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Tax Implication On Property Income

Nowadays, a number of people argue about the tax rates for property income and have concerns as well as a deep interest in knowing about the current income tax development imposed by Govt. through the finance Act 2022-23, as most people have rental income and stakes in real estate, current budget 2022-23 set certain fear themselves about the increase in the tax rates as a new concept introduced by Govt. about the deemed income u/s 7E through tax ordinance 2001. This article will discuss the tax implication on property income with both sides, Tax slab rates on rental, and Tax implication on vacant property, unused plots, or files.

Tax Slabs For Rental Income

Firstly, Income from the property treated (u/s 15A) such proceeds received or receivable from a person under a tax year 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.

There are certain deductions available from the rental income

  • With respect to repairs to a building, an allowance equal to one-fifth of the rent is chargeable to tax in respect of the building for the year.
  • Any premium paid or payable by the person 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 person 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 person in the year on any money borrowed including by way of mortgage, to acquire, construct, renovate, extend or reconstruct the property.
  • Where the property has been acquired, constructed, renovated, extended, or reconstructed by the person with capital contributed by the House Building Finance Corporation or a scheduled bank under a scheme of investment in property on the basis of sharing the rent made by the Corporation or bank, the share in rent and share towards appreciation in the value of the property (excluding the return of capital, if any) from the property paid or payable by the person to the said Corporation or the bank in the year under that scheme.
  • Where the property is subject to a mortgage or other capital charges, the amount of profit or interest paid on such mortgage or charge.
  • Any expenditure paid or payable by the person in the tax year for legal services acquired to defend the person’s title to the property or any suit connected with the property in a court.

In order to compute the tax on the rental income, you should go through the following steps. Likewise, a built-up understanding of how to compute the fair market value and income tax slab rates is available in the following. 

Slab rates for rental income are the same as the previous tax year which are as follows:

Taxable Income Tax Liability
Where the taxable income doesn’t exceed PKR 300,000 PKR 0/-
Where the taxable income does exceed PKR 300,000 but doesn’t exceed PKR 600,000 5% of the amount exceeding PKR 300,000
Where the taxable income does exceed PKR 600,000 but doesn’t exceed PKR 2,000,000 PKR 15,000 + 10% of the amount exceeding PKR 600,000
Where the taxable income does exceed PKR 2,000,000 PKR 155,000 + 25% of the amount exceeding PKR 2,000,000

Tax On Deemed Income Of Non-productive Properties

Secondly, the new concept was introduced and implemented from 1st July 2022 onwards through Section 7E on wealth tax and the main purpose of this tax is to discourage investment in non-productive assets, such as plots and files. FBR has imposed a 1% Deem Tax as per the FBR Fair market value tables on the unused/additional property worth over 25 Million.  This includes unused houses, plots, farmhouses, or any land holding which has a value above 25 Million but it doesn’t create regular income. The Government has deemed the income of such properties at 5% per annum, out of which 20% will be taxed, which comes out to be 1% of its FBR value. The following exemptions are available

  • One capital asset owned by the resident person is exempt.
  • The first 25 Million worth of property is also exempt from an aggregate property value.
  • Self-owned business premises from where the business is carried out by the persons appearing on the active taxpayers’ list at any time during the year.
  • Any property from which income is chargeable to tax and tax leviable is paid thereon WHT u/s 155 rental tax slabs and in annual return would pay as per normal tax slabs or business tax slabs
  • Self-owned agricultural land where agricultural activity is carried out by a person excluding farmhouse and land annexed thereto.
  • Capital assets allotted to, a Shaheed or dependents of a shaheed belonging to the Pakistan Armed Forces, a person or dependents of the person who dies while in the service of Pakistan armed forces or Federal or provincial government, a war-wounded person while in service of Pakistan armed forces or Federal or provincial government; and an ex-serviceman and serving personal of armed forces or ex-employees or serving personnel of Federal and provincial governments, being original allottees of the capital asset duly certified by the allotment authority.
  • Capital asset in the first tax year of acquisition where tax under section 236K has been paid
  • capital assets owned by a local authority, a development authority, builders, and developers for land development and construction, subject to the condition that such persons are registered with the Directorate General of Designated NonFinancial Businesses and Professions
  • A farmhouse constructed on a total of less than an area of 2000 square yards with a less than covered area of 5000 square feet used as a single dwelling unit.

Similarly, in order to compute the fair market value of your property, you should use the FBR Fair Market value tables, a list of immovable properties around all of the Pakistani cities, use the following link to explore the FV tabes.

Immovable Assets FV Tables

FBR Pakistan continuously updates Fair market values of property according to market conditions.

In simple words, your first property or personal house is exempted from this tax. In contrast, If you have a built-up property, house, commercial, etc which is not being rented out, you will have to pay the deemed rental income tax on it. Similarly, It will be levied on the collective FBR value of all your plots, for instance, if you own a number of plots that have a collective FBR value of 50 Million, the first 25 Million will be exempt from tax and the remaining 25 Million will be taxed at 1% of FBR value which amounts to 2.5 lacs per year. The vital purpose of this tax is to target the richest among us, who invest in dozens of plots that do not produce rental income and houses which they rent out etc but don’t declare their rental income.

People in developed Societies pay taxes. You should also read the Benefits for Filler section articles. Which describes well the benefits of being a responsible resident of Pakistan.