The government is considering lowering income tax rates for salaried individuals in the Budget 2026-27 while keeping salaries and pensions unchanged, as it looks to provide relief without creating additional fiscal pressure.
Finance Minister Muhammad Aurangzeb is in favor of reducing the tax burden on salaried taxpayers and possibly increasing the taxable income threshold in view of their strong contribution to revenue collection compared with sectors such as retail, wholesale, exports, and real estate, reported Dawn.
Officials said one option under discussion is to avoid raising salaries and pensions this year and instead use the available fiscal space to offer direct tax relief. The rationale is that salary increases often push employees into higher tax brackets, limiting any real improvement in take-home pay, especially for government workers.
A senior official said the aim is to ensure that public employees remain net beneficiaries through lower tax rates and a higher taxable threshold, even if there is no increase in basic pay.
The proposal comes at a time when government salaries have already risen by more than 60 percent over the past four years, while private sector wage growth has remained subdued amid high inflation and weak economic expansion.
Officials said the tax policy office, along with independent consultants, is preparing multiple proposals that will be taken up with the IMF during budget consultations beginning on May 15.
The federal development programme may also be cut further and reduced to a bare minimum allocation, although final decisions on tax rates, salaries, pensions, and development spending are expected after talks with the IMF.
Last year, the federal government faced an additional burden of more than Rs. 170 billion due to increases in salaries and pensions, while the financial impact on provinces was more than double that amount. Officials believe that redirecting even part of those funds could significantly reduce the tax burden on salaried individuals.
The salaried class has remained one of the biggest contributors to tax collection this fiscal year. During the first nine months, salaried taxpayers reportedly paid more than Rs. 425 billion in taxes, more than double the amount contributed by the real estate sector and higher than the combined tax contribution of wholesalers, retailers, and exporters.
Despite this, salaried households have continued to face mounting financial pressure due to inflation and broader economic challenges.
Officials clarified that salary increases already approved for employees working on Public Sector Development Programme-funded projects will remain intact. Last month, the government approved a 20 to 35 percent increase in the minimum salaries of PSDP employees after a gap of four years, effective from July 1, 2026.
Their pay packages were last revised in April 2022. Unlike regular government employees, PSDP staff had faced cuts in annual increments and maximum salary limits during the same period when salaries of other public sector employees increased substantially.
If approved, the proposed tax relief could provide meaningful support to salaried individuals in both the public and private sectors in the next fiscal year.
