Finance Minister Muhammad Aurangzeb stood before the National Assembly on Friday, June 12, 2026, and presented a federal budget of Rs 17.573 trillion for fiscal year 2026-27. It was a budget that gave something to almost every constituency and, in doing so, satisfied none of them entirely. Federal employees got a salary increase below inflation. The salaried class got a tax cut concentrated above the median wage. BISP families got a higher stipend. And the broader public, including the drivers of every car and the operators of every generator, absorbed a higher petroleum levy without ever being asked.
The headline numbers, in one place
The total federal outlay for FY27 is broadly comparable to the current year, but the composition has shifted in ways that will be felt at kitchen tables, factory gates, and forex counters alike.
Put those figures side by side and a pattern emerges: revenue is being squeezed upward to fund a defence allocation that is itself rising sharply, while debt servicing, although marginally lower thanks to the State Bank’s policy rate cuts, still eats nearly half of every rupee the federal government spends. There is little room left for development, and almost none for the kind of broad-based relief Pakistanis were asking for ahead of the budget.
Salaries and pensions: the 7% decision
The federal cabinet approved a 7% increase in salaries and pensions for government employees ahead of the budget speech, ending weeks of speculation that had ranged from a flat tax-only relief package to a 10% ad hoc raise. The figure sits below the headline inflation rate of 10.9% recorded in April 2026, which means that in real purchasing-power terms, federal employees are taking a small pay cut even as they receive a nominal raise.
The government paired the salary decision with the income tax relief package described below, effectively splitting the available fiscal space between a direct wage increase and a reduction in deductions at source. For Grade 17 and above officers whose tax liability is meaningful, the combined effect of a 7% raise plus a lower marginal rate produces a larger net take-home gain than either measure alone. For workers in lower grades, the salary increase is the entire story.
Income tax relief: who actually benefits
Aurangzeb announced income tax relief across four slabs for salaried individuals, alongside the abolition of the 9% surcharge that had applied to high earners. The changes are concentrated in the middle and upper-middle income brackets, not at the bottom of the table.
| Annual taxable income (PKR) | Old rate (TY2026) | New rate (TY2027) |
|---|---|---|
| Up to 600,000 | 0% | 0% |
| 600,001 – 1,200,000 | 1% | 1% |
| 1,200,001 – 2,200,000 | 11% | 11% |
| 2,200,001 – 3,200,000 | 23% | 20% |
| 3,200,001 – 4,100,000 | 30% | 25% |
| 4,100,001 – 5,600,000 | 35% | 29% |
| 5,600,001 – 7,000,000 | 35% + surcharge | 32% (new slab) |
| Above 7,000,000 | 35% + 9% surcharge if >10m | 35% (surcharge abolished) |
For a full bracket-by-bracket breakdown of the new rates, our detailed guide on the latest income tax slabs and how to calculate your new liability walks through the methodology step by step.
The relief is targeted, not universal. Individuals earning between Rs 100,000 and Rs 183,000 a month — the largest segment of Pakistan’s salaried workforce — see no change to their applicable rate, which remains Rs 500 plus 11% of income above Rs 100,001. For them, the 7% salary increase is the only relief on offer.
Defence spending rises sharply
Defence allocation climbs from Rs 2.55 trillion in FY26 to approximately Rs 3 trillion in FY27, an increase of close to 18%. Aurangzeb framed this allocation within the context of Operation Bunyan-um-Marsoos, describing it as a defining episode in the recent military standoff, and referenced a new defence cooperation agreement between Pakistan and Saudi Arabia as evidence of strengthened strategic partnerships. The strategic context, including the wider posture of Pakistan’s armed forces and their 2026 readiness, makes a 3-trillion-rupee defence figure politically defensible, even as it crowds out civilian development.
Under the 18th Amendment’s fiscal architecture, defence spending is a federal responsibility that sits outside the NFC Award divisible pool, meaning the increase is absorbed entirely by the federal government rather than being shared with the provinces. With debt servicing and defence together accounting for close to Rs 11 trillion of the Rs 17.573 trillion outlay, more than 60% of total federal spending is now committed before development, social protection, or civilian administration are funded.
