Chapter 7: Income from Property

Chapter 7
INCOME FROM PROPERTY
[Sections 15 – 16]

1. Rent for the tax year is chargeable on accrual basis under ‘income from property’.
Rent means a consideration received or receivable for a tax year by the owner of any land or
building for the use or occupation and includes any forfeited deposit under a contract for the
sale of land or building.
Actual rent or fair market rent whichever is higher is taxable. Fair market rent is also called
Annual Letting Value (ALV).
If a tenant pays any amount which is the obligation of the owner then the said payment shall
be deemed to be rent and therefore shall be included in the chargeable rent e.g. property
taxes paid by the tenant which is an obligation of the owner of property.
Note for students: If ALV is given in the question and the actual rent out period is less
than 12 months then proportionate ALV should be compared with actual rent of the actual
rent out period.
The concept of “actual rent or ALV whichever is higher” is not applicable on self-hiring.
Self-hiring is a situation where an employee or his / her spouse owns an accommodation
lets out the same to the employer and the employer provides the same accommodation to
the employee as a perquisite. In this case the following points emerge:

- Actual rent paid or payable for the year by the employer is taxable as income from
property in the hands of the employee or spouse;
- The concept of “actual rent or ALV whichever is higher” is not applicable in this case; and
- The fair market rent or 45% of basic salary (MTS, if given in the question) whichever is
higher is taxable as a taxable perquisites under the head salary.

2. The following are taxable under the head ‘income from other sources’:
o Rent in respect of a building together with plant and machinery
o Any amount in respect of amenities, utilities or other service charges in respect of land or
building.

3. Unadjustable amount received in respect of Building

Where the owner of a building receives any amount (deposit or pugree) not adjustable
against rent payable the same is treated as chargeable rent in 10 years in equal proportion.
However, if before the expiry of 10 years the said amount is refunded by the owner then no
portion of the said amount is taxable in the year in which it is refunded.

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If the owner lets out the same building to another tenant and receives any unadjustable
amount then the amount already taxed in this respect shall be deducted and the balance
shall be treated as rent chargeable in 10 years in equal proportion.
Notes for students:
a. Advance which is adjustable against rent payable is not taxable separately as the same
is a part and parcel of rent chargeable on accrual basis.
b. Unadjustable amount received in respect of open plot of land is not treated as
chargeable rent.
c. If deposit is refunded in the same tax year then there will be no tax treatment in
respect of the deposit.

4. Co-ownership of property – Section 66

Co-ownership of property is not considered as an AOP for the purpose of rental income and
therefore rental income is not taxable as a separate tax entity. Share of taxable rental
income is taxable in the hands of each co-owner.
This provision is applicable in each case other than income from business. Examples may be:
- Rental income under the head income from property
- Rental income under the head income from other sources
- Capital gain on disposal of shares with joint ownership
Note for students in respect of co-ownership:
Co-ownership of property shall not be considered as an AOP in respect of rental income.
However, if an AOP (already established as an AOP) buys any property from its resources
then the rental income shall be taxable in the hands of AOP despite the fact that the property
is registered in the name of one or more partners.
In this case the AOP shall be the beneficial owner of the property.

Q.10(a) March 2001 ICAP CAF (Marks 3)

Q.2(b) March 2005 ICAP CAF (Marks 2)
How is the tax levied on rental income in the case of co-ownership of property
Q.4(b) March 2012 ICAP CAF
Yaqoot and Loha are joint owners of a bungalow which has been rented out for Rs.70,000
per month.
Required: Discuss the taxability of Yaqoot and Loha in respect of above income, in the
light of Income Tax Ordinance, 2001. (Marks 3)

5. Signing amount from the tenant is taxable under the head “income from property”. Signing
amount is the amount paid by the tenant to the owner to enter in the tenancy agreement
which is not refundable nor it can be termed as deposit.

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Chargeable rent consists of the following:
a. Rent of land or building (Actual rent or fair market rent whichever is higher.
Actual rent in case of self-hiring)
b. Forfeited deposit under a contract for the sale of land or building
c. 10% of deposit from the tenant (not in the case of open plot of land)
d. Signing amount

6. Taxability of property income where the owner is an individual or AOP

Property income in the hands of an individual or AOP is taxable as a separate block of income at
the following tax rates on the gross chargeable rent without deduction of any expenditure or
allowance:

S. # Gross amount of rent Rate of tax

1 Up to Rs.200,000
2 Rs.200,001 – Rs.600,000
3 Rs.600,001 – Rs.1,000,000
4 Rs.1,000,001 – Rs.2,000,000
5 Exceeding Rs.2,000,000
Nil
5% of the gross amount exceeding
Rs.200,000
Rs.20,000 plus 10% of the gross amount
exceeding Rs.600,000
Rs.60,000 plus 15% of the gross amount
exceeding Rs.1 million
Rs.210,000 plus 20% of the gross
amount exceeding Rs.2 million

7. Taxability of property income where the owner is a company

7.1 Income from property is taxable under normal tax structure at chargeable rent minus
allowable deductions u/s 15A along with other normal taxable income. Allowable deductions from
chargeable rent are as under:

a) Repairs allowance: 1/5th of chargeable rent of building.

