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 1st 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
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Tax Year Ended : 30-06-2014
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Personal Status : Individual (Salaried
Person)
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Residential Status : Resident
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Computation of Rent Chargeable to Tax
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Particulars
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Rs.
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Income from Property
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Rent
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(Monthly Rent x 12)
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(Rs 9,000 x 12)
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108,000
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Token Money
(Forfeited amount is chargeable
to tax)
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12,000
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Rent chargeable to tax
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120,000
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Tax Payable
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(Taxable rent does not
exceed Rs 150,000 )
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Nil
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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
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108,000
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Less (earlier
non-adjustable amount charged to tax)
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12,000
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Rent chargeable to tax
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120,000
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Figures
are included for explanation
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Example 2
Mr. Raouf Roofi rented out his property to Mr. Awais Ansari
for Rs. 8,000 per month on 1st 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
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Tax Year Ended : 30-06-2014
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Personal Status : Individual
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Residential Status : Resident
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Computation of Rent Chargeable to Tax
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Particulars
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Rs.
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Rs.
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Income from Property
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Higher of:
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a.
Rent
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(Monthly Rent x 12)
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(Rs. 8,000 x 12)
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96,000
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b.
Fair Market
Rent
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110,000
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110,000
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Non-adjustable Advance
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(Taxable up to 1/10 p.a.)
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(Rs 100,000 x 1/10)
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10,000
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Rent Chargeable to Tax
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120,000
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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 30th 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
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Tax Year Ended : 30-06-2014
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Personal Status : Individual
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Residential Status : Resident
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Computation of Rent Chargeable to Tax
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Particulars
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Rs.
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Rs.
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Income from Property
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Higher of:
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a.
Rent
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(Monthly Rent x 12)
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(Rs. 8,000 x 12)
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96,000
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b.
Fair Market
Rent
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125,000
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125,000
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Rent chargeable to tax
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125,000
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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.
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Rent
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Rate of tax
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(1)
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Rent does not exceed Rs 150,000
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Nil
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(2)
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Rent exceeds Rs.150,000 but not Rs.400,000
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5% of amount exceeding Rs.150,000
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(3)
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Rent exceeds Rs.400,000 but not Rs.1,000,000
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Rs 12,500
plus 7.5% of amount exceeding Rs 400,000
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(4)
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Rent exceeds Rs.1,000,000
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Rs 57,500
plus 10% of amount exceeding Rs 1,000,000
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Rates for Companies
Sr.
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Rent
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Rate of tax
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(1)
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Rent does not exceed Rs 400,000
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5% of the amount of rent
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(2)
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Rent exceeds Rs 400,000 but not Rs 1,000,000
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Rs 20,000
plus 7.5% of the amount of rent exceeding Rs.400,000
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(3)
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Rent exceeds Rs 1,000,000
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Rs 65,000
plus 10% of the amount of rent exceeding Rs 1,000,000
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