The Rs 10 Million Surcharge Cliff, and Why Earning More Could Leave You With Less
Most tax thresholds in Pakistan are gentle. You cross into a higher slab and only the money above the line is taxed at the higher rate. The section 4AB surcharge did not work like that, and for two tax years it produced a result that surprises people.
How the surcharge worked
Section 4AB was introduced by the Finance Act 2024 and applied to individuals whose taxable income for the year exceeded Rs 10 million. It was charged at 10% for tax year 2025 and reduced to 9% for tax year 2026.
The important detail is what it was charged on. It was a percentage of the tax you owed, not of the income above the threshold. Pass Rs 10 million by a single rupee and the surcharge applied to your entire tax bill for the year.
What that does to the arithmetic
Take tax year 2026. On taxable income of exactly Rs 10,000,000, the tax works out at Rs 2,681,000 and no surcharge is due, so you keep Rs 7,319,000.
Now take Rs 10,200,000. The tax on that is Rs 2,751,000, and because you are over the threshold, 9% of it is added as surcharge. That is another Rs 247,590, giving a total of Rs 2,998,590 and leaving you Rs 7,201,410.
You earned Rs 200,000 more and kept Rs 117,590 less.
Where the band ends
Take home pay does not recover until taxable income reaches roughly Rs 10,390,000 for tax year 2026. Anywhere between Rs 10 million and about Rs 10.39 million, you would have been better off earning less.
For tax year 2025, when the surcharge was 10%, the affected band was slightly wider and the worst point cost about Rs 276,000.
Does this still apply
For salary income, no — the surcharge was withdrawn for the salaried class with effect from 1 July 2026, so it does not apply to salaried tax year 2027 onward. ⚠️ Read that scope carefully. The Finance Act 2026 amended the proviso to section 4AB rather than removing the charge itself, so if your income is from business, property or another non-salary source you should not assume the surcharge has gone for you. Confirm your own position before relying on it. It matters if you are filing or revising a return for tax year 2025 or 2026, or if you are looking back at what was deducted from a bonus in those years.
Our tax calculator models the surcharge for the years it applied, and warns you when a salary you enter falls inside the band.
Why a cliff is different from a slab
Every other threshold in the salary schedule is marginal. Cross from the 25% band into the 29% band and only the rupees above the line are charged at 29%; the money below keeps the treatment it already had. Nobody is ever worse off for earning more.
Section 4AB was not built that way. It was a switch rather than a gradient — below the line it was worth nothing, above it, it applied to the whole tax bill at once. That is what economists call a cliff, and it is generally regarded as a drafting fault rather than a policy choice, because it makes the tax system pay people to earn less.
The dead zone for tax year 2026 ran from Rs 10,000,000 up to about Rs 10,390,121, and the worst point inside it cost roughly Rs 241,289. Anywhere in that band you would have kept more money by earning less.
What it did to behaviour
Thresholds like this change what people do, not just what they pay. In the two years the surcharge applied, it was rational for someone close to the line to defer a bonus into the following tax year, decline an increase that would carry them just over, or ask for the difference in a non-salary form.
None of that is avoidance. It is people responding sensibly to a rule that punished a small increase with a large charge — and it is the practical argument against cliff thresholds generally.
If you think you were caught by it
It is worth checking rather than assuming, particularly if a bonus or arrears pushed your taxable income over Rs 10 million in tax year 2025 or 2026 when your base salary would not have.
- Put your taxable income for that year into the income tax calculator and select the year. It models the surcharge for the years it applied and flags a figure that falls inside the band.
- Compare the result against what was actually deducted, using your salary certificate for the year.
- If the two do not agree, that is a conversation with your employer’s payroll or with a practitioner — the surcharge was new in tax year 2025 and not every payroll system handled it correctly at first.
Common questions
Was the surcharge charged on my income above Rs 10 million?
No, and this is the detail that makes it a cliff. It was a percentage of your whole tax bill for the year, triggered by passing the threshold — not a rate on the income above it.
Does it still apply to me?
Not if your income is salary — it was withdrawn for the salaried class from 1 July 2026. If your income comes from business, property or another non-salary source, do not assume it has gone; see the note below.
Which years does it affect?
Tax years 2025 and 2026 only. Section 4AB did not exist before tax year 2025.
Last updated: 5 September 2026 · Tax year: TY2025 and TY2026
Sources
- Income Tax Ordinance 2001, section 4AB (surcharge on high income individuals)
- Finance Act 2024, introduction of section 4AB at 10%
- Finance Act 2025, reduction of the section 4AB rate to 9%
- Finance Act 2026, withdrawal of the surcharge from 1 July 2026
- Professional firm commentary on the section 4AB surcharge, accessed 28 July 2026
This article gives general information about tax in Pakistan. It is not advice on your own situation. Rules and rates change, sometimes in the middle of a year. Before you act on anything here, check the current position with the FBR or a registered tax practitioner.
