amount receivable to maximize the exemption limit.
- Consider alternate investment options: Consider investing your gratuity and pension income in alternate investment options such as mutual funds, stocks, or bonds to reduce your tax liability.
- Consult a tax expert: If you are unsure about the taxation rules for gratuity and pension, consult a tax expert to help you plan your retirement finances.
Gratuity and pension are essential retirement benefits for employees in Pakistan. Understanding the taxation rules for these benefits is crucial to plan your retirement finances effectively. By following the tips mentioned above and consulting a tax expert, you can optimize your gratuity and pension for taxation purposes and enjoy a stress-free retirement.