In Pakistan, taxation of pension funds is governed by the Income Tax Ordinance, 2001, and the rules made thereunder. A pension fund is a type of investment vehicle that is designed to provide income to individuals during their retirement years. The fund is usually managed by a professional investment manager who invests the assets of the fund in a diversified portfolio of stocks, bonds, and other financial instruments.
Under the Income Tax Ordinance, 2001, pension funds are exempt from income tax. This means that any income earned by the fund, including capital gains and dividends, is not subject to income tax. However, there are certain conditions that must be met in order for the pension fund to be exempt from income tax.
Firstly, the pension fund must be registered with the Securities and Exchange Commission of Pakistan (SECP) as a pension fund under the Voluntary Pension System Rules, 2005. The SECP is the regulatory body responsible for the registration and regulation of pension funds in Pakistan.
Secondly, the pension fund must comply with the investment restrictions and other requirements set out in the Voluntary Pension System Rules, 2005. These rules set out the investment limits and asset allocation requirements for pension funds, as well as the reporting and disclosure requirements.
Thirdly, the pension fund must distribute at least 90% of its income to its members in the form of pensions. This means that the pension fund cannot accumulate income in the fund for future investment or expansion purposes.
If these conditions are met, the pension fund will be exempt from income tax. However, if the pension fund fails to meet these conditions, it will lose its tax-exempt status and be subject to income tax on its income.
For example, let’s say that Mr. Ahmed is a member of a pension fund that is registered with the SECP and complies with the Voluntary Pension System Rules, 2005. The pension fund invests in a diversified portfolio of stocks and bonds, and earns income from capital gains and dividends.
Since the pension fund meets the conditions for exemption from income tax, the income earned by the fund will not be subject to income tax. However, if the pension fund fails to comply with the investment restrictions or fails to distribute at least 90% of its income to its members in the form of pensions, it will lose its tax-exempt status and be subject to income tax on its income.
In summary, pension funds in Pakistan are exempt from income tax, provided they are registered with the SECP and comply with the Voluntary Pension System Rules, 2005. The income earned by the pension fund is not subject to income tax, but the fund must distribute at least 90% of its income to its members in the form of pensions.
