Govt May Cut Income Tax for Salaried Class in Budget 2026-27

The government is considering reducing the income tax burden on salaried individuals in the upcoming Budget 2026-27 while keeping salaries and pensions unchanged.

The report said the government may avoid increasing salaries and pensions this year and instead use the resulting fiscal space to offer tax relief. The thinking behind the move is that salary hikes often push employees into higher tax slabs, reducing the net benefit in take-home pay, particularly for government workers.

An official familiar with the discussions said the aim is not to leave public employees worse off, but to ensure they remain net beneficiaries through lower tax rates and a higher taxable threshold even without a pay raise.

Government salaries have increased by more than 60 percent over the past four years, while wage growth in the private sector has remained weak amid persistent inflation and slower economic activity.

Officials said the tax policy office, along with independent consultancy firms, is currently working on multiple proposals that are expected to be discussed with the IMF during budget consultations starting May 15.

The report also stated that the federal development programme may face further cuts and could be reduced to a minimal allocation, although final decisions on income tax measures, salaries, pensions, and development spending are expected to be made after discussions with the IMF.

Last year, the federal government absorbed an additional burden of more than Rs. 170 billion due to increases in salaries and pensions, while the impact on provincial budgets was said to be more than twice that amount. Officials believe that even part of these savings could be used to significantly reduce the income tax burden on salaried taxpayers.

The salaried class has emerged as one of the largest contributors to tax revenues this fiscal year. During the first nine months, salaried individuals reportedly paid more than Rs. 425 billion in taxes, more than double the contribution of the real estate sector at around Rs. 200 billion, and higher than the combined taxes collected from wholesalers, retailers, and exporters.

Despite this, salaried households have continued to face rising living costs, particularly due to inflation and external pressures on the economy.

Officials clarified, however, that salary increases already notified last month for employees working on Public Sector Development Programme-funded projects will remain protected. 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 earlier faced cuts of up to 28 percent in annual increments and 14 percent in maximum salaries, while the salaries of other public sector employees increased significantly during the same period.