Tax Saving Strategies for Income from Property or Rental Income for Tax Year 2024

Important Provisions of Income Tax Ordinance 2001

 The rent received or receivable by a person a tax year, other than rent exempt from tax under this Ordinance, shall be chargeable to tax

 Rent means 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.

 Any rent received or receivable by any person in respect of the lease of a building together with plant and machinery shall be chargeable to tax under the head “Income from Other Sources

 Rent received or receivable by any person for the provision of amenities, utilities or any other service connected with the renting of the building, such amount shall be chargeable to tax under the head “Income from Other Sources”

 Where the rent received or receivable by a person is less than the fair market rent for the property, the person shall be treated as having derived the fair market rent for the period the property is let on rent in the tax year.

Shall not apply where the fair market rent is included in the income of the lessee chargeable to tax under the head “Salary”.

Demystifying Withholding Tax Rates:

Income from property of rental income is subject to withholding of tax at source. The tax rates at which withholding shall be carried out are as follows. Tax slabs for individuals and associations of persons – AOPs:

Annual Gross Rent (Rs.) Tax Rate

Up to 300,000 Nil

300,001 - 600,000 5% of amount exceeding Rs. 300,000

600,001 - 2,000,000 Rs.15,000 + 10% of amount exceeding Rs. 600,000

Above 2,000,000 Rs.155,000 + 25% of amount exceeding Rs. 2,000,000

15% of the gross rent is the straight rate of tax applicable to companies

For companies:

Rental income is taxed at the corporate tax rate of 29%.

These rates are applied after accounting for any allowable deductions and exemptions as specified by the ordinance.

Allowable Deductions and Exemptions

Taxpayers can benefit from various deductions which can reduce their taxable rental income. These include:

Deductions in computing income chargeable under the head “Income from Property

·       Repairs to a building, an allowance equal to 1/5th of the rent chargeable to tax in respect of the building

·       Insurance premium paid or payable in the year to insure the building against the risk of damage or destruction

·       Any local rate, tax, charge or cess in respect of the property or the rent from the property paid or payable by the to any local authority or government in the year, not being any tax payable under this Ordinance;

·       Any ground rent paid or payable by the person in the year in respect of the property

·       Any profit paid or payable by the in the year on any money borrowed including by way of mortgage, to acquire, construct, renovate, extend or reconstruct the property

·       House Building Finance Corporation or a scheduled bank under a scheme of investment in property on the basis of sharing the rent, the share in rent and share towards appreciation in the value of property

·       Amount of profit or interest paid on such mortgage or charge;

·       any expenditure, not exceeding 4% of the rent in respect of the property for the year. wholly and exclusively. for the purpose of deriving rent chargeable to tax including administration and collection charges;

·       Any expenditure paid or payable for legal services connected with the property in a court

·       Irrecoverable rent: the tenancy was bona fide, the defaulting tenant has vacated the property or steps have been taken to compel the tenant to vacate the property and the defaulting tenant is not in occupation of any other property

Non-adjustable amounts received in relation to buildings

Where 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 under the head “Income from Property” in the tax year in which it was received and the following nine tax years in equal proportion. (1/10th)

Where an earlier amount referred 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.

Where the circumstances occur and the owner lets out the building or part thereof to another person and receives from the succeeding tenant any amount which is not adjustable against the rent payable by the succeeding tenant, the succeeding amount as reduced by such portion of the earlier amount as was charged to tax shall be treated as rent chargeable to tax under the head “Income from Property”

 Penalties for non-compliance

 Non-compliance with rental income tax laws can result in penalties and fines. The FBR conducts audits and assessments to identify underreporting or non-payment of taxes. Penalties can include fines, additional tax assessments, and in severe cases, prosecution.