Tax rate for those earning up to Rs1.2m per year reduced to 1%

In a major relief to the tax-weary salaried class, the federal government on Saturday said that it has slashed the tax rate for those individuals earning up to Rs1.2 million per year from 5% to 1%.

"The salaried class bears the burden of inflation and also pays [due] taxes. The reduction in the income tax is already part of the proposed budget [for FY26]. On the directions of Prime Minister Shehbaz Sharif, the government has reduced tax on those earning from Rs600,000 to Rs1.2 million per year from [the proposed] 2.5% to a [mere] 1%," Finance Minister Muhammad Aurangzeb said while speaking during a Senate session on Saturday.

"We [the government] hope that this move will not only result in the increase of disposable income of the [salaried] class but also restore their trust in the taxation system," the finance czar remarked.

The development comes after the government, in its Rs17.57 trillion budget for the FY26 has sought across-the-board cuts in income tax rates for the salaried class.

Initially, the tax rate for individuals making between Rs600,000 and Rs1.2 million a year was proposed to slash to 2.5% from existing 5% — which now as confirmed by Aurangzeb has further been cut to 1%. The move comes after PM Shehbaz, earlier this week, told the federal cabinet of 1% tax imposed on the people from the said salary bracket.

Meanwhile, the tax rate for those earning up to Rs2.2 million annually, has been reduced from 15% to 11% — a 4% fall in the budget FY26.

For those earning between Rs2.2 million and Rs3.2 million, the tax rate is expected to ease from 25% to 23%.

The budget also includes a move to slow down brain drain. A 1% reduction in surcharge has been proposed for those earning over Rs1 million, to retain highly skilled professionals who might otherwise consider leaving the country due to high taxes.

Speaking on the Senate floor today, the finance minister stressed that the government had taken steps for welfare in its proposed budget and highlighted that the federal expenditure had only been hiked by 1.9% which had soared up to 12% in the past.

He also confirmed that the initial 18% tax proposed on solar panels in order to promote the local industry has been reduced to 10% and warned those hoarding imported solar panels saying that action would be taken against individuals who had increased the price in advance.

It is pertinent to know that the government has set out the Federal Bureau of Revenue's (FBR) tax collection target of Rs14,131 billion — reflecting an 18.7% increase compared to the previous fiscal year.

The part of provinces in the federal taxes would amount to Rs8,206 billion. With the non-tax revenue target set out at Rs5,147 billion, the federal government's net income is expected to be Rs11,072 billion whereas the overall federal expenditures are estimated at Rs17,573 billion of which Rs8,207 billion will be allocated for the mark-up payment.