Finance Act 2026 took effect on 1 July 2026, and its income tax changes apply to Tax Year 2027, the year running from 1 July 2026 to 30 June 2027. The headline changes for individual taxpayers are a wider set of salaried tax slabs with lower middle rates, the end of the 9% surcharge on high salaried income, the omission of Section 7E, a broader tax credit for businesses that integrate with FBR systems, and two new ways FBR can deal with your case: faceless assessment and an algorithmic settlement offer. One point matters before anything else: the return most people are filing right now, in the current filing season, is for Tax Year 2026, and that return still uses the Tax Year 2026 slabs. The new slabs below apply to income earned from 1 July 2026 onwards, and employers have been deducting salary tax at the new rates since July 2026.
New salaried tax slabs for Tax Year 2027
The salaried table in Division I of Part I of the First Schedule now has eight brackets instead of six. The first three brackets are unchanged, the middle rates have come down, and the top rate of 35% now starts at Rs 7,000,000 instead of Rs 4,100,000. The full updated table is also on our tax slabs page.
| Taxable salary (Rs) | Tax Year 2026 | Tax Year 2027 |
|---|---|---|
| Up to 600,000 | Nil | Nil |
| 600,001 to 1,200,000 | 1% of the amount above 600,000 | 1% of the amount above 600,000 |
| 1,200,001 to 2,200,000 | Rs 6,000 + 11% of the amount above 1,200,000 | Rs 6,000 + 11% of the amount above 1,200,000 |
| 2,200,001 to 3,200,000 | Rs 116,000 + 23% of the amount above 2,200,000 | Rs 116,000 + 20% of the amount above 2,200,000 |
| 3,200,001 to 4,100,000 | Rs 346,000 + 30% of the amount above 3,200,000 | Rs 316,000 + 25% of the amount above 3,200,000 |
| 4,100,001 to 5,600,000 | Rs 616,000 + 35% of the amount above 4,100,000 | Rs 541,000 + 29% of the amount above 4,100,000 |
| 5,600,001 to 7,000,000 | Rs 616,000 + 35% of the amount above 4,100,000 | Rs 976,000 + 32% of the amount above 5,600,000 |
| Above 7,000,000 | Rs 616,000 + 35% of the amount above 4,100,000 | Rs 1,424,000 + 35% of the amount above 7,000,000 |
The slabs for non-salaried individuals and associations of persons were not changed by Finance Act 2026.
Example 1: Salary of Rs 5,000,000
Taxable salary of Rs 5,000,000 a year, with no other income:
- Tax Year 2026: Rs 616,000 + 35% of Rs 900,000 = Rs 931,000
- Tax Year 2027: Rs 541,000 + 29% of Rs 900,000 = Rs 802,000
That is Rs 129,000 less tax on the same salary, purely from the wider brackets and the lower 29% rate in that band.
The 9% surcharge on salaried income is gone
For Tax Year 2026, a salaried individual with taxable income above Rs 10 million also paid a surcharge of 9% of the tax. Finance Act 2026 changed the position for salaried individuals to "no surcharge shall be payable", so from Tax Year 2027 the surcharge no longer applies to salary income. Read this carefully, because the surcharge has not disappeared for everyone: non-salaried individuals and AOPs with taxable income above Rs 10 million still pay a surcharge of 10%.
Example 2: Salary of Rs 12,000,000
Taxable salary of Rs 12,000,000 a year:
- Tax Year 2026: tax of Rs 3,381,000, plus 9% surcharge of Rs 304,290, total Rs 3,685,290
- Tax Year 2027: tax of Rs 3,174,000, surcharge nil, total Rs 3,174,000
The total saving is Rs 511,290, part from the wider slabs and part from the surcharge ending.
Section 7E has been omitted
Section 7E charged resident persons tax on deemed income from immovable property: deemed income was taken as 5% of the fair market value of the property and taxed at 20%, an effective charge of 1% of fair market value, subject to exclusions such as one self-owned property and property on which rental income tax was paid. Finance Act 2026 omitted Section 7E from the Income Tax Ordinance, 2001 (see the Finance Act 2026 text). For Tax Year 2027 there is therefore no Section 7E charge to compute in your return. Matters relating to earlier tax years, when Section 7E was part of the law, stand on the law of those years, so do not treat the omission as cancelling a past year's liability or notice by itself.
