Income Tax Changes in Budget 2026
The Federal Budget 2026–27 made two major changes to income tax for salaried employees:
- The tax-free annual income limit was raised from ₨400,000 to ₨600,000 (₨50,000/month)
- Tax slab rates for higher income levels were revised upward
This means if your total annual salary (basic pay + allowances) is ₨600,000 or less, you pay zero income tax. Most BPS 1–9 employees will fall under this limit.
FBR Income Tax Slabs for Salaried Persons — Tax Year 2026–27
| Annual Taxable Income | Tax Rate | Tax Amount |
|---|---|---|
| Up to ₨600,000 | 0% | Nil |
| ₨600,001 – ₨1,200,000 | 5% of amount above ₨600,000 | Up to ₨30,000 |
| ₨1,200,001 – ₨2,400,000 | ₨30,000 + 15% of amount above ₨1,200,000 | Up to ₨210,000 |
| ₨2,400,001 – ₨3,600,000 | ₨210,000 + 25% of amount above ₨2,400,000 | Up to ₨510,000 |
| ₨3,600,001 – ₨6,000,000 | ₨510,000 + 30% of amount above ₨3,600,000 | Up to ₨1,230,000 |
| Above ₨6,000,000 | ₨1,230,000 + 35% of amount above ₨6,000,000 | Calculated |
These are the slabs for salaried persons. The tax is withheld monthly by your employer (DDO) and deposited to FBR.
Which BPS Grades Pay Tax?
Whether you pay tax depends on your gross annual salary (all components — basic pay + HRA + medical + conveyance). Here is a rough guide based on Islamabad postings:
| BPS Grade | Approx. Annual Gross Salary | Tax Status |
|---|---|---|
| BPS 1–9 | Below ₨600,000 | No tax |
| BPS 10–13 | ₨600,000 – ₨900,000 | Low tax (5% slab) |
| BPS 14–16 | ₨900,000 – ₨1,400,000 | Moderate (5–15% slab) |
| BPS 17 | ~₨2,350,000 | 15% slab |
| BPS 18 | ~₨3,200,000 | 25% slab |
| BPS 19+ | Above ₨3,600,000 | 30–35% slab |
Step-by-Step Tax Calculation — BPS-17 Example
Let us calculate income tax for a BPS-17 officer in Islamabad at minimum pay:
- Monthly basic pay: ₨123,750
- Monthly HRA (45%): ₨55,688
- Medical allowance: ₨12,000
- Conveyance allowance: ₨5,000
- Monthly gross: ₨196,438
- Annual gross: ₨2,357,256
Tax calculation on ₨2,357,256 annual income:
- First ₨600,000 → ₨0
- Next ₨600,000 (₨600K–₨1.2M) → 5% = ₨30,000
- Remaining ₨1,157,256 (₨1.2M–₨2.357M) → 15% = ₨173,589
- Total Annual Tax: ₨203,589
- Monthly Tax Deduction: ₨16,966
- Net Monthly Salary: ₨179,472
What Is Taxable Income?
For government employees, all salary components are taxable — basic pay, HRA, medical allowance, and conveyance allowance are all included in the taxable salary. There is no exemption for allowances (unlike some private sector rules).
However, the following are not taxable for government employees:
- Gratuity received on retirement (up to a prescribed limit)
- Leave Fare Assistance (LFA) — once per year
- Pension received after retirement
- Medical reimbursement for actual hospitalisation expenses (with bills)
How Is Tax Deducted?
Your Drawing and Disbursing Officer (DDO) or Accounts Office calculates your estimated annual tax, divides it by 12, and deducts that amount from your monthly salary. You should see the deduction labelled as "Income Tax" on your salary slip.
At the end of the tax year (June 30), if your actual tax liability differs from what was deducted, you may need to file an income tax return with FBR to pay the remaining tax or claim a refund.
Filing a Tax Return
Salaried individuals with annual income above the taxable limit must file an annual income tax return on FBR's IRIS portal (iris.fbr.gov.pk) by September 30 each year. Even if your full tax was deducted at source, filing is mandatory once you are above the threshold.
Filing makes you an "Active Taxpayer" — which provides benefits such as lower withholding tax on bank transactions, property purchases, and vehicle registrations.
Calculate Your Take-Home Pay
Use our Salary Calculator to estimate your gross salary. For tax calculations, consult your DDO or a tax advisor for the most accurate figures.