[This allowance is irrespective of actual expense on repairs of building.]
b) Insurance in respect of building.
c) Property related taxes including ground rent payable to government authorities.

Note for students:

Ground rent is paid on commercial land by the owners of leasehold properties to the
local government authorities every year. It is generally fixed for long-lease commercial
properties, which are usually leased for 99 years, at the time of the agreement.
Therefore, ground rent is just like property tax.

d) Interest or mark up on loan utilized for property including mortgage charges

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e) Share of rental income including share towards appreciation in the value of property to
HBFC or a scheduled bank
f) Legal charges to defend title of the property or any suit connected with the property in a
court.
g) Any other expense (not exceeding 6% of chargeable rent) paid or payable wholly and
exclusively for the purpose of deriving chargeable rent including administration and
collection charges.
Note for students: Any expense, not mentioned specifically, related to property income
is allowable subject to maximum of 6% of chargeable rent. However, depreciation on
immovable property is not deductible from chargeable rent as the same is not covered in
the term of “paid or payable”.
h) Unpaid rent considered as irrecoverable subject to the following conditions:
i. Tenancy was bona fide;
ii. The defaulting tenant has vacated the property or steps have been taken to
compel him to vacate the property;
iii. The defaulting tenant is not in occupation of any other property of the company;
iv. Legal proceeding has been initiated to recover unpaid rent or there are
reasonable ground to believe that legal proceeding would be useless; and
v. Unpaid rent was previously chargeable to tax.
If the unpaid rent allowed as tax expense is subsequently recovered then the same shall
be taxable.
7.2 Any unpaid expenditure allowed as tax expense is required to be paid within a period of 3
years from the end of the tax year in which it was allowed. Any unpaid liability against such
expense shall be chargeable to tax in the 4 th year. However, if the said amount is paid
subsequently then it shall be allowed as a tax deduction in the year in which it is paid.
This concept is not applicable for those expenditures which are not allowed against income
from property such as actual repairs on building, other expenditures including collection
charges in excess of 6% of chargeable rent.

7.3 Apportionment of common expenses

Common expenses shall be apportioned if the building or land is:
 not available for rent for the whole year such as land or building is in company’s use for
a part of the year e.g. building is used by the company itself for 4 months
 partly rented out and a part is used for other purpose e.g. 40% of the building is used by
the company for its own business; or
 expenditure is partly used for some other purposes e.g. loan taken for property is partly
used for the purchase of shares of any other company.
It is a considered opinion that expenses would not be apportioned if land or building is
available for rent for the whole tax year but actually rented out for a part of the year due to
any reason including non-availability of tenant.

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8. Rental income from property for agricultural purpose – Section 41

Letting out a property in Pakistan which is used for agricultural purposes is included in the
definition of agricultural income which is exempt from tax under section 41 of the Income Tax
Ordinance 2001.

Agricultural income is fully exempt. Definition of Agricultural Income is as under:

Agricultural income means:

a) Any rent or revenue from land in Pakistan used for agricultural purposes
b) Any income from land situated in Pakistan from:
i. Agriculture
ii. Performance or receiver of rent in kind of any agricultural process to render the
produce fit to be taken to market
iii. Sale of such produce in respect of which no process has been performed other
than agricultural process
c) Any income from:
i. Any building owned and occupied by the receiver of rent or revenue of any land
being used for agricultural purpose
ii. Any building occupied by the cultivator or the receiver of rent in kind of any land
which is being used for agricultural process as a dwelling house or store house and is
in the immediate vicinity of the agricultural land.

9. Loss under the head income from property where the owner is a company
Where allowable deductions are more than chargeable rent then the loss under the head income
from property can be adjusted against any other head of income other than income taxable
under FTR such as dividend income.
Unadjusted loss, if any, under the head income from property cannot be carried forward and
therefore it will be lapsed.
Loss under any other head cannot be adjusted against income from property. This restriction is
also applicable for an individual and AOP.