Salary withholding under Section 149 in Tax Year 2027
Employers deduct tax from salary at the average rate of tax on the employee's estimated salary income for the year, after adjusting tax already withheld under other heads and the tax credits admissible under Section 61 (donations) and Section 63 (approved pension fund). Two specific rules are worth knowing:
- A directorship fee, including a fee for attending board meetings, is taxed by withholding at a flat 20% of the gross amount instead of the average rate, and the tax deducted is adjustable.
- Where a pension is paid to a former employee below the age of seventy and the pension for the year exceeds Rs 10 million, the payer deducts tax at 5% on the amount above Rs 10 million, after the prescribed adjustments.
One adjustment that does not enter the employer's withholding calculation is the deductible allowance for children's education expenses under Section 60D. If your employer has not counted an allowance or credit you are entitled to, it is settled in your own return, not by asking payroll to change the deduction mid-year. A salaried individual is also not required to pay advance tax under Section 147.
Withholding tax on rent under Section 155
A prescribed person paying rent for immovable property (including rent of furniture and fixtures and related services) must deduct tax from the gross rent. Prescribed persons include government bodies, companies, non-profit organisations, diplomatic missions, private educational institutions, hospitals and clinics, and any individual or AOP paying gross rent of Rs 1,500,000 or more in a year. Gross rent includes any non-adjustable amount received in relation to the building. The rates for Tax Year 2027 are:
| Gross rent per year (individual or AOP) | Tax to be deducted |
|---|---|
| Up to Rs 300,000 | Nil |
| Rs 300,001 to Rs 600,000 | 5% of the amount above Rs 300,000 |
| Rs 600,001 to Rs 2,000,000 | Rs 15,000 + 10% of the amount above Rs 600,000 |
| Above Rs 2,000,000 | Rs 155,000 + 25% of the amount above Rs 2,000,000 |
For a company receiving rent, the rate is a flat 15% of the gross amount. Income from property is taxed under the normal tax regime, so this withholding is adjustable against your final liability, not a final tax. If you are a landlord whose tenant is a company or another prescribed person, expect this deduction and make sure you receive the withholding certificate, because you will need it to claim the credit in your return.
Selling online: the digital transactions tax can now be opted out of
The tax on digitally ordered goods and services delivered within Pakistan, under Section 6A, stays at 1% where payment comes through digital means or banking channels and 2% where a courier collects cash on delivery. What Finance Act 2026 changed is how final that tax is:
- If your turnover in the tax year exceeds Rs 200 million, the tax is now adjustable instead of a final discharge.
- If your turnover is up to Rs 200 million, you may opt out of the final tax regime at the time of filing your return, starting from Tax Year 2027. Opting out means your actual income is assessed under the normal regime, which suits sellers whose real profit margin is thin compared with the percentage charged on gross receipts.
Export proceeds taxed under Sections 154 and 154A stay outside this section, as before.
Tax credit for integration under Section 64D: 10% of what you spend
Section 64D was fully substituted by Finance Act 2026. The old credit for point of sale machines, capped at Rs 150,000 per machine, is gone. In its place, any person who is required under the Income Tax Ordinance, 2001, the Sales Tax Act, 1990 or the Federal Excise Act, 2005 to integrate with FBR's computerised system, for real-time production monitoring or for recording or reporting sales and receipts, gets a tax credit of 10% of the amount actually invested in the electronic resource used for that integration: the equipment, hardware and software bought, installed or implemented exclusively for integration. The credit belongs to the tax year in which the resource is installed, integrated and configured, and it comes in addition to the initial allowance and depreciation otherwise available on the same asset. If your business is being pushed to integrate, price the integration work knowing that a tenth of the qualifying spend comes back as a tax credit.
