pakistan considers 2percent tax hike on saving to relieve salaried class

Pakistan Considers Tax Adjustment: Savings Hike to Ease Salaried Burden

By Our Correspondent | June 4, 2025

ISLAMABAD – In a strategic move aimed at balancing its fiscal challenges while providing much-needed relief to a strained salaried class, Pakistan is reportedly weighing a 2 percent tax hike on interest income from savings. This proposal, currently under discussion as part of the upcoming federal budget for the fiscal year 2025-26, seeks to offset the revenue impact of significant tax concessions being planned for salaried individuals, a segment that has borne a disproportionately heavy tax burden in recent years.

Sources within the Federal Board of Revenue (FBR) and the Ministry of Finance indicate that this measure is being actively deliberated, with an eye towards securing the crucial approval of the International Monetary Fund (IMF). The IMF has consistently pushed for broadening Pakistan's narrow tax base and enhancing revenue collection efficiency, making any tax relief for one sector contingent upon compensatory measures elsewhere.

The Salaried Class: A Long-Awaited Respite?

For years, Pakistan's salaried individuals have faced escalating income tax rates, often contributing a significantly higher percentage of direct taxes compared to other sectors, including exporters and retailers. Data from the Salaried Class Alliance of Pakistan (SCAP) suggests that the salaried class’s contribution to the national exchequer in the outgoing fiscal year (2024-25) was projected to be five times higher than that of these other segments, collecting approximately Rs430 billion in income tax in the first ten months alone.

Recognizing this disparity and the severe impact of soaring inflation on household budgets, Prime Minister Shehbaz Sharif's government has made a commitment to provide substantial relief. The proposed changes, largely supported by the IMF, include:

• Raising the tax-free annual income threshold from Rs 600,000 to Rs 1 million, effectively exempting monthly salaries up to Rs 83,000. This is a considerable increase from the existing Rs 50,000 monthly exemption limit.
• Reducing income tax rates across all salary slabs. For instance, the tax rate on a monthly salary of Rs 100,000 could be halved from 5% to 2.5%, with higher-slab rates also seeing reductions of approximately 2.5 percentage points. The maximum tax rate for the highest income bracket is expected to decrease from 35% to 32.5%.

These adjustments are anticipated to offer significant relief to lower and middle-income earners, potentially sparing hundreds of thousands of households from any income tax liability for the first time. The total fiscal cost of this relief package could be substantial, estimated around Rs 350 billion, or 0.4% of the GDP.

The Rationale Behind Taxing Savings

To bridge the revenue gap created by these tax concessions for the salaried class, the FBR is exploring new avenues, and increasing the tax on interest income from bank deposits and various savings schemes has emerged as a primary candidate. The current tax rate on interest income stands at 15% for filers and a much higher 35% for non-filers. The proposed 2% hike would apply to both categories, bringing the rates to 17% and 37% respectively.

The rationale behind this move is multifaceted. Firstly, it aims to redistribute the tax burden more equitably across different income streams. While the salaried class faces direct and often inflexible deductions, interest income from savings, particularly for those with substantial deposits, can represent a significant source of passive income. Secondly, by targeting a segment of the economy that is documented, the government hopes to enhance tax collection efficiency without necessarily expanding the tax net to new, informal sectors immediately, although this remains a long-term goal.

Concerns and Potential Impact

However, the proposed tax hike on savings is not without its critics. Tax experts and economists have raised concerns about its potential impact on the national savings rate, which is already among the lowest in the region. Increasing the tax on interest income could discourage individuals from parking their money in formal financial instruments, potentially driving savings into untaxed or less regulated alternatives. This could further weaken a crucial pillar of economic stability and reduce the capital available for investment, hindering long-term economic growth.

Furthermore, those heavily reliant on interest income from their savings, particularly retirees or individuals with fixed incomes, could face additional financial strain, especially in an environment where declining policy rates are already reducing returns from banks.

The Path Forward: Balancing Act

The upcoming federal budget, expected to be presented in the National Assembly around June 12, 2025, will be a critical juncture. The government faces a delicate balancing act: providing tangible relief to the hard-pressed salaried class while simultaneously meeting the ambitious revenue targets agreed upon with the IMF. Beyond the proposed tax adjustments, efforts are also underway to enhance tax collection efficiency by cracking down on non-filers, widening the tax base by bringing the informal sector into the documented economy, and rationalizing other expenditures.

The final shape of these proposals will depend on ongoing discussions with the IMF, which is reviewing various measures including the proposed hike on passive income. The outcome will not only determine the immediate fiscal landscape but also set the tone for Pakistan's economic direction in the coming year, underscoring the government's commitment to both social welfare and fiscal discipline.