ISLAMABAD: Salaried employees in Pakistan are set to benefit from significant tax relief under the federal budget for 2025–26, as the government moves to cut income tax rates for middle- and high-income earners.
Presenting the budget in Parliament on Tuesday, Finance Minister Muhammad Aurangzeb said Prime Minister Shehbaz Sharif had made it a priority to support the salaried class, which has long carried a disproportionately high tax burden.
“In response, we are introducing broad-based reductions in income tax rates for salaried individuals,” Aurangzeb announced.
The most substantial relief is planned for those earning up to Rs2.2 million annually. For this group, the income tax rate will drop from 15% to 11%, representing a 4-percentage-point reduction.
Similarly, individuals with annual incomes between Rs600,000 and Rs1.2 million will see their tax rate halved—from 5% to 2.5%.
Higher earners are also set to benefit. Those making between Rs2.2 million and Rs3.2 million will see their tax rate reduced from 25% to 23%.
Aurangzeb said the changes are designed not only to provide financial relief but also to align wages with inflation and make the tax system simpler and more balanced.
To further support professionals and reduce the outflow of skilled workers, the government has proposed a 1% cut in the income surcharge for individuals earning over Rs1 million annually.
“The government acknowledges that Pakistan’s highly skilled professionals are burdened by some of the highest tax rates in the region,” Aurangzeb noted. “We want to give them reasons to remain in Pakistan.”
The government unveiled the full federal budget for fiscal year 2025–26 on Tuesday, with total expenditures reduced by 7% to Rs17.57 trillion ($62 billion). However, defence spending has been significantly increased—up 20%—following a deadly conflict with India last month.
The defence allocation now stands at Rs2.55 trillion ($9 billion) for FY26, compared to Rs2.12 trillion in the outgoing fiscal year.
The government is projecting GDP growth of 4.2% for the upcoming year, signaling a recovery from economic instability that brought the country close to default in 2023. For the current fiscal year, growth is estimated at 2.7%, falling short of last year’s 3.6% target.
Officials expect economic momentum to be bolstered by a sharp decline in borrowing costs, thanks to multiple interest rate cuts by the central bank. However, economists caution that monetary easing alone may not be sufficient, as fiscal tightening and ongoing IMF reforms could continue to weigh on private investment.
