Every June, millions of salaried Pakistanis rush to save receipts, donation slips, and Zakat certificates to trim their tax bill while sitting on one of the most generous tax breaks the Government offers. That break is the tax credit available under the Voluntary Pension System (VPS), and if you haven’t used it yet, you’re paying more tax than you need to.
What is the Voluntary Pension System?
Introduced in 2007 under the Voluntary Pension System Rules 2005, VPS is a privately managed, individually owned retirement savings account. Unlike EOBI or a company provident fund, a VPS account belongs entirely to you, it’s portable across employers, flexible in how much you contribute, and lets you choose your own mix of equity, debt, and money market exposure through a licensed pension fund manager. For those who want their retirement savings to stay within Shariah principles, Islamic VPS options are available as well.
The Tax Credit: How It Actually Works
This is the part most people skip past. Subject to the conditions prescribed under Section 63 of the Income Tax Ordinance, 2001, an individual taxpayer (whether salaried or self-employed) who contributes to an approved pension fund may claim a tax credit on the eligible contribution.
The eligible amount is the lower of:
- Your actual contribution to the VPS during the tax year, or
- 20% of your taxable income for that year
The tax credit is determined by multiplying your eligible contribution by your average rate of tax for the relevant year. The calculated credit is then offset against your tax liability for the relevant tax year, resulting in a reduction in the tax payable.
A simple example: Suppose your taxable income for the year is PKR 1,000,000 and your average tax rate works out to 15%. You contribute PKR 180,000 to a VPS account (well within the 20% ceiling of PKR 200,000). Your tax credit is:
PKR 180,000 × 15% = PKR 27,000. The tax liability for the year will be reduced by PKR 27,000, in addition to any investment return earned on the contribution.
The larger your income and contribution, the larger the absolute rupee value of the credit, which is exactly why higher earners tend to benefit the most from planning around this every single year, not just once.
A Few Rules Worth Knowing
- No refunds or carry-forwards. Contributions should be planned carefully to ensure they remain within the prescribed tax credit limit (currently up to 20% of taxable income, where applicable). Any contribution exceeding the eligible limit will not be entitled to tax credit, and the excess cannot be carried forward or utilized in subsequent tax years.
- Transferred balances don’t count. If you move funds from one pension account to another, only new contributions are eligible not the transferred balance.
- Early withdrawal has a cost. VPS is designed to be held until retirement (age 60–70, or 25 years from joining, whichever comes first). Withdraw early, and the amount (principal + profit) is taxed at your average rate over the preceding three years.
How to Actually Claim It
If you’re salaried: Share your VPS contribution statement with your HR or Finance department. Where applicable, the employer may take the eligible VPS contribution into account while determining monthly tax deductions, subject to its payroll policies and the documentation provided, so you see the benefit in your take-home pay rather than waiting for a return.
If you’re self-employed: Declare the eligible contribution while filing your income tax return and retain the relevant supporting documents, including the VPS contribution statement, to substantiate the claim.
Either way, the contribution must be made within the current tax year (ending June 30) to count, so this isn’t a decision to defer to the last week of the fiscal year and hope for the best.
The Real Cost of Waiting
Every tax year you don’t invest in a VPS is a tax credit you’ve permanently forfeited, it doesn’t roll over, and it doesn’t wait for you. Meanwhile, the contributions you do make aren’t just sitting there; they’re invested and compounding toward the retirement income you’ll eventually need.
If you’re already filing returns and paying income tax, the question isn’t really whether you can afford to invest in a VPS, it’s whether you can afford not to.
Ready to see what your own tax credit could look like? Get in touch with our team to run the numbers on your income and find the VPS allocation that fits your goals.
Get in Touch
Call: 021-111-090-090
Visit: www.alfalahamc.com
Email: aaml.is@alfalahamc.com
Note: Subject to Section 63 of the Income Tax Ordinance, 2001 and the applicable rules, an eligible individual taxpayer may claim a tax credit at the average tax rate on contributions made to Voluntary Pension Schemes during the Tax year, up to a maximum of twenty percent (20%) of his / her taxable income for that year. The tax credit and tax savings shown are applicable for the relevant tax year. The individual’s ability to fully avail the tax credit depends on the amount of tax deducted from salary during the entire tax year. Actual tax liability may vary due to multiple factors. Investors are advised to consult their tax advisors for financial planning and to ascertain the total tax credit amount applicable to their specific circumstances.
Disclaimer: All investments in Voluntary Pension Schemes are subject to market risks. The NAV of the fund is dependent on several factors including force majeure. Please read the Offering Document carefully to understand the investment policies and risks involved. Tax credit information is based on current tax laws which may be subject to change. Past performance is not necessarily indicative of future results, and the unit prices and investment returns may go down, as well as up. No guarantee of tax credit is implied or offered. The information is for general information only and does not take into account your individual objectives, financial situation or needs. Before making an investment decision, you should consider obtaining financial and tax advice. Withdrawals from Voluntary Pension Schemes before retirement may have tax implications.