Tax Allowance for Contribution to Approved Pension Funds in Pakistan (Section 63)

Introduction

Planning for retirement is crucial, and the government of Pakistan has provided tax incentives to encourage individuals to secure their financial future. Section 63 of the Income Tax Ordinance, 2001, outlines the tax allowance for contributions to Approved Pension Funds (APF) under the Voluntary Pension System (VPS). This provision offers a tax credit to eligible individuals, reducing their taxable income and promoting long-term savings.

In this blog, we’ll cover the eligibility criteria, the computation of tax credit, and related rules under Section 63, ensuring you understand the benefits and requirements to claim this allowance.

What is an Approved Pension Fund (APF)?

An Approved Pension Fund is a retirement savings plan regulated under the Voluntary Pension System Rules. Contributions to these funds are deductible under the law, incentivizing individuals to build a retirement corpus.

Key Provisions of Section 63

1. Eligibility Criteria
   An individual Pakistani is eligible for this allowance if they:

   • Derive income under the heads of “salary” or “income from business”.
   • Hold a valid National Tax Number (NTN) or Computerized National Identity Card (CNIC).

2. Tax Credit Calculation
   The tax credit is computed at the average rate of tax on the lower of the following:

   • The total contribution or premium paid during the tax year.
   • 20% of the taxable income for the year.

3. Transfer of Account Balance
   If you transfer the balance of an account under the Voluntary Pension System to another account, it does not qualify for a rebate. Only the original contributions are eligible.

4. Excess Tax Rebate

   • If the amount of the rebate exceeds the tax liability, no refund or carryforward is allowed.
   • However, excess tax paid or deducted at source can be refunded.

5. Tax Credit for AOP Members
   If a member of an Association of Persons (AOP) cannot claim the credit, it can be transferred to the AOP, provided there is a written agreement between the member and the AOP.

Example: Calculating the Tax Credit

Suppose Mr. Ali, a salaried individual with a taxable income of PKR 1,000,000, contributes PKR 180,000 to an APF during the tax year.

• Lower Value:
  • 20% of taxable income: PKR 200,000.
  • Contribution: PKR 180,000.

The tax credit will be computed on PKR 180,000, as it is the lower amount.

Assuming Mr. Ali’s average tax rate is 15%, the tax credit would be:
PKR 180,000 × 15% = PKR 27,000.

FAQs about Contributions to Approved Pension Funds

1. What is the maximum tax rebate under Section 63?
   The rebate applies to contributions up to 20% of the taxable income.

2. Can a company claim this rebate?
   No, only individual Pakistanis are eligible.

3. What happens if I transfer my pension fund balance?
   The transferred balance does not qualify for a rebate; only original contributions are eligible.

4. Do I need to file a tax return to claim this rebate?
   Yes, you must file your income tax return to claim the rebate.

5. Can salaried individuals benefit from this allowance?
   Yes, salaried individuals are eligible for this tax credit.

6. What documents are required to claim this rebate?
   Proof of contribution to the APF and relevant tax documents.

7. Is there a penalty for non-compliance with APF rules?
   No specific penalty applies under Section 63, but improper documentation may result in disallowance.

8. Are foreign contributions eligible for this allowance?
   No, only contributions to Pakistani APFs qualify.

9. What happens if my rebate exceeds my tax liability?
   The rebate cannot be refunded or carried forward.

10. How does an AOP member claim the tax credit?
    A written agreement between the member and the AOP is required.

11. Is the rebate applicable to part-time employees?
    Yes, as long as they meet the eligibility criteria.

12. Can contributions be made in installments?
    Yes, but the total amount for the year must be calculated.

13. What is the deadline for claiming this rebate?
    Contributions must be made within the tax year.

14. Does the rebate apply to insurance premiums?
    Only premiums paid to an approved pension fund qualify.

15. Are there limits on how much I can contribute?
    Contributions are capped at 20% of your taxable income for the rebate.