What is Called Rent:
Tax on Rental Income in Pakistan a Comprehensive Guide: Rental income means that land or a building is given for occupation or use, and the amount received or receivable by the landlord in return is called rent.
Rental amount is not just the monthly payment that the tenant pays to the landlord under the agreement, but also includes other amounts that are considered part of the rent.
Property Income for the fiscal year is chargeable on the accrual basis i.e. it is taxable when it is earned, not when it is actually received.
Treatment of Deposits, and Lease Payments
If any non-refundable/ forfeited deposit is received, it will also be considered as part of the rental income.
Similarly, the non-refundable amount charged to the tenant to enter into the tenancy agreement, which is called the signing fee, will also be considered part of the Property income.
If any ground rent has been paid, that will also be eligible for adjustment as property tax.
Generally, commercial property acquired on a 99-year lease and the leaseholder has to pay to the government every year.
Refundable/security Deposit or Pugree
If the landlord has received any amount of Pugree or non-adjustable deposit from the tenant, it will be divided equally over a period of 10 years and included in each year’s rent.
Exempt Income:
If any land is rented out which is being used for agricultural purposes, then income tax will not be levied on the amount received from the tenant, as it falls under the category of agricultural income.
Tax applied on Fair Market Value
If the rental compensation is set below the market rate, income tax will be levied at the market rate, not on the lower amount. This is because sometimes the amount stated in the agreement is lower than the actual amount paid, in order to avoid taxes on the income from the property.
Allowable Deductions:
Repair and Maintenance Allowance
This allowance is set at one-fifth of the chargeable rent of the building.
Insurance Premium
If an insurance premium has been paid to protect the property from damage or any other calamity, it will be deductible.
Local Taxes:
Any Taxes paid to the local authority such as TMA tax, which is usually paid.
Interest on bank loan
If a loan has been taken from a bank for any alteration, extension or renovation of the property, then the interest paid on that loan will also be allowed to be deducted.
Legal Expenses
If a case related to the property is going on in court and legal services have been taken to defend it, then the expenses incurred on it can also be deducted.
Irrecoverable rent allowance
If it is certain that the arrears (the amount on which taxes have been paid in previous years and which was recoverable from the tenant but which was not paid by the tenant subsequently) will not be recovered, an allowance of the same amount will be given, provided that the:
Tenancy was genuine or bona fide
Tenant has left the premises or legal action has been taken to vacate and is not living in any other property of the owner.
If unpaid rental was taken as a deduction and later recovered from the tenant, then the same amount will be taxable again.
Other expenses
The limit of other expenses will not exceed 4% of the rent chargeable. If the expenses exceed this, then only up to 4% will be allowed. For example, if the annual payment is 100,000 and the expenses are 10,000, then out of this, only 4,000 (which is 4%) will be allowed, the remaining 6,000 will not be deductible.
Chargeable Rent:
Consists of rental of the building/land as per the agreement plus signing fee, ground fee, and proportion of pugree or security Deposit minus allowable deduction.
Who will deduct the withholding tax on rental property?
This is the tax that the tenant is obligated to deducts at the applicable rates before paying the rental amount to the landlord and later deposits it in the government treasury.
This Levy is not deducted directly by the common citizen, but the person or institution nominated as the Withholding Agent will deduct and deposit them with FBR. That is, if the tenant is a government department, company, Business Individual or association of peons will deduct this tax and deposit it in the national treasury.
An individual or an Association of Peons (AOP) will also become a withholding agent if their annual turnover or sales revenue exceeds 10 million or 1,000,000 in any one of the last three financial years.
Rate of Withholding Taxes
| Gross amount of rent | Rate of tax | |
| if the amount of is less than 300,000 | 0 | |
| exceeds 300,000 but not more than 600,000 | 5% | |
| exceeds 600,000 but not more than 2000,000 | 15,000+10% | |
| exceed.2,000,000 | 155,000+ 25% |
Company: 15% of amount payable e.g if the company has make monthly payment of 100,000 then the amount of tax to be withheld by the company and subsequently paid to FBR is 15,000.
Taxation of rental or property income:
No separate tax will be levied on this income, but it will be added to the rest of the taxpayer’s income and will form part of the total income.
Mr. Aslam is a government employee whose annual salary is 850,000, out of which 28,000 is deducted as income tax. He has given his building on monthly Tenancy charges of 81,667 and the tenant has also deposited a security deposit of 100,000. Collection Expenditure 2,500 and Other Deductions are 120,000 restricted to 4 % of Rent changeable which is 44,480.
Taxation of property or Rental Income
| Rent Received or Receivable | 980,000 |
| 1/10th of Amount not Adjustable against Rent | 25,000 |
| Forfeited Deposit under a Contract for Sale of Property | 100,000 |
| Recovery of Unpaid Irrecoverable Rent allowed as deduction | 1,800 |
| Unpaid Liabilities exceeding three Yea | 5,200 |
| Total Receipts from Property | 1,112,000 |
| 1/5th of Rent of Building for Repair | 222,400 |
| Insurance Premium | 27,000 |
| Local Rate / Tax / Charge / Cess | 5,600 |
| Ground Rent | 15,000 |
| Rent Collection Expenditure | 2,500 |
| Legal Service Charges | 48,000 |
| Payment of Liabilities treated as Income | 36,000 |
| Other Deductions against Rent | 44,480 |
| Total Deductions from Property | 400,980 |
Calculation of Tax Payable
Income / (Loss) from Property
Total Receipts from Property – Total Deductions from Property
1,112,000- 400,980 = 711,020
Total Income= Income from Salary + property income
850,000+711,020 = 1,561,020
Tax Chargeable = 162,204
Tax already paid on Salary = 28,000
Admitted Income Tax = 162,204 – 28,000 = 134,204
Tax on Rental Income in Pakistan a Comprehensive Guide:
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