Government Considers Income Tax Relief for Salaried Class Without Raising Salaries or Pensions

Islamabad: The federal government is reportedly considering significant income tax relief for salaried individuals in the upcoming budget while keeping salaries and pensions unchanged, as part of efforts to provide broader fiscal support without increasing financial pressure on the national budget.

According to informed sources, Muhammad Aurangzeb is examining proposals aimed at reducing income tax rates for the salaried class and potentially increasing the minimum taxable income threshold. The move is being considered in recognition of the salaried sector’s substantial contribution to national tax revenues compared to other sectors including real estate, retail, wholesale trade, and exports.

Officials familiar with the discussions said the government may avoid announcing salary and pension increases in the upcoming federal budget and instead utilise the resulting fiscal space to reduce the tax burden on employees in both the public and private sectors.

“There is little benefit in raising salaries if employees are immediately pushed into higher tax brackets, reducing the impact on their take-home income,” a senior official explained. He added that lower tax rates and higher exemption thresholds could allow employees to retain more disposable income even without salary increases.

Sources said the government’s tax policy office, along with independent consultancy firms, is currently preparing multiple proposals that will be discussed with the International Monetary Fund (IMF) during budget consultations beginning on May 15.

Officials also indicated that the federal development programme could face further reductions, potentially limiting new spending allocations as the government attempts to maintain fiscal discipline under ongoing IMF commitments.

Last year, increases in salaries and pensions created an additional financial burden of more than Rs170 billion for the federal government, while the fiscal impact on provincial governments was reportedly even higher.

During the first three quarters of the current fiscal year, Pakistan’s salaried class contributed more than Rs425 billion in taxes — over twice the amount paid by the real estate sector, which contributed approximately Rs200 billion. Revenue collected from salaried individuals also exceeded the combined tax contributions of wholesalers, retailers, and exporters.

Officials acknowledged that salaried employees have faced growing financial pressure due to inflation, rising utility costs, and broader economic uncertainty, particularly following recent instability in the Middle East region.

However, the government clarified that recently announced salary increases for employees working under the Public Sector Development Programme (PSDP) would remain protected.

Last month, after a four-year gap, the government approved salary increases ranging between 20 and 35 percent for PSDP-funded project employees, effective from July 1, 2026. Their salaries had last been revised in April 2022.

According to a finance ministry memorandum, PSDP employees previously experienced reductions of up to 28 percent in annual increments and 14 percent in maximum salary ceilings, while salaries of regular government employees increased by more than 60 percent during the same period.

Economic analysts believe the proposed tax relief could offer meaningful support to middle-income earners if implemented carefully, especially at a time when inflation continues to affect household purchasing power across Pakistan.