Medical allowance
Up to 10% of basic salary
Only if your employer does not also give free medical treatment or reimburse medical bills.
Second Schedule, clause 139
Tax Exemptions, Deductions & Credits in Pakistan
What is tax-free on your salary, what you can deduct, and which tax credits still apply in 2026-27.
Updated for 2026-27 Based on the Income Tax Ordinance 2001
- 1Exemption
Income that is not taxed at all, such as part of your medical allowance.
- 2Deduction
An amount taken off your taxable income, such as Zakat.
- 3Tax credit
An amount taken off the tax itself, such as for approved donations.
01 The basics
What is the difference between a tax exemption, deduction and credit?
An exemption (istisna) is income the law does not tax. A deduction (katauti) is taken off your taxable income before the slabs apply. Both save tax at your slab rate.
A tax credit, often called a rebate (chhoot), is taken off the tax itself. In Pakistan a credit is worked out at your average tax rate, not your slab rate, so the same amount usually saves less.
Rs 100,000 claimed on Rs 200,000 a month · 2026-27
Exemptions and deductions save at the 20% slab rate; credits at the 6.5% average rate.
- Tax with no claim
- Rs 156,000
- Exemption saves (20%)
- Rs 20,000
- Deduction saves (20%)
- Rs 20,000
- Credit saves (6.5%)
- Rs 6,500
- Deduction beats credit by
- Rs 13,500
02 Exemptions
Which salary allowances are tax-free in Pakistan?
These parts of a salary package are exempt, fully or up to a limit. Exempt amounts are left out of your taxable salary before the slabs apply.
Medical treatment from your employer
The full amount
Free treatment, hospitalisation or reimbursement under your terms of employment. The hospital's NTN must be given and your employer must certify the bills.
Second Schedule, clause 139
Employer's provident fund contribution
Up to 10% of salary or Rs 150,000 a year, whichever is lower
Paid into a recognised provident fund. Anything above the limit is taxed as salary.
Sixth Schedule, Part I, rule 3
Gratuity on retirement
Fully or partly, depending on the scheme
Fully exempt for government employees and from an FBR-approved gratuity fund. Up to Rs 300,000 from another approved scheme; otherwise half the amount or Rs 75,000, whichever is less.
Second Schedule, clause 13
Commuted pension
The full amount
The lump sum you take in place of part of your pension, from the government or an FBR-approved scheme.
Second Schedule, clause 12
Pension from a former employer
Tax-free up to Rs 10 million a year
No longer fully exempt. Since the Finance Act 2025, pension above Rs 10 million a year is taxed at 5%.
First Schedule, Part I, Division I
03 Deductions
Deductions that lower your taxable income
Two deductions are open to salaried individuals. Any part you cannot use in the year is lost; it is not carried forward to the next year.
Zakat (section 60)
Zakat paid in the tax year under the Zakat and Ushr Ordinance 1980 is deducted from your taxable income. This includes Zakat your bank deducts from savings accounts. Keep the bank's Zakat deduction certificate, or a receipt for Zakat you pay yourself.
Children's tuition fees (section 60D)
Only if your taxable income is under Rs 1.5 million a year (about Rs 125,000 a month). The deduction is the lowest of:
- 5% of the tuition fees paid in the year
- 25% of your taxable income
- Rs 60,000 for each child
Either parent can claim it, with the school's NTN. Your employer does not apply it to monthly tax; claim it in your return.
Workers' Welfare Fund and Workers' Participation Fund (sections 60A and 60B) are deductions for businesses, not salaried people.
04 Tax credits
Tax credits for salaried individuals
Three tax credits are open to salaried people in 2026-27. Each is worked out with the same formula from the Income Tax Ordinance.
Credit = (A ÷ B) × C
A your tax before credits · B your taxable income · C the amount you paid, up to the limit
Charitable donations (section 61)
Donations to an approved non-profit organisation, a government school, hospital or relief fund, a university or board of education, or a fund in the Thirteenth Schedule.
Limit: 30% of taxable income
15% if you give to an associate. Cash donations count only if paid by crossed cheque.
Voluntary pension fund (section 63)
Contributions to an approved pension fund under the Voluntary Pension System Rules 2005, offered by asset management companies.
Limit: 20% of taxable income
Moving an existing provident or pension balance into the fund does not count.
