Alarm as tweaks to finance bill bring many pensioners into tax net

ISLAMABAD: The proposed changes in the Finance Bill for 2025-26 have brought pension income exceeding Rs10 million per annum in the tax net at a rate of 5 percent, but this proposal has raised many eyebrows.

First of all, it seems that FBR proposed changes after which the commutation will become taxable for all practical purposes.

If the proposed changes get approval from Parliament, it would have serious consequences for all the pensioners. So the element of commutation needs some thorough review in the proposed changes in the law because every officer of higher grades who gets the maximum limit in advance will have to pay increased tax amounts.

Former Member FBR Policy Dr Muhammad Iqbal, when contacted, said that FBR ostensibly made changes in the tax regime applicable to pensions to tax pension income exceeding Rs10 million in a year, but ended up taxing the income of most of the pensioners drawing far less amount of annual pension at much higher rates.

Clause 12 of Part I of the second schedule to the Income Tax Ordinance is proposed to be omitted through the Finance Bill 2025. As a result, the pension income, which has always been a part of salary income given the definition of salary income provided in section 12 of the Ordinance, and taxable at the rates applicable to salary income.

All that the FBR was required to do was to treat the pension as a separate block instead of subjecting it to the rates applicable to salary income.

It tried to do this by proposing to add a proviso at the end of Table II in Division I of Part I of the First Schedule. This Table provides the tax rates applicable to various slabs of income, ranging from 1 percent (which was now proposed upward from 1 to 2.5 percent in the cabinet) to a maximum of 35 percent.

The slab rate of 35 percent is applicable on annual salary income of Rs4.1 million. The proviso proposed to be inserted through the Finance Bill reads as “Provided that the in case of an individual deriving income solely from pension, annuity, supplement to the pension or annuity and commutation of pension from former employer for tax year, the rate of tax on such annuity or pension income or commutation of pension shall be set out in the following table:”

The succeeding Table provides a flat rate of 5 percent on pension income exceeding Rs10 million in a year. What the drafters of this proviso did not realise was that the word “solely” used in the proviso made it inapplicable to all pensioners who have a source of income other than a pension.

Now, almost all pensioners have other sources of income, most commonly interest or profits from amounts kept in profit and loss accounts maintained in banks or savings schemes.