New tax regime may hit middle class hardest

Despite a proposed increase in the tax-free income threshold, many taxpayers, especially salaried individuals, are likely to face a higher tax burden from the next fiscal year.

In the new budget, Finance Minister Amir Khosru Mahmud Chowdhury has proposed raising the tax-free income limit by Tk 25,000 to Tk 375,000. Although the tax-free income threshold has been raised, much of the relief is offset by three major changes in the Finance Bill 2026.

One of the key proposals is the abolition of the 5 percent introductory tax slab.

Its removal means the lowest post-threshold rate rises to 10 percent, effectively increasing the marginal tax burden for lower-tier earners.

Under the proposed structure, individuals earning up to Tk 300,000 on top of the Tk 375,000 threshold will face a 10 percent tax rate.

An analysis found that a taxpayer earning a gross monthly income of Tk 74,000 could see their tax liability rise by nearly 49 percent in FY27

In the current system, taxpayers earning up to Tk 100,000 above the Tk 350,000 threshold pay only 5 percent.

Another change likely to increase pressure on taxpayers is a reduction in tax benefits linked to eligible investments.

The overall effect will be a higher effective tax burden, especially for higher income groups who rely on rebates to reduce liabilities.

An analysis by SMAC Advisory Services Ltd found that a taxpayer earning a gross monthly income of Tk 74,000 could see their tax liability rise by nearly 49 percent in fiscal year 2026-27, due mainly to slab restructuring and reduced rebate benefits.

During the presentation of the bill on Thursday last week, Khosru also proposed a five-year forward-looking tax framework for individuals, under which the first slab rate has effectively doubled from 5 percent to 10 percent.

The burden is expected to remain relatively high for middle-income people. Those earning up to Tk 100,000 a month will continue to face significantly higher tax outflows under the proposed regime.

By contrast, taxpayers earning more than Tk 250,000 a month will see their overall tax liability rise by around 10 percent, highlighting the uneven impact across income groups, according to SMAC Advisory Services Ltd.

Alongside the slab changes, the bill proposes a cut in the tax rebate available on investments in approved savings and financial instruments.

Currently, taxpayers can reduce their tax liability through investment rebates calculated at 15 percent of eligible investments. The proposal lowers this to 10 percent.

The maximum annual rebate is also set to fall to Tk 7.5 lakh from Tk 10 lakh.

As a result, taxpayers who depend on investment schemes to reduce their tax liability will receive smaller benefits unless they increase eligible investments before June 30, 2026.

“These measures will directly raise the effective tax burden on individual taxpayers, especially certain salaried employees,” said Snehasish Barua, a chartered accountant and tax expert.

The bill also introduces a new condition aimed at encouraging long-term savings. Under the proposal, investments must be held until maturity to qualify for tax benefits. If funds are withdrawn early, the rebate previously claimed will have to be repaid as additional tax in the year of withdrawal.

For instance, if a taxpayer withdraws money from a savings certificate before maturity, they will have to repay the tax rebate.

The annual investment limit for deposit pension schemes (DPS) eligible for tax benefits remains unchanged at Tk 1.2 lakh.

The bill also sets a Tk 5 lakh ceiling on investments in government securities that can be considered for tax rebate purposes.

The proposed measures are a part of the government’s broader effort to raise revenue and reduce the cost of tax incentives.

However, for the first time, the National Board of Revenue (NBR) has proposed an incentive for early tax return submission. Taxpayers who file returns by September 30 will be eligible for a rebate equivalent to 5 percent of payable tax or Tk 25,000, whichever is lower.

If approved by parliament, the changes will take effect from tax year 2026-27.

“Except for taxpayers in the lowest tax bracket, those with annual incomes of up to Tk 375,000, almost everyone else will face a higher tax burden under the proposed measures,” said Towfiqul Islam Khan, additional director (Research) at Centre for Policy Dialogue (CPD).

“The increase will be felt across income groups, but the impact will be more pronounced on the middle class. Although higher-income individuals will also pay more tax, the relative increase in tax liability is larger for middle-income earners.”

He said the changes would dilute the intended relief from inflation, as the purchasing power of middle-income households would come under further pressure.

“This group generally has lower disposable income and limited savings. As a result, their consumption capacity is likely to weaken, which could also affect demand for domestically produced goods and services,” Khan said.

He added that the government’s objective appears to be increasing revenue collection while reducing tax concessions linked to investments.

“The policy seems aimed at preserving incentives for productive and industrial investments, while scaling back the tax benefits individual taxpayers receive through investment-related rebates,” said Khan.

“While the government may have moved away from some of the IMF’s recommendations on reducing tax exemptions, this particular measure will put additional pressure on taxpayers, especially middle-income earners,” he added.

He said a detailed assessment is needed, but the overall direction is apparently clear. “A large number of taxpayers will end up paying more tax despite the increase in the tax-free income threshold,” he added.