FBR Eyes Pension Tax on High Earners & Income Tax Relief in FY26 Budget

Islamabad – May 2025:
In a significant move ahead of the federal budget for FY2025-26, the Federal Board of Revenue (FBR) is preparing two major proposals set to reshape Pakistan’s tax landscape. These include the introduction of a nominal tax on high pensions and a relaxation of the income tax exemption threshold, aimed at providing relief to lower and middle-income earners.

High Pensions Under Tax Radar

The FBR is considering a 2.5% monthly tax on pensions exceeding Rs 0.4 million. This measure targets Grade-22 retired bureaucrats, judges, and senior military officials receiving luxury-level pensions while continuing to enjoy high standards of living.

Officials clarified that the proposed pension tax would not affect the average retiree, ensuring only the top earners contribute under this new category.

“This is a targeted tax policy. The idea is to promote fairness and fiscal responsibility without burdening the common pensioner,” an official source from FBR told Business Recorder.

The proposal is pending final approval from Prime Minister Shehbaz Sharif and is being weighed carefully due to its potential political sensitivity.

Income Tax Relief on the Cards

The second proposal, which could bring welcome relief to millions of Pakistanis, suggests an increase in the current income tax exemption threshold from Rs 600,000 annually. The adjustment is seen as a cost-of-living relief measure, especially crucial given inflationary pressures and slowing economic growth.

While the exact new threshold has not been finalized, tax experts anticipate a potential increase to Rs 800,000 or even Rs 1 million, depending on revenue projections and IMF consultations.

Tough Budget Ahead, But Some Relief Likely

Earlier this month, FBR Chairman revealed that FY26 will be a tough fiscal year, with limited scope for GST reductions. However, he hinted that salaried individuals may receive targeted tax relief, aligning with the exemption threshold proposal.

Political and Economic Implications

If passed, the pension tax would mark a historic policy shift—a bold step in taxing segments previously untouched. Simultaneously, increasing the exemption threshold aligns with public expectations for tax fairness, especially amid rising prices and stagnant wages.

Bottom Line

With Pakistan aiming to broaden its tax base while ensuring equity, these proposals reflect a balancing act between revenue generation and economic relief. Final decisions are expected in the lead-up to the FY26 Budget announcement in June.