VPS Pension Calculator

Contributions to an approved pension fund under the Voluntary Pension System Rules earn a tax credit under section 63 of the Income Tax Ordinance. The credit is calculated at your average tax rate, not your top rate, and it is limited to contributions of 20% of your taxable income.

The calculator computes A and B from the tax year 2027 slabs, so a salaried person is taxed on the salaried table and a business owner on the non-salaried table. It then credits each year of your plan separately, so a rising contribution or income is handled year by year. Your employer can apply the credit to your monthly salary tax if you give documentary evidence of the contribution.

A worked example

Take a salary of Rs 3,600,000 a year, with tax of Rs 416,000: an average rate of 11.6%. Contributing Rs 20,000 a month is Rs 240,000 a year, well under the limit of Rs 720,000, so the credit is Rs 27,733 and the real cost of the contribution is Rs 212,267, or Rs 17,689 a month. Kept up for 25 years at 13% a year, the account grows to about Rs 39,929,569 from Rs 6,000,000 contributed, and the credits add up to Rs 693,333 of tax saved. A business owner with the same income has a higher average rate and gets a credit of Rs 54,000 a year on the same contribution.

The same contribution of Rs 20,000 a month (Rs 240,000 a year) earns a different credit depending on your income and whether it is salary or business income. This table is worked out by the same engine as the calculator.

The lesson is that the credit is generous at high incomes and small at low ones. Below Rs 600,000 of taxable income there is no tax, so no credit. If you contribute more than 20% of your taxable income, only that part earns the credit: Rs 100,000 a month on a Rs 3,600,000 salary is Rs 1,200,000 a year, but credit is worked out on Rs 720,000. A catch-up allowance for people who joined at age 41 or older expired on June 30, 2019.

The growth depends on what you invest in. VPS offers equity, debt and money market funds and allocation schemes that mix them with different amounts of equity. The returns below are illustrative assumptions for low, medium and high volatility schemes, used to show the range, and they are not forecasts. The table shows the balance after 25 years, contributing at the start of every month.

Compare these with a plain mutual fund plan in the SIP calculator, or work out how much you need in total with the retirement calculator. Inflation matters over 25 years: set it in the today's money card to see the balance in today's rupees.

You choose a retirement age between 60 and 70. Up to 50% of the balance can be taken as a tax-free lump sum under clause (23A) of the Second Schedule. The remainder has to be used to buy an annuity or to start an income payment plan, so it pays you a monthly pension instead of a lump sum. Taking more than 50% as cash, or withdrawing before retirement, makes the amount taxable.

For the example above, the Rs 39,929,569 balance gives a tax-free lump sum of Rs 19,964,785 and leaves Rs 19,964,785 for the income plan. If that earns 10% a year and is paid out evenly over 20 years, the monthly pension is about Rs 186,998. If the plan earned 8% instead, it would be Rs 163,542. Payouts are shown before tax: the treatment of income plan instalments depends on the plan, so confirm it with your pension fund manager.

• Eligibility. The credit is for individuals with a National Tax Number or CNIC who have salary or business income, and it counts only new contributions, not balances moved from provident or pension schemes.
• Evidence. Keep the contribution receipts from your pension fund manager and give them to your employer, or claim the credit when you file your return.
• Lock-in. The tax benefit comes with a commitment: early withdrawals are taxed. Do not put in money you may need in the next few years.
• Compare options. A provident fund or gratuity from your employer may already cover part of your retirement; see the provident fund calculator and the gratuity calculator, and the salary tax calculator for the effect of the credit on your monthly tax.