Pension, Gratuity and Provident Fund: What Retirement Money Is Actually Taxed

Salaried & retirement

Retirement money is taxed far more lightly than most people assume. The complication is not the rate. It is whether your employer’s fund is approved.

All Pakistan Taxes desk · 16 August 2026

Retirement benefits in Pakistan are taxed far more lightly than most employees assume, but
the three components are treated under different rules and the differences matter. Pension,
gratuity and provident fund each have their own basis of exemption, and an employee who
understands only the headline figure can be caught out on the detail.

Pension

Under the 2026-27 budget measures, pension income up to Rs 10 million a year is entirely
tax-free, with a flat 5% applying above that threshold. For the overwhelming majority of
pensioners this means no liability at all, since the threshold sits well above what most
retirement schemes in Pakistan pay out.

FBR has separately clarified that no tax has been imposed on pensions, gratuity fund
payments, leave prior to retirement, commutation of pension or allied benefits — a
clarification issued largely because periodic budget speculation had suggested otherwise.

Gratuity, where the answer depends on paperwork

Gratuity is the component most likely to produce an unexpected tax bill, because its
treatment turns on your employer’s arrangements rather than on anything you control.

Government and public sector employees

Gratuity paid in accordance with the applicable service rules is fully exempt. Amounts
received on retirement or on death are 100% exempt, and there is little scope for
complication.

Private sector employees

Here the decisive question is whether the fund is approved by the Commissioner Inland
Revenue under the rules of the Sixth Schedule. Where an employer contributes to an approved
gratuity fund, the entire amount reaches the employee tax-free. Where the fund has not been
approved, the treatment is markedly less generous and exemption is limited.

Two employees can retire on the same day with identical gratuity entitlements
and face entirely different tax outcomes, decided by an approval application neither of them
was party to.

The question to ask your employer

Ask, in writing, whether the gratuity fund is approved under the Sixth Schedule, and ask
well before retirement rather than at it. If the fund turns out not to be approved, that is a
conversation worth having with HR while there is still time to do something about it —
years ahead of the payment, not weeks after it has been made and taxed.

Provident fund

Employer contributions and the interest credited on them are exempt up to prescribed
limits, and employer contributions to approved pension or gratuity funds are treated separately
from taxable salary within limits set by FBR.

The operative word in both cases is limits. Contributions and accrued interest
above the prescribed thresholds fall outside the exemption, and long-serving senior employees
are the group most likely to cross them without noticing, because the excess accumulates
quietly over years rather than appearing as a single event.

Working after retirement

A considerable number of Pakistani pensioners take consultancy work, teach, or run a small
business after leaving formal employment. That income is taxable in the ordinary way; the
pension exemption attaches to the pension and does not extend to anything earned alongside
it.

It also changes the filing position materially. A pensioner with no other income may have
very little to report, whereas one drawing consultancy fees holds business income and may
acquire an advance tax obligation under Section 147 on top of the annual return.

What this means at filing

Exempt income still has to be declared. It is entered in the return as exempt rather than
omitted, and this distinction causes more avoidable correspondence than almost anything else in
salaried filing.

Omitting an exempt amount creates a mismatch against the third-party data FBR already holds,
and a mismatch generates a notice regardless of whether any tax was due. Being right on the
liability is no defence against a discrepancy on the face of the return.

For the taxable side of salaried income, the
salary tax calculator and the
2026-27 slab
structure set out the position, while the
filing guide covers where
exempt figures belong on the form.

Four questions worth settling before you retire

1. Is your employer’s gratuity fund approved under the Sixth Schedule, and can they confirm
   it in writing?
2. Will your annual pension exceed the Rs 10 million threshold?
3. Have employer provident fund contributions and accrued interest stayed within the
   prescribed limits?
4. Are exempt amounts being declared in the return rather than left off it?

Common questions