Tax on Rental Income from Property in Pakistan

This post is on income tax on rental income from property or real estate.

Income from Property

Section 11 of the Income Tax Ordinance, 2001, classifies income under the following heads, namely:

(1)      Salary;

(2)      Income from Property;

(3)      Income from Business;

(4)      Capital Gains; and

(5)      Income from Other Sources.

Income from property is the second head of income.

Rent received or receivable by a person in a tax year is chargeable to tax under the head "income from property." Therefore, while assessing taxable income, a person has to account for:

(1)      The rent received during a tax year; and

(2)      The rent receivable during a tax year.

However, exempted rent is not chargeable to tax.

Rent

Rent is any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building.

Computation of Rent

Example 1

Ms. Bisma Bilal let out her building to Ms. Sidra Siddique for Rs 9,000 per month on 1^st July 2013. During the year, she received Rs 12,000 token money on a contract of sale of her house to Sidra for Rs 120,000. However, Sidra could not purchase the house and forfeited the token money.

Let us calculate rent chargeable to tax:

Tax Year : 2014
Tax Year Ended : 30-06-2014
Personal Status : Individual (Salaried Person)
Residential Status : Resident
Computation of Rent Chargeable to Tax
Particulars	Rs.
Income from Property
Rent
(Monthly Rent x 12)
(Rs 9,000 x 12)	108,000
Token Money (Forfeited amount is chargeable to tax)	12,000
Rent chargeable to tax	120,000
Tax Payable
(Taxable rent does not exceed Rs 150,000 )	Nil

Non-adjustable Advance

If the owner of a building receives from a tenant an amount which is not adjustable against the rent payable by the tenant, the amount shall be treated as rent chargeable to tax in the tax year it was received and the following nine tax years in equal proportion.

If an earlier non-adjustable amount is refunded by the owner to the tenant on termination of the tenancy before the expiry of ten years, no portion of the amount shall be allocated to the tax year in which it is refunded or to any subsequent tax year. However, if the owner lets out the building to a succeeding tenant and receives from him any succeeding non-adjustable amount, the succeeding amount minus the portion of the earlier amount charged to tax shall be treated as rent chargeable to tax. The calculation is like this:

Succeeding non-adjustable amount	108,000
Less (earlier non-adjustable amount charged to tax)	12,000
Rent chargeable to tax	120,000
Figures are included for explanation

Example 2

Mr. Raouf Roofi rented out his property to Mr. Awais Ansari for Rs. 8,000 per month on 1^st July 2012. He received a non-adjustable advance of Rs 100,000 from Mr. Ansari. The authorities assigned a fair market rent of Rs 110,000 to the property.

Let us calculate rent chargeable to tax:

Tax Year : 2014
Tax Year Ended : 30-06-2014
Personal Status : Individual
Residential Status : Resident
Computation of Rent Chargeable to Tax
Particulars	Rs.	Rs.
Income from Property
Higher of:
a.   Rent
(Monthly Rent x 12)
(Rs. 8,000 x 12)	96,000
b.   Fair Market Rent	110,000	110,000
Non-adjustable Advance
(Taxable up to 1/10 p.a.)
(Rs 100,000 x 1/10)		10,000
Rent Chargeable to Tax		120,000

Example 3

Mr. Lateef Langha let out his property to Mr. Anser Ansari at Rs 8,000 per month. Mr. Ansari vacated the property after one year on 30^th May 2014. Mr. Langha returned the non-adjustable advance of Rs 200,000, which was received at the time of negotiating the tenancy agreement, to Mr. Ansari. If the fair market rent is Rs 125,000 p.a., what is rent chargeable to tax?

Tax Year : 2014
Tax Year Ended : 30-06-2014
Personal Status : Individual
Residential Status : Resident
Computation of Rent Chargeable to Tax
Particulars	Rs.	Rs.
Income from Property
Higher of:
a.   Rent
(Monthly Rent x 12)
(Rs. 8,000 x 12)	96,000
b.   Fair Market Rent	125,000	125,000
Rent chargeable to tax		125,000

Income not chargeable to tax as rent

The following are not rent chargeable to tax:

(1)      Royalty;

(2)      Ground rent;

(3)      Rent from building let out with plant and machinery, equipment, etc.;

(4)      Rent from subletting immovable property;

(5)      Income from providing utilities or other services with immovable property;

(6)      Income from mining;

Exempted income from property

The following rents are exempt from tax:

(1)      Rent of agricultural building;

(2)      Rent of immovable property held under trust;

(3)      In a tax year, fair market rent is exempted subject to the following conditions:

(a)    The recipient is an individual or AOP;

(b)    The fair market rent does not exceed Rs 150,000; and

(c)    The recipient has no income under any other head.

Specified Tax Rates

The tax rates to be paid under the head "income from property" are:

Rates for Individuals and Associations of Persons

Sr.	Rent	Rate of tax
(1)	Rent does not exceed Rs 150,000	Nil
(2)	Rent exceeds Rs.150,000 but not Rs.400,000	5% of amount exceeding Rs.150,000
(3)	Rent exceeds Rs.400,000 but not Rs.1,000,000	Rs 12,500 plus 7.5% of amount exceeding Rs 400,000
(4)	Rent exceeds Rs.1,000,000	Rs 57,500 plus 10% of amount exceeding Rs 1,000,000

Rates for Companies

Sr.	Rent	Rate of tax
(1)	Rent does not exceed Rs 400,000	5% of the amount of rent
(2)	Rent exceeds Rs 400,000 but not Rs 1,000,000	Rs 20,000 plus 7.5% of the amount of rent exceeding Rs.400,000
(3)	Rent exceeds Rs 1,000,000	Rs 65,000 plus 10% of the amount of rent exceeding Rs 1,000,000