Income from Property – Income Tax Ordinance 2001
Rent chargeable on an accrual basis is taxable under the head income from property. Rent means the sum of money either received or receivable by the owner of any land or building for the use or occupation. (Section 15-16).
Chargeable rent consists of the following;
- Higher of actual rent or fair market rent of land or building. Actual rent in case of self-hiring.
- Forfeited deposit under a contract for the sale of land or building.
- 10% of the deposit from the tenant (not applicable in the case of an open plot).
- Signing amount.
In self-hiring, the employee gets the accommodation from the employer as a perquisite and the same accommodation is owned by him/her or spouse. In this case, actual rent only (and not the fair market value rent) paid or payable by the employer is taxable under income from property in the hands of the employee or spouse. The higher of fair market value or 45% of the basic salary is taxable in the head salary.
The following are taxable under the head “ income from other sources”
- Rent of a building together with plant and machinery.
- Any amount in respect of utilities or service charges in respect of land or building.
Deposits received by the owner that are not adjustable against Rent
The deposits received by the owner which are not adjustable against rent are chargeable in 10 years i.e. 10% per year. However, the amount received in respect of the open plot is not treated as chargeable rent.
If the said amount is refunded by the owner before the expiry of 10 years then no portion is taxable in the year of refund.
For example, if the amount received by the owner is Rupees 100,000 and 4 years have passed so total of Rupees 40,000 shall be chargeable in individual 4 years (100,000 x 10% = 10,000 per year) and if the amount is refunded in the 5th year, then in this year no portion is taxable.
Deposits from New Tenant not adjustable against the rent
In case of a change of the tenant, the owner receives any deposit which is not adjustable against the rent from the new tenant. Then the amount which is already taxed in previous years shall be deducted and the balance shall be treated as chargeable in 10 years.
In the above example, Rupees 40,000 is already chargeable if the owner receives Rupees 200,000 from the new tenant. Now the balance shall be chargeable i.e. Rupees 160,000 (Rupees 200,000 – Rupees 40,000) for the next 10 years which is Rupees 16,000 (Rupees 160,000 x 10%) per year.
Property rental income for agricultural purposes – Section 41
Agricultural income is exempt from tax u/s 41. Therefore, letting any property situated in Pakistan on rent for agricultural purposes is exempt.
Co-ownership of property – Section 66
Association of Persons (AOP)
If an AOP buys property from its own resources and is registered in the name of one or more partners, then the rental income is taxable in the hands of the AOP.
More than 1 owner
Ownership of property in the hands of more than 1 owner does not make it an AOP. Therefore, rental income on sharing basis is taxable in the hands of each co-owner.
The below deductions are allowable from chargeable rent;
- Repairs @20% (1/5) of the rent of the building irrespective of the actual expense.
- Insurance on a building.
- Property taxes including ground rent payable to government authorities.
- Internet or markup including mortgage charges on loans utilized for a property.
- Legal charges for any suit connected with the property including defending the title of a property.
- Share of rental income to HBFC or any scheduled bank including share towards appreciation in the value of the property.
- Any other expenses up to 4% of chargeable rent wholly and exclusively to derive chargeable rent e.g. administration and collection charges.
- Irrecoverable unpaid rent on the below conditions;
- The tenancy was bona fide (genuine).
- Unpaid rent was previously chargeable to tax.
- The defaulting tenant has either vacated the property (or steps have been taken to compel him to vacate) and
- The tenant is not in occupation of other property of the person.
However, if the unpaid rent is subsequently paid same shall be taxable.
Depreciation on the property is not allowed as a deductible allowance.
Any unpaid expenditure Allowed as an expense is liable to be paid within 3 years from the end of the tax
year in which it was allowed.
If the amount is not paid until 3 years then the same shall be taxable in the 4th year. But if it is paid subsequently the same shall be allowed as an expense.
Apportionment of common expenses
Common expenses shall be apportioned when land or building is;
- Not available for rent for the whole year. For example, it is in the user of the owner for part of the year.
- Partly rent out. For example, 30% is used by the owners, and 70% rent out.
- Expenditure is partly used for some other purpose. For example, a loan taken for the property is partly used for personal purposes or for the purchase of a vehicle.
Apportionment shall not be done if the property is available for rent for the whole year but in actuality, it is rented out for part of the year or the tenant was not available in that part of the year.
Where Chargeable rent is lower than allowable deductions then the loss can be adjusted against any other head of income except salary and income under FTR (final tax regime). Unadjusted loss can not be carried forward.
Rates of tax deduction at source – Division V Part III 1st Schedule
Owner is a company: 15% of gross rent
Owner is individual or AOP: Below Table
Gross Annual Rent Amount
Rate of tax
|Upto Rupees 300,000||NIL|
|Rupees 300,001 – Rupees 600,000||5% of the gross amount exceeding Rs.300,000|
|Rupees 600,001 – Rupees 2,000,000||Rs.15,000 + 10% of the gross amount exceeding Rs.600,000|
|Exceeding Rupees 2,000,000||Rs.155,000 + 25% of the gross amount exceeding Rs.2,000,000|
Who can deduct tax at source from the rent of immovable property – Sec 155
- Federal, Provincial, or local government;
- Non-profit organization or charitable institution;
- The diplomatic mission of a foreign state;
- Private educational institution, boutique, beauty parlor, hospital, clinic, or maternity home; or
- Individuals or AOP paying gross rent of Rupees 1,500,000 and above in a year.