On the deduction side, note the related rule for businesses: expenditure claimed by a person who fails to install the required electronic resource, or fails to act as an integrated enterprise where the law requires it, is disallowed to the extent of 3% of the expenditure claimed.
Faceless assessment and the algorithmic settlement offer
Two procedural changes in Finance Act 2026 affect anyone who receives a notice, not just students of the law:
Faceless audit and assessment (Section 122E). Audit under Sections 177 and 214C, orders under Section 111, assessments and rectification under Section 221 can now be made in a faceless manner for the persons and cases FBR specifies. Where a hearing is needed, it is held as an e-hearing under Section 227E, and the identity of the officer conducting it, including face and voice, is kept confidential. In practice this means your case may be handled without a named jurisdictional officer sitting across from you, and all communication discipline, complete records, timely replies, matters even more.
Algorithmic settlement mechanism (Section 134B). FBR may set up a digitally operated mechanism that calculates and presents a settlement offer to settle proceedings at any stage before an assessment or amended assessment order, through a revised return under Section 114(6). The offer is worked out from factors such as the stage of the proceedings, your compliance history in FBR's data and the nature of the discrepancy. If you want to accept, you have 10 days from the offer to accept it on IRIS, deposit the settlement amount and file the revised return. Accepting abates the proceedings covered by the offer (for example an audit selection notice, a Section 111 notice or an audit report under Section 177(6)), but it does not stop proceedings on other issues the offer did not cover, or for other tax years. Treat the 10-day window seriously: an offer you ignore is not an offer that waits.
What has not changed
Several widely shared summaries present old rules as new ones. For the record, Finance Act 2026 did not change these:
- Capital gains rates on immovable property are the same as before, including the flat 15% for active taxpayers on properties acquired after 1 July 2024, whatever the holding period, and the holding period based rates for properties acquired on or before 30 June 2024. One clarification worth noting on losses: a capital loss on shares of a private company (normal tax regime) can be set off against a gain on shares of a public company (separate block), but the reverse is not allowed.
- Section 75A is unchanged: immovable property with fair market value above Rs 5,000,000 bought outside the banking channel does not get its cost recognised for gain computation, and the asset does not qualify for depreciation and similar allowances.
- The donation tax credit under Section 61 still requires the donation to be paid by crossed cheque drawn on a bank to count, and the approved institutions remain those listed in the Thirteenth Schedule.
- The non-salaried slabs (see the table note above) and the 10% surcharge for non-salaried individuals and AOPs above Rs 10 million also continue.
What to do with this in the current filing season
If you are filing a Tax Year 2026 return now, file it on Tax Year 2026 law: old slabs, Section 7E as it then stood, and the old surcharge position. Use the Tax Year 2027 rules in this article for salary already being taxed from July 2026, for planning a property or business decision that falls in Tax Year 2027, and for any Tax Year 2027 notice that arrives under the new faceless and settlement procedures. When the two years are kept separate, most confusion disappears. The law texts themselves are available in our law library, and if you would rather have the return handled for you, the current options are on the pricing page.
Frequently asked questions
Do the new salaried slabs apply to the return I am filing now?
No. Returns being filed in the current season are for Tax Year 2026 and use the Tax Year 2026 slabs. The new slabs apply to income of Tax Year 2027 (1 July 2026 to 30 June 2027), which is why your employer is already deducting at the new rates on salary paid from July 2026 onwards.
Is Section 7E finished for all years?
No. Finance Act 2026 omitted Section 7E, so it does not apply for Tax Year 2027. Liabilities, exemptions and disputes for earlier tax years are governed by the law as it stood in those years.
Last updated: 20 October 2026
Disclaimer: This article is general information on the Income Tax Ordinance, 2001 as amended by Finance Act 2026, not tax advice for a specific case. Rates and provisions are stated for the tax years named in the article.
Official references:
- Finance Act 2026, Gazette of Pakistan, 26 June 2026: http://na.gov.pk/uploads/documents/6a422720f05a0_626.pdf
- Finance Act 2026 (copy in the TrueFiler law library): https://truefiler.pk/law/FinanceAct2026.pdf