Low-cost home loan profit (section 63A)
Profit paid on a bank or approved loan used to build or buy one house of up to 2,500 sq ft or one flat of up to 2,000 sq ft. New from 2025-26.
Limit: 30% of taxable income
Once claimed, you cannot claim it for another home for 15 tax years.
Tax credit estimator 2026-27
Enter your salary and what you paid this tax year. See how much tax you save.
05 No longer available
Tax reliefs that have ended
Many websites still list these. None of them applies in 2026-27.
| Relief | Ended by | What applies now |
|---|---|---|
| Tax credit on life insurance premium, shares, sukuk and ETFs (section 62) | Finance Act 2022 | No credit. Insurance and investments no longer reduce tax. |
| Tax credit on health insurance (section 62A) | Finance Act 2022 | No credit for health insurance premium. |
| Deduction for profit on a house loan (section 60C) | Finance Act 2022 | Replaced in 2025 by the narrower low-cost housing credit (section 63A). |
| 25% rebate for full-time teachers and researchers | Ended after tax year 2025 (2024-25) | Not available in 2025-26 or 2026-27. |
| 50% tax reduction for senior citizens | Finance Act 2014 | Senior citizens pay the same salary slabs as everyone else. |
| Full exemption for pension from a former employer | Finance Act 2025 | Tax-free up to Rs 10 million a year, 5% above. |
06 Claiming
How to claim deductions and tax credits
Tell your employer
Give HR proof of donations and pension fund contributions. Under section 149 your employer can then lower the tax taken from your monthly salary.
Keep your proof
Keep crossed cheques or bank records for donations, your Zakat deduction certificate, fund statements, fee receipts with the school's NTN and your loan profit certificate.
Claim in your tax return
Enter each deduction and credit in your annual return on FBR's IRIS portal. If too much tax was deducted, the return shows a refund.
07 Answers
Questions about exemptions and credits
Quick answers about lowering your income tax in Pakistan.
Estimate your tax savingIs medical allowance tax-free in Pakistan?
Yes, up to 10% of your basic salary, but only if your employer does not also provide free medical treatment or reimburse medical bills. If your employer pays for treatment under your terms of employment, that benefit is exempt instead.
Is Zakat deductible from income tax in Pakistan?
Yes. Zakat paid under the Zakat and Ushr Ordinance 1980 is a deductible allowance under section 60, so it lowers your taxable income. On a salary of Rs 200,000 a month, Rs 100,000 of Zakat saves Rs 20,000 of tax in 2026-27.
Can I get a tax rebate on life insurance in 2026-27?
No. The tax credit for life insurance premium, shares and mutual fund style investments (section 62) was removed by the Finance Act 2022, along with the health insurance credit (section 62A).
Do teachers get a tax rebate in 2026-27?
No. The 25% rebate for full-time teachers and researchers ended after tax year 2025 (2024-25). Teachers now pay the same salary slabs as other employees.
Are senior citizens exempt from income tax in Pakistan?
No. The 50% tax reduction for taxpayers aged 60 or over was removed in 2014. Pension from a former employer is taxed separately: it is tax-free up to Rs 10 million a year and taxed at 5% above that.
What is the difference between a tax credit and a tax deduction?
A deduction lowers your taxable income, so it saves tax at your slab rate. A credit is taken off the tax itself, at your average tax rate. On Rs 200,000 a month, Rs 100,000 of Zakat (a deduction) saves Rs 20,000, while Rs 100,000 of donations (a credit) saves Rs 6,500.
Is pension taxable in Pakistan?
Pension from a former employer is tax-free up to Rs 10 million a year and taxed at 5% on the amount above that, since the Finance Act 2025. Family pension paid to dependants of public servants or armed forces members who die in service remains exempt.
08 Salary tools
More salary calculators
Every tool uses the same FBR salary slabs, so the figures match across the site.
Sources and last update
- Income Tax Ordinance 2001 (amended up to 30 June 2026): sections 60, 60D, 61, 63, 63A and 149; Second Schedule clauses 12, 13 and 139; Sixth Schedule Part I
- Finance Act 2022 (sections 60C, 62 and 62A omitted)
- Finance Act 2025 (section 63A added; pension exemption replaced)
- Finance Act 2026 (Gazette of Pakistan, 26 June 2026)
- Federal Board of Revenue (FBR)
Last reviewed: 7 November 2026. How we calculate
Results are estimates, not tax advice. For your exact tax, check your salary certificate or ask a tax professional.