ISLAMABAD, May 12: The Central Board of Revenue (CBR) has told the finance ministry that the proposed tax-free Private Pension Scheme (PPS) will not result in revenue loss.

Senior income tax officials have informed Dawn that the proposal was made following a thorough examination of the scheme prepared by the Securities and Exchange Commission of Pakistan (SECP).

The officials say the scheme, which is expected to be announced in the next annual budget (2002-3), would encourage establishment of individually capitalized pension saving account managed by the private sector and professional managers.

Under the system, contribution upto 20 per cent of salary or declared income will be allowed as admissible deduction, however, investment income on earnings of the pension funds would be exempt from tax. Pension benefits at the time of withdrawal will be taxed.

The proposed scheme is said to meet all the basic parameters of modern tax legislation. It gives rebate to employees on account of contributions at the time of deposit, which would encourage the employees to save money for old age and taxes the receipts at the time of withdrawal and thus there is no tax loss in aggregate.

According to the officials, in case pension benefits at the time of withdrawal are exempted, as s the case in the law, the scheme could not be accepted as it would cause revenue loss.

The existing pension and provident funds could, however, be governed under the tax provisions and there would be no loss of revenue.

Presently, contributions to pension funds, provident funds and contribution to pensions are not allowed as deduction in the hands of employees. And the interest accrued to pension funds and the total withdrawal at the time of maturity is exempt from tax in the hands of employees in case of government pensions and approved pension and provident funds.

Similarly, gratuity is also exempt in case of government and approved funds. There is an exemption up to Rs75,000 in case of non-approved funds.

The officials say that upto 2001, there was no provision of tax rebate in respect of retirement scheme. On the recommendation of the SECP, provision relating to retirement annuity scheme was introduced whereby tax rebate in respect of contribution upto five per cent of the income or Rs50,000 (whichever is less) was provided for those persons, who held an employment, which was not pensionalbe.

SECP in the scheme has proposed to introduce a scheme applicable to all private and public employees, and in which the self-employed people may also participate on voluntary basis.