Pakistan Tax Exemptions

Pension paid to a retired employee is fully exempt from income tax. Applies to government, private, and foreign pensions.

Exempt in full when received by the retired employee themselves. Family pension paid to a widow / dependant after the employee's death is also exempt under Clause 12. Commuted pension (lump-sum) up to 50% of the entitlement is exempt under Clause 12 as well.

Gratuity paid by an approved gratuity fund is exempt. Government service gratuity is fully exempt. Recognised private gratuity exempt up to the ceiling.

Government service gratuity: fully exempt. Approved gratuity fund (rules in the Sixth Schedule): fully exempt. Any other gratuity paid on cessation of service: exempt up to PKR 200,000. Excess taxed as salary income of the year of receipt.

Employer contributions and interest credited to a recognised PF are exempt in the employee's hands.

Only recognised provident funds (registered under the PF Act 1925 or approved by the Commissioner). Unrecognised PF withdrawals attract normal tax on employer contributions + interest at the year of receipt.

Foreign remittance received through banking channels and supported by a PRC is exempt from Section 111 unexplained-income addition.

Not a Second Schedule exemption strictly, but the most-used exemption in practice. Requires: (a) foreign currency credited to a Pakistani bank account, (b) Proceeds Realization Certificate from the receiving bank, (c) no cash-hawala involvement. Amount is not counted towards taxable income and does not trigger a Section 111 addition.

Employer-paid HRA is exempt up to 45% of basic salary OR PKR 400,000 per year, whichever is lower.

Applies only when the employee actually pays rent for accommodation. The exemption is the lower of (a) actual HRA received, (b) 45% of basic salary, (c) rent paid minus 10% of basic salary. Statutory limits are refreshed via each Finance Act.

Employer-paid medical allowance exempt up to 10% of basic salary. Reimbursement of actual medical bills is fully exempt.

Cash medical allowance in lieu of reimbursement: exempt up to 10% of basic. Actual reimbursement of medical bills (hospitalisation, consultation, medication) under a company health policy: fully exempt with no cap. Health insurance premium paid by employer is also exempt.

Statutory conveyance allowance exempt within prescribed limits.

Cash conveyance allowance for commuting: exempt to the extent notified. Company-provided car for personal use is taxed as a perquisite under prescribed valuation rules (5% of cost or actual expenses, whichever is higher).

Agricultural income is exempt from federal income tax. Provinces levy their own agricultural income tax.

Federal exemption under Section 41. Provincial agri income tax administered by Punjab / Sindh / KP / Balochistan revenue departments. Rates and thresholds differ by province. Wealth statement must still show agricultural land + income.

Specific SROs notify time-bound exemptions on flood relief donations and reconstruction contracts. Check current SRO list on fbr.gov.pk.

Ad-hoc exemptions. Recent examples: 2022 flood reconstruction contracts, 2010 flood relief donations. Coverage varies by SRO - always read the specific notification.

PSEB-registered IT and IT-enabled services exporters taxed at flat 0.25% final tax on export receipts. Extended to 30 June 2029.

Requires valid PSEB registration for the tax year. Bank deducts 0.25% at credit of foreign currency. Final tax - no further slab computation, no adjustments, no foreign tax credit. Non-PSEB freelancers fold receipts into business income at normal slab rates (10-20x higher for high earners).

Prize money on prize bonds taxed at 15% flat final tax for filers, 30% for non-filers. No slab computation.

Deducted at source by the paying bank / State Bank. Final tax - not adjustable. Not eligible for Zakat deduction. Unclaimed prize bonds beyond 6 years are forfeited to the State Bank.

Full-time teachers or researchers employed by a non-profit educational or research institution get a 25% reduction in tax payable on salary.

Institution must be registered under the Societies Registration Act 1860 or Trust Act 1882 as non-profit. Applies only to salary income from the qualifying institution. Reduction is on tax computed, not on taxable income.

Behbood Savings Certificates and Pensioner's Benefit Account income taxed at 5% flat for senior citizens above 60. Not a Second Schedule exemption strictly.

Applies to BSC and PBA products. Individual must be 60+ or widowed. Regular saving account interest still taxed under Section 151 at standard rates.

Salary and allowances of foreign diplomatic and consular staff are exempt under international convention.

Applies to accredited diplomats, consular staff, and UN specialised agency personnel. Does not exempt local employees of embassies (Pakistani citizens working at foreign missions) unless a specific treaty covers them.

Interest on specified federal government securities exempt from tax.

Includes some issues of Federal Investment Bonds and specified defence savings certificates. Check the specific issue notification - not all government-issued instruments qualify.

Section 61 grants a tax credit for donations to institutions listed in the Second Schedule Part I. Credit reduces income tax, not taxable income.

Approved institutions: Edhi, SIUT, Shaukat Khanum, Sundas Foundation, LRBT, and 100+ others notified via SRO. Credit computed as: (donation × average tax rate) capped at 30% of taxable income for individuals, 20% for companies.

Tax credit on life insurance premium paid to a Pakistan-based insurer. Capped at PKR 500,000 or 20% of taxable income.

Premium paid on the filer's own life or spouse / children. Only registered Pakistani insurers qualify. Credit = premium × average rate of tax. Premium refunded / policy surrendered within 2 years reverses the credit.

Contribution to an approved Voluntary Pension Scheme earns a tax credit. Capped at 20% of taxable income.

VPS approved by SECP. Contribution × average tax rate = credit. Withdrawal from VPS before retirement age triggers add-back of previously claimed credit + normal tax on withdrawal. Long-term instrument - not for short-term tax planning.

Zakat paid under the Zakat & Ushr Ordinance 1980 is deductible from taxable income (not a credit).

Reduces taxable income before slab computation - typically produces a bigger benefit than a credit for higher-rate taxpayers. Bank-deducted Zakat on savings accounts on 1 Ramadan automatically qualifies. Voluntary Zakat paid outside the compulsory system also deductible with evidence.

Person holding a Disability Certificate from a Provincial Social Welfare Department gets a 50% reduction in tax payable if taxable income is below PKR 1,000,000.

Disability certificate must be current. Reduction cap applies to total tax computed under normal slab rules. Does not apply to final-tax categories (dividend, profit on debt).