Government Weighs Income Tax Cuts, Pay Hikes, and Sector Relief in Budget 2025–26

The federal government is reviewing a series of relief proposals aimed at easing financial pressure on salaried individuals and bolstering key sectors ahead of the Budget 2025–26, according to sources familiar with the matter.

The measures, developed on directives from Prime Minister Shehbaz Sharif, include a potential reduction in income tax rates for the salaried class and an increase in government salaries.

Draft proposals suggest a cut of up to 2.5 percentage points in income tax slabs. For example, individuals earning Rs100,000 per month may see their tax rate halved from 5% to 2.5%, while those with monthly salaries of Rs183,000 could face a reduced rate of 12.5%, down from 15%. Employees earning Rs267,000 per month may benefit from a cut from 25% to 22.5%, and those earning Rs333,000 could see a drop from 30% to 27.5%.

An official pay raise for government employees is also under active consideration and is likely to be announced during the upcoming budget speech.

The government is additionally working on relief plans for small-scale farmers, including low-interest loan schemes and steps to cut input costs. In parallel, tax incentives for the manufacturing and construction industries are on the table. One major proposal involves eliminating Rs200 billion in withholding taxes on raw materials, with particular focus on the construction sector.

These proposals have been shared with the International Monetary Fund, which has offered initial support, while urging the government to present a credible revenue strategy to offset the expected shortfall. The economic team has reportedly briefed the Fund on alternate plans.

Final decisions will be outlined by the Finance Minister in the federal budget speech, scheduled for mid-June.