Do I have to show exempt pension, commutation and gratuity in my return and wealth statement?

What does the law say?

Two rules work together. Section 116(2) says every resident taxpayer being an individual who files a return shall furnish a wealth statement and a wealth reconciliation statement for that year along with the return. Section 114(2)(e) repeats the point: a return “shall be accompanied with a wealth statement as required under section 116”. Section 116(1) describes what a wealth statement covers: total assets and liabilities, including foreign ones, those of a dependent spouse, minor children and other dependents, assets transferred to others, total expenditure, and “the reconciliation statement of wealth”.

Section 111(1) then deals with money and assets whose source is not explained. Where a person “has made any investment or is the owner of any money or valuable article” and offers no explanation of its nature and source, or an explanation the Commissioner does not find satisfactory, the amount is included in income chargeable under the head “Income from Other Sources” to the extent it is not adequately explained.

Nothing in section 111 says that an exempt receipt is excused from explaining wealth. An exempt commutation is not taxed, but it is still where the money came from.

Which retirement receipts are exempt?

Receipt	Where the law deals with it	Extent of exemption
Commutation of pension from Government, or under a pension scheme approved by the Board	Second Schedule, Part I, clause (12)	Whole payment
Gratuity or commutation of an employee of the Government, a Local Government, or a statutory body or corporation	Clause (13)(i)	Amount receivable under the rules and conditions of service
Gratuity from a gratuity fund approved under Part III of the Sixth Schedule	Clause (13)(ii)	Amount receivable from the fund
Gratuity or commutation of any other employee, under a scheme for all employees approved by the Board	Clause (13)(iii)	Up to Rs. 300,000
Any other employee	Clause (13)(iv)	50% of the amount or Rs. 75,000, whichever is less

Clause (13) does not apply to a payment not received in Pakistan, to a director who is not a regular employee, to an employee who is not a resident individual, or to a gratuity received by someone who has already received a gratuity from the same or any other employer. Gratuity that is not exempt is salary: section 12(2)(a) names gratuity in the definition.

Worked example (illustrative figures)

Case 1: exempt commutation. Mr. Siddiqui, a retired federal officer in Peshawar, retires in August 2026 and receives commutation of Rs. 4,200,000 from Government, plus pension of Rs. 90,000 a month. His net assets at 30 June 2026 were Rs. 12,000,000.

1. Pension received in tax year 2027: Rs. 90,000 x 12 = Rs. 1,080,000.
2. Commutation received: Rs. 4,200,000, exempt under clause (12).
3. Household expenses for the year: Rs. 1,300,000.
4. Net assets at 30 June 2027, as reconciled: Rs. 12,000,000 + Rs. 1,080,000 + Rs. 4,200,000 - Rs. 1,300,000 = Rs. 15,980,000.

Suppose he leaves the commutation out of the reconciliation, but his closing assets (bank balance and a plot) still total Rs. 15,980,000. The sources he has shown explain only Rs. 12,000,000 + Rs. 1,080,000 - Rs. 1,300,000 = Rs. 11,780,000. The gap of Rs. 15,980,000 - Rs. 11,780,000 = Rs. 4,200,000 has no stated source. That is the kind of unexplained money or investment section 111(1) is written for. Showing the commutation as an exempt inflow closes the gap.

Case 2: partly exempt gratuity. Ms. Naqvi retires from a private trading company in Faisalabad that has no approved gratuity fund and no Board-approved scheme. She receives a gratuity of Rs. 1,000,000.

1. Clause (13)(iv): 50% of Rs. 1,000,000 = Rs. 500,000. The cap is Rs. 75,000. The lesser is Rs. 75,000 exempt.
2. Taxable as salary: Rs. 1,000,000 - Rs. 75,000 = Rs. 925,000.
3. In her wealth reconciliation, the full Rs. 1,000,000 is the inflow that explains her larger bank balance. The Rs. 925,000 is also income in her return.

What if I spent the lump sum straight away?

The reconciliation still needs it. Section 116(1)(d) covers “the total expenditures incurred by the person, and the person’s spouse, minor children, and other dependents”. A daughter’s wedding or Hajj paid from commutation is expenditure, and the commutation is its source. Section 111(1)(c) applies to a person who “has incurred any expenditure” whose source is not explained, not only to assets still held.

What if the money went into a Behbood or pensioners’ account?

The deposit is an asset in the wealth statement and the commutation is its source. The profit on it has its own treatment, which is outside this page.

Common mistakes

• Reading “exempt” as “not reportable”. Exemption decides tax, not disclosure. The wealth statement under section 116 covers all assets, and the reconciliation needs every source.
• Treating every gratuity as fully exempt. Only clause (13)(i) and (ii) exempt the full amount. Private employees without an approved fund or scheme have a small cap.
• Leaving out the family’s assets. Section 116(1)(b) covers the assets of a dependent spouse, minor children and other dependents. The Explanation says a spouse’s assets are included only if the spouse is dependent.
• Relying on a late fix. Section 116(3) allows revision only before the notice it describes and never after five years from the return due date.

What to check in the official text

Read section 116 in full, section 111(1), and clauses (12) and (13) of Part I of the Second Schedule in the official PDF. Clause (12) and clause (13)(iii) depend on schemes “approved by the Board”; which schemes are approved is not in this corpus. The prescribed wealth statement form and the return form are also outside this corpus, so the exact field in which an exempt receipt is entered is not covered here.