ISLAMABAD: The Federal Board of Revenue (FBR) is working on two significant budget proposals for the fiscal year 2025–26, aimed at revising the taxation structure on pensions exceeding a certain high threshold and raising the existing income tax exemption limit for individual taxpayers.
Both proposals are currently under internal deliberation and will soon be presented to the Prime Minister for approval.
The FBR has already initiated the groundwork on these measures, which are expected to feature in the next federal budget.
The first proposal involves the introduction of a nominal tax on large pension amounts, with the initial focus on retired individuals from the highest echelons of government service.
Specifically, it seeks to levy a 2.5% tax on pensions that exceed Rs400,000 per month or Rs4.8 million annually.
This measure is expected to primarily apply to retired Grade-22 civil servants and those in equivalent categories, such as senior members of the judiciary and armed forces.
Officials familiar with the proposal argue that some retired personnel enjoy opulent lifestyles while drawing substantial monthly pensions.
The proposed tax is therefore targeted only at very high-income pensioners, and will not affect lower- or middle-income retirees, who will continue to be exempt under the current system.
A former FBR Member of Tax Policy, speaking on condition of anonymity, stated that taxing high pensions is a politically sensitive matter.
The final decision would depend on whether the government is willing to include high-ranking retirees—including former judges, generals, and top civil servants—in the country’s broader tax net.
The second proposal under review aims to offer tax relief to the general public by increasing the income tax exemption threshold, which currently stands at Rs600,000 per annum under the Income Tax Ordinance, 2001.
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This adjustment is being positioned as a pro-people initiative to help ease the financial burden on low-income earners amid inflationary pressures.
According to insiders, raising the exemption limit is expected to benefit salaried individuals and small taxpayers, potentially enhancing disposable income and stimulating consumer spending.
However, the exact revised threshold is still under consideration.
Both proposals form part of the FBR’s broader effort to rebalance the tax system by broadening the base without further burdening those already in the formal tax net.
The revenue authority is under increasing pressure to explore equity-based reforms, especially as Pakistan looks to secure more stable public finances in alignment with IMF recommendations and fiscal consolidation goals.
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Final approval and implementation details will depend on the Prime Minister’s Office and the broader cabinet’s consensus in the lead-up to the 2025–26 federal budget announcement.
