Medical Allowance Tax Exemption in Pakistan 2025-26 (10% Rule)
Last reviewed by Zohaib Nasir, registered tax practitioner
Medical allowance up to 10% of basic salary is fully exempt from income tax in Pakistan under Section 13 of the Income Tax Ordinance. For most salaried employees, this is the simplest legal way to reduce tax burden.
How the exemption works
If your employment contract specifies a separate medical allowance (not just a lump-sum salary), up to 10% of your basic salary is excluded from taxable income. On a basic salary of PKR 1,000,000, that means PKR 100,000 becomes tax-free — saving PKR 11,000-23,000 in tax depending on your bracket.
Requirements to qualify
The contract must explicitly mention medical allowance as a separate component. The employer must have a documented medical reimbursement policy. The amount cannot exceed 10% of basic salary. If it exceeds 10%, only the first 10% is exempt; the rest is taxable.
How to structure it
Negotiate with HR to split your gross salary into Basic + House Rent Allowance + Medical Allowance + Conveyance. Common structure: Basic 50%, HRA 30%, Medical 10%, Conveyance 10%. This maximizes Medical exemption while keeping HR documentation clean.