In an attempt to offer some relief to the salaried class, the Federal Board of Revenue (FBR) is considering increasing tax on interest income by 2%. This tax would apply to interest earned from commercial banks and savings schemes. The proposal is part of budget discussions for the fiscal year 2025–26 and is under review with the International Monetary Fund (IMF).
According to officials, the tax hike may apply to both filers and non-filers. Currently, filers pay 15% on interest income, while non-filers pay up to 35%. The suggested 2% increase aims to offset potential revenue losses if the government gives relief to salaried workers. However, IMF approval is still pending, and details are being worked out to meet its fiscal conditions.
Tax experts and former officials have raised concerns about this proposal. Dr. Muhammad Iqbal, former Member of FBR’s Tax Policy, said the current 15% rate is already high. He pointed out that interest income is often earned from already-taxed funds. Increasing taxes on such income could make life harder for many people, especially retirees and fixed-income individuals who rely on bank profits.
He explained that the 15% rate only applies to individuals earning up to Rs5 million annually in interest. If income exceeds that limit, the person pays regular income tax on the total amount, including interest. Companies also pay tax on interest income at a rate of 29%, plus surcharges and super tax. This move could discourage savings and impact liquidity in the banking sector.
Critics warn that raising this tax could further reduce profit margins for savers, who are already hit by falling policy rates. Commercial banks could also suffer if people pull out their savings due to lower returns. Dr. Iqbal questioned the fairness of this move, asking why the government is targeting interest income when the dividend tax rate remains at 15%. He suggested that this step could distort the tax system and burden honest savers even more.