Budget may include income tax relief amid salary, pension freeze

ISLAMABAD: The government is considering reducing the income tax burden on salaried individuals while refraining from increasing salaries and pensions in the upcoming budget, aiming to provide equitable fiscal relief to both public and private sector employees.

Informed sources told Dawn that Finance Minister Muhammad Aurangzeb has expressed a desire to lower tax rates and, if possible, raise the taxable income threshold for the salaried class in recognition of their significant contribution to revenue generation compared to retailers, wholesalers, exporters, and real estate players.

On the other hand, the government may keep salaries and pensions uncha­nged at current levels, using the resulting fiscal savings to provide tax relief instead. “There is no reason to increase salaries if it pushes employees into hig­her taxable income brackets, leaving government employees with little to no increase in take-home pay,” an official said. He added that with lower tax rates and higher taxable income thresholds, government employees would remain net beneficiaries even without a salary increase. “Gov­ernment employees would not be worse off financially. That is neither the idea nor the intention,” he said.

Government salaries have increased by more than 60 per cent over the past four years, while private sector wages have generally stagnated amid high inflation and lower economic growth. The official said the tax policy office and some independent consultancy firms were working on various proposals to be discussed with the IMF mission during budget consultations beginning on May 15.

During this fiscal year, salaried class paid more than double the real estate taxes; even higher than the combined revenue from wholesalers, retailers and exporters

In addition, the development programme may be reduced further to a skeleton allocation, although final decisions on income tax, salaries, and development spending will become clearer during discussions with the IMF.

Last year, the federal government incurred an additional burden of more than Rs170 billion due to increases in salaries and pensions, while the provincial impact was more than double. An official noted even part of this amount could significantly reduce personal income tax burden.

The salaried class reportedly paid more than Rs425bn in taxes during the first three quarters of the current fiscal year — more than double the real estate sector’s contribution of about Rs200bn, and significantly higher than the combined revenue from wholesalers, retailers, and exporters. The salaried class has not only contributed the largest share of revenue but has also faced rising household expenses due to inflation, particularly after the onset of the Middle East crisis.

However, the official clarified that salary increases for PSDP-related employees, already notified by the government last month, would remain protected. After a four-year gap, the government last month approved a 20 to 35pc increase in the minimum salaries of employees working on development projects funded through the Public Sector Development Programme (PSDP), effective from July 1, 2026. Their pay packages were last revised on April 1, 2022.

Unlike other government employees, PSDP project employees previously faced cuts of up to 28pc in annual increments and 14pc in maximum salaries, according to an office memorandum issued by the finance ministry. During the same period, salaries of all other government employees, including those in finance ministry, increased by more than 60pc.

Published in Dawn, May 11th, 2026