The Finance Bill 2025–26 proposes vast changes to the Income Tax Ordinance, 2001. The goal is to make the tax system fairer and to make it easier to follow the rules by using technology and keeping records. A wide range of taxpayers will be affected by these developments, from those who work for a living to pensioners, big businesses, and digital entrepreneurs. Here is a full look at the most important ideas and what they may mean.
Revised Slab Rates for Salaried Individuals
The change in tax slab rates is a big comfort for anyone who work for a salary. Even while the top marginal rate is at 35%, rates for people with lower and medium incomes have gone down. For example, people who make between Rs. 600,000 and Rs. 1,200,000 a year would now only pay 1% of the amount over Rs. 600,000 instead of 5%. Also, the extra levy for people who make more than Rs. 10 million in taxable income is planned to go down from 10% to 9%. These improvements will cut the effective tax burden for most salaried taxpayers, especially those with intermediate incomes. Higher earners will get some relief, but not much.
Withdrawal of Exemptions on Pension and VPS Withdrawals
The Bill suggests getting rid of the 50% exemption that used to be granted for withdrawals from Voluntary Pension Funds. In addition, anyone under the age of 70 will have to pay 5% tax on any pension or annuity income over Rs. 10 million a year. People with a lot of money and early retirees who arrange their finances around their pensions will now have to pay taxes on significant lump-sum withdrawals, which will make their post-retirement cash flow less favorable.
Reinstatement of 25% Tax Credit for Teachers and Researchers
The Bill suggests bringing back the 25% tax credit for full-time teachers and researchers, which would be in force from July 1, 2022, until the end of tax year 2025. This is a good thing for schools. The Finance Act of 2022 took away the refund, which caused tax demands and debate. This gives teachers a much-needed break and protects them from having to pay taxes on money they didn’t get back since the rebate was taken away earlier.
Tax Credit for Low-Cost Housing Loans
Section 63A was included to encourage people to own their own homes by giving them a tax credit for the interest they pay on loans they take out to buy or build their own homes. This is true for homes that are no bigger than 2,500 square feet and apartments that are no bigger than 2,000 square feet. People who work for a salary, especially first-time homebuyers, would gain a lot from this, as it will make homes more accessible through a direct tax break.
Introduction of Tax Framework for E-Commerce and Digital Transactions
A new Section 6A adds a tax on payments for products and services bought online through local e-commerce sites. Payment processors and delivery providers will keep taxes and this will be the end of the tax responsibility. Vendors must register, and those who don’t might face fines of up to Rs. 1 million. This is a big change since it officially makes the digital economy subject to income tax regulations. It makes online vendors and platforms follow the rules, and it also makes it easier for tax authorities to see how much money they are making.
No Expenses Allowed to Promote Documentation
To stop unauthorized business activities, the following disallowances are suggested:
- 10% of purchases from people who don’t have NTN will not be accepted.
- Half of the costs of cash-based sales beyond Rs. 200,000 each invoice will not be authorized.
- If the seller doesn’t follow the rules in Section 152 or 153 on withholding, depreciation won’t be authorized.
These steps force firms to keep records of their transactions and make sure they follow the rules for withholding taxes, which will make the documentation system stronger in the end.
Minimum Fair Market Rent for Businesses
It is suggested that the rental revenue from a business should be at least 4% of the property’s FBR-declared fair market value, unless the taxpayer can prove with good evidence that the real rent is lower. This change is meant to stop people from underreporting rental income, especially on high-value commercial properties in cities. It also aims to make sure that the government gets a minimum amount of money.
Limits on Group Relief and the Set-Off of Business Losses
Companies that pay taxes under fixed/final regimes would no longer be able to seek collective relief by giving up their losses. Also, you won’t be able to use company losses to offset property income, which goes against the relief that was put in place in 2021. This makes it harder for business groups and mixed-income companies to prepare their taxes, which raises their overall effective tax burden.
Super Tax Rates Will Slowly Go Down Starting in Tax Year 2026
For Tax Year 2025, the super tax under Section 4C will stay the same. However, starting in Tax Year 2026, rates are planned to go down slowly across several income brackets. For example, the tax rate on income between Rs. 250 and 300 million will go down from 3% to 2.5%. This progressive respite is likely to help big enterprises in the medium term, especially those who aim to grow quickly and spend a lot of money on new things.
People Who Aren't Eligible Can't Do Business With Each Other
The Bill talks about “ineligible persons,” which are those who don’t submit returns or don’t report enough of their claimed resources. People like this may not be able to buy property, register automobiles, open bank accounts, or take out huge amounts of cash. Also, banks will now have to disclose consumer information with the FBR based on algorithms that use AI. This approach encourages people to pay their taxes by keeping non-filers from being able to participate in important economic activities. This strengthens the government’s digital enforcement infrastructure.
Changes Impacting Banks
The Finance Bill makes big reforms to the financial industry. You now have to spread out the cost of leasehold upgrades across ten years. Under IFRS 16, the depreciation on right-of-use assets and the cost of financing will be replaced by the real rent charge, which will be verified by outside auditors. Provisions against loans that don’t pay must also be approved in a certain way. These changes modify how banks account for certain expenses, which might mean that they have to make modifications to past records and face compliance issues.
Other Important Steps
- The advance tax on cash withdrawals by people who don’t file their taxes went hiked from 0.6% to 0.8%.
- Capital gains from selling debt securities to get withholding tax from custodians, like banks.
- The way taxes are handled for mutual fund distributions and offshore digital services has changed, and the rates of withholding have gone up.
- Tax breaks have been extended for the ICC Champions Trophy 2025, Special Economic Zones (until 2035), and those who used to live in tribal territories (until 2026).
- Taxpayers who have been audited in the previous three years instead of four are now immune from audit.
- To counterbalance the tax burden, advance tax rates on real estate were changed such that seller rates went up and buyer rates went down.
Conclusion: Navigating the New Tax Landscape
The Finance Bill 2025–26 signals a clear policy direction prioritizing transparency, digital traceability, and equitable taxation. While salaried individuals may find relief in reduced tax rates and targeted credits, businesses will need to reassess their compliance structures, transaction recording practices, and tax planning strategies. The proposed changes demand proactive evaluation and realignment to mitigate risk and leverage available reliefs.
At Tax Way, we are committed to guiding individuals and businesses through these changes with tailored advisory, compliance support, and strategic tax planning. Reach out to our team to understand how these reforms impact your tax profile and what steps you should take in response.
