The Rs 600,000 Tax-Free Salary Threshold Explained (2026-27)
One of the most important figures for salaried individuals under Finance Act 2026 is the Rs 600,000 annual tax-free threshold. Zaffre Tech explains what it means, who benefits and how to keep your taxable salary correctly measured for 2026-27.
What the threshold means
If your annual taxable salary is Rs 600,000 or less - that is up to Rs 50,000 a month - your income tax is zero. This is the entry point of the progressive slab structure in the Income Tax Ordinance 2001, First Schedule, Part I, Division I.
It is a floor, not a cliff
Crossing Rs 600,000 does not suddenly tax your entire salary. Only the amount above Rs 600,000 is taxed, and only at 1% in the next band.
| Annual taxable income (Rs) | Tax |
|---|---|
| Up to 600,000 | 0% |
| 600,001 - 1,200,000 | 1% of amount over 600,000 |
For example, an annual salary of Rs 650,000 is taxed at 1% on Rs 50,000 - just Rs 500 for the whole year. There is no penalty for crossing the line.
What counts toward the Rs 600,000
Your taxable salary is more than basic pay. Most allowances - house rent, conveyance, utilities and mobile - are fully taxable and count toward the threshold. A few items reduce the base:
- Medical allowance is exempt up to 10% of basic salary under Clause 139 of the Second Schedule, provided free treatment or health insurance is not separately given.
- Employer provident fund contributions are exempt up to the lower of 10% of basic or Rs 150,000 a year.
Used correctly, these reliefs can keep an employee with modest allowances at or under the tax-free line.
Income tax zero does not mean zero deductions
Even within the exempt band, EOBI applies at 1% employee and 5% employer of the minimum wage under the EOBI Act 1976, with the Budget proposing a minimum wage of Rs 40,700. These statutory contributions are separate from income tax.
Why precise tracking matters
A single bonus, arrear or mid-year increment can push an employee just over Rs 600,000, triggering a small tax that must be deducted and reported to FBR. Zaffre Axon and the Zaffre HRM payroll module continuously annualise taxable salary, apply the exemption correctly and handle EOBI, so threshold employees are neither over-deducted nor missed. Check any figure with the Zaffreaxon salary tax calculator.
References: Finance Act 2026 (Federal Budget 2026-27); Income Tax Ordinance 2001, First Schedule, Part I, Division I; Second Schedule, Clause 139; EOBI Act 1976; FBR.
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