BISP and the cost of targeted relief
The Benazir Income Support Programme receives Rs 838 billion in FY27, up from Rs 716 billion in FY26, an increase of close to 17%. The quarterly stipend rises from Rs 13,000 to Rs 14,500 per beneficiary family. The increase is smaller in percentage terms than the 21% jump BISP received the previous year, but it continues the programme’s role as the primary mechanism for protecting low-income households from energy tariff adjustments under the IMF programme. Provincial social-protection initiatives, such as the Punjab Rehmat Card for widows and orphans, sit alongside BISP rather than replacing it.
BISP’s growth trajectory across three consecutive budgets — from Rs 591 billion to Rs 716 billion to Rs 838 billion — reflects a structural commitment rather than a one-off allocation. As Pakistan continues moving electricity and gas tariffs toward cost recovery, the targeted cash-transfer model embodied by BISP remains the IMF’s preferred substitute for blanket subsidies that benefit all consumers regardless of income.
Petroleum levy, environmental levy, and the price of driving
The petroleum levy collection target rises to Rs 1.727 trillion from Rs 1.468 trillion, an increase of Rs 259 billion. This pre-committed increase under the IMF programme means fuel-linked costs across transport and logistics rise regardless of relief delivered elsewhere in the budget. The April 2026 Rs 27 per litre increase in petrol and diesel prices showed how quickly these levy changes pass through to the pump.
For the first time, the budget introduces a new Environmental Levy on larger petrol and diesel vehicles, applying a 10% levy on vehicles with engine capacities between 2001cc and 3000cc, and a 19.5% levy on vehicles exceeding 3000cc. The government expects to collect approximately Rs 25.8 billion through this levy, which functions both as a revenue measure and as an environmental policy signal aimed at larger, higher-emission vehicles.
Development spending: PSDP holds flat
The federal Public Sector Development Programme is set at Rs 1 trillion for FY27, unchanged in nominal terms from FY26 despite the Ministry of Planning’s earlier demand for a substantially higher allocation. Provincial development programmes are budgeted at Rs 2.218 trillion, with the National Economic Council approving a combined national development plan worth Rs 3.669 trillion across federal and provincial tiers.
Reaching this combined figure required negotiated cuts to provincial development budgets, including reductions of Rs 701 billion in Punjab, Rs 110 billion in Sindh, and Rs 109 billion in Khyber Pakhtunkhwa. A flat PSDP allocation against an FBR target growing by close to 18% means development spending’s share of the total budget continues to shrink in relative terms, even as its nominal value holds steady. The wider economic backdrop, set out in the finance minister’s pre-budget growth briefing, gives some context for why the federal government has chosen consolidation over expansion.
What the numbers mean together
Taken together, the FY27 budget confirms a pattern that analysts had flagged before budget day: fiscal space remains too narrow for broad-based relief, so the government has split available resources between a modest salary increase, targeted income tax relief concentrated in upper-middle income brackets, and continued protection for BISP beneficiaries. Debt servicing and defence together absorb the majority of federal spending, leaving development spending essentially flat in nominal terms for a second consecutive year. The recurring tension in Pakistan’s fiscal framework, between an IMF-mandated primary surplus and the political need to deliver visible relief, has produced a budget that gives something to almost every constituency without fully satisfying any of them.
For ordinary households, the practical impact will be felt first at the petrol pump and on the electricity bill, both of which carry the cost of higher petroleum and gas surcharges, even as overall cost-of-living pressures continue to shape household budgets in 2026. Salaried employees get a tax cut concentrated above the median income, federal employees get a below-inflation raise, BISP families get a stipend increase, and the broader public absorbs a higher petroleum levy regardless of where they sit on the income scale.
Frequently asked questions
Sources: Federal Budget FY27 documents (Ministry of Finance, FBR), Dawn, Business Recorder, AKD Securities Research, Tribune. Figures are based on the budget speech and Finance Bill proposals and are subject to change upon formal passage by Parliament.
