Pakistan eyes tax on individuals drawing hefty pensions ahead of IMF budget talks

ISLAMABAD: Pakistan is weighing a proposal to tax pension withdrawals of Rs400,000 a month as it prepares for budget negotiations with the International Monetary Fund (IMF), which is set to begin a week-long visit on May 14, according to officials familiar with the matter.

The plan is part of broader efforts to raise the country’s tax-to-GDP ratio to over 11 per cent from the current 10.6 per cent — a key target under the upcoming IMF engagement. Islamabad is seeking to finalise fiscal reforms to unlock further financial support from the lender.

One of the main proposals under discussion involves imposing a 2.5 per cent tax on monthly pension incomes of Rs400,000 or more. That would amount to a Rs10,000 monthly tax on high-income pensioners. The move comes amid IMF pressure to eliminate exemptions and bring all income sources into the tax net.

Pension payments have become a major strain on public finances, ranking as the third-largest federal expenditure after debt servicing and defence.

Currently, salaried individuals earning Rs400,000 a month pay around Rs78,750 in income tax, far more than what pensioners would pay under the new plan. The proposed pension tax is seen as a step toward narrowing that disparity.

To offset pressure on middle-income earners, the government is also considering raising the annual income tax exemption threshold to either Rs800,000 or Rs1.2 million.

Additionally, expanding the number of income tax slabs from four to seven is being studied, a move aimed at easing the tax load on individuals earning between Rs150,000 and Rs200,000 per month.

The outcome of the IMF talks is expected to shape key aspects of the upcoming federal budget.

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