How much tax is charged on a pension above Rs 10 million a year, and is it on the whole pension or only the excess?

What does the law say about pension above Rs. 10 million?

The Ordinance taxes only the part of a pension above Rs. 10 million, at 5%. The rate is in the proviso to clause (2) of Division I of Part I of the First Schedule, which applies to “pension received by an individual from a former employer in a tax year”. In the Ordinance as amended to 30 June 2026, which governs tax year 2027, the table reads:

S. No.	Description	Rate of tax
1	Where the amount of pension received does not exceed rupees ten million	0% of the amount
2	Where the amount of pension received exceeds rupees ten million	5% of the amount exceeding rupees ten million

Section 12(2A)(i), inserted by the Finance Act 2025, points to this table and says the pension “shall be charged to tax as a final tax” at these rates where the amount received from a former employer for a tax year exceeds ten million rupees.

Is it the whole pension or only the excess?

Only the excess. Row 2 does not say “5% of the pension”. It says “5% of the amount exceeding rupees ten million”. A pensioner whose pension is Rs. 10,500,000 is taxed on Rs. 500,000, not on Rs. 10,500,000. There is no cliff at the threshold: moving from Rs. 10,000,000 to Rs. 10,000,001 adds a tax of five paisa, not a jump.

The rate is also flat. Unlike the salary slabs in clause (2), the pension table has no further bands above Rs. 10 million. A pension of Rs. 30 million is taxed at the same 5% on its excess as a pension of Rs. 11 million.

What does “final tax” mean here?

Section 12(2A)(i) calls the pension tax a final tax. Section 169 sets out what final tax generally means under the Ordinance: under section 169(2), the income “shall not be chargeable to tax under any head of income in computing the taxable income of the person”, no deduction is allowed for expenditure, the income is not reduced by deductible allowances or losses, and the tax is not reduced by tax credits.

One caution: section 169(1) as printed lists particular withholding provisions by number and does not name section 12(2A) or section 149(1A). The “final tax” label for pension comes from section 12(2A)(i) itself. How far each consequence in section 169(2) carries over is not spelled out in either provision, and this page does not resolve it.

How is the tax collected?

Section 149(1A) requires any person responsible for paying pension to a former employee below seventy, where the payment in a tax year exceeds rupees ten million, to “deduct tax from the amount which is over and above rupees ten million” at the time of payment. In practice the pension-paying office, bank or former employer withholds it. There is a drafting point about which rates that deduction uses; it is covered on the related page about who deducts tax on a high pension.

Worked example (illustrative figures)

Justice (retd.) Saeed, aged 66, Lahore, receives a pension of Rs. 1,050,000 a month from his former employer for all of tax year 2027.

1. Annual pension: Rs. 1,050,000 x 12 = Rs. 12,600,000
2. Is it above Rs. 10 million? Yes, so row 2 applies.
3. Amount exceeding Rs. 10 million: Rs. 12,600,000 - Rs. 10,000,000 = Rs. 2,600,000
4. Tax: 5% x Rs. 2,600,000 = Rs. 130,000
5. Tax as a share of the whole pension: Rs. 130,000 / Rs. 12,600,000 = about 1.03%

If the 5% were wrongly applied to the whole pension, the figure would be Rs. 630,000 (5% x Rs. 12,600,000), almost five times the correct amount.

A second check, Brigadier (retd.) Naveed, aged 61, Rawalpindi, with a pension of Rs. 10,200,000 for the year:

• Excess: Rs. 10,200,000 - Rs. 10,000,000 = Rs. 200,000
• Tax: 5% x Rs. 200,000 = Rs. 10,000

What if my situation is different?

What if I turn seventy during the year? Section 12(2A)(i) says an individual who “has attained the age of seventy years” is not charged on pension income, and section 149(1A) applies only to former employees “below the age of seventy years”. Neither provision says how a pension received partly before and partly after the seventieth birthday in one tax year is split. The text is silent on that point.

What if I still work for my former employer? Section 12(2A)(ii) takes the pension out of this table altogether. It is charged at the ordinary rates in clause (1) or (2) of Division I, which are much higher than 5%.

What if I get more than one pension? The table refers to “pension received by an individual from a former employer”. The Ordinance does not say in this proviso whether pensions from two former employers are added together against one Rs. 10 million threshold. Treat that as an open question.

Common mistakes

• Applying 5% to the full pension. The table charges 5% only on the amount exceeding Rs. 10 million.
• Adding pension to other income to pick a salary slab. For a pensioner not working for the former employer, section 12(2A)(i) sends the pension to the pension table, not to the clause (2) salary slabs.
• Assuming a refund of tax deducted on the excess. Final tax is generally not reduced by tax credits under section 169(2). Check the provisions yourself before planning around a refund.

What to check in the official text

Read the proviso to clause (2) of Division I of Part I of the First Schedule in the Ordinance amended to 30 June 2026, together with section 12(2A) and section 149(1A). Compare section 169(1) and 169(2) if you need to know exactly how the final tax label operates. The figures on this page apply to tax year 2027; a later Finance Act can change the threshold or rate.