10.Tax deduction at source from property income – Section 155

The following tenants shall deduct tax while making payment of rent including advance and in
respect of furniture and fixtures and services related to property at the prescribed rates:
I. Federal, Provincial or Local Government;
II. company;
III. non-profit organization or a charitable institution;
IV. diplomatic mission of a foreign state;

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V. private educational institution, boutique, beauty parlour, hospital, clinic or a maternity
home; or
VI. individuals or AOP paying gross rent of Rs.1,500,000 and above in a year.
Tax shall be deducted @ 15% of the amount of gross rent where the owner is a company
[17.5% for a non-filer company].
If the owner is an individual or AOP tax shall be deducted at the rates mentioned in the chart
given in para 6 above:

Question 1:
A Ltd rented out its building on 1.7.20X7 @ Rs.80,000 per month. The company also received
Rs.800,000 as deposit that is not adjustable against rent payable. Other information relevant to
property income is as under:
a) Actual repairs and maintenance Rs.65,000
b) Insurance premium Rs.28,000
c) Property tax Rs.25,000
d) Total interest expense charged by the bank Rs.180,000; initially Rs.1 million borrowed
out of which 60% was utilized to acquire the building and 40% for business use.
e) Collection charges Rs.36,000.
f) Legal charges of Rs.45,000 to a legal advisor for drafting the rent agreement.
Business income of A Ltd is Rs.1.2 million net of business expenditures other than interest
expense as mentioned in para (d) above.
Advance tax already paid by the company is Rs.400,000
Required: Calculate taxable income and tax liability of A Ltd for the tax year 20X8.

Question 2:
Mr. B rented out his shop to Mr. Z @ Rs.150,000 per month with effect from 1.1.20X8 and
received Rs.2,000,000 as deposit not adjustable against rent payable. Previously the shop was
given on rent to Mr. Y in the tax year 20X5 @ Rs.100,000 per month and received deposit of
Rs.1,400,000 from Mr. Y who vacated the shop on 30.9.20X7 and the deposit of Rs.1,400,000
was duly refunded to him.
In the month of November 20X7 Mr. B entered into an agreement to sell the shop with Mr. X and
received Rs.200,000 as token money (Biyana). Mr. X backed out resulting into forfeiture of the
said token money.
Property related expenses were Rs.380,000 including repairs and maintenance of the shop
Rs.80,000.
Required: Calculate property income of Mr. B for the year ended 30.6.20X8 (tax year 20X8) and
tax liability thereon, if any.

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Question 3 [Q.4 Sept 2002 ICAP CAF]
ABC Ltd owns a building which is 30% occupied for its business. The rest 70% is on rent. The
following information is available:
Rs.
- Annual letting value (ALV) of the property owned 2,000,000
- Rent received from tenants 1,800,000
- Depreciation on building under the Third Schedule to the Ordinance 400,000
- Property Tax 100,000
- Municipal/local government taxes (agreement with tenant provide that
tenant should pay the municipal taxes) 100,000
- General and administration expenses related to property 200,000
Rent received includes Rs.600,000 for three years commencing from July 01 of the current year.
ABC Ltd follows accrual basis of accounting and its income year is July-June 20X8.
Required: Please compute the income of ABC Ltd under the head ‘income from property’.

Question 4 [Q.5 March 2003 ICAP CAF – Marks 10]:

Z Ltd has recently constructed an office complex for the purposes of letting out. As per terms and
conditions, Z Ltd is also entitled to signing amount, which is non-refundable.

For the tax year 20X8 following information has been provided to you for the computation of
income from property:
Rs.
Rent for the year already received 1,150,000
Rent for the year though due but irrecoverable 50,000
Signing amount (non-adjustable, non-refundable) 100,000
Fire and water tax paid to the local authority 20,000
Lawyer’s fee for suit to recover rent 50,000
Lawyer’s fee for drafting master rent agreement 10,000
Salary of the caretaker who collects monthly rent 36,000
Insurance premium being 1% of market value of the property 200,000
Repair maintenance expenditure 50,000

Question 5 [Q.4 March 2014 ICAP CAF]:

Bashir and Jameel jointly own a house in Karachi. Bashir has 75% share in the house. On
1.9.20X3, the house was let out at an annual rental value of Rs.6,500,000. This amount includes
Rs.186,000 per month for utilities, cleaning and security.
During the tax year 20X4, the owners incurred the following expenditures in relation to the
house:
Rs.
Utilities, cleaning and security 650,000
Repairs and maintenance 810,000
Insurance premium 240,000
Collection charges 25,400
Mark-up on amount borrowed for renovation of the house 840,000

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Bashir and Jameel have no other source of income. All the above expenses were incurred by
them jointly.
Required: Calculate taxable income of Bashir and Jameel under appropriate heads of income for
the tax year 20X4. (Marks 10)

Answer to Question 1:
A Ltd
Tax Year 20X8
Computation of taxable income and tax liability

Income from property

Rent of building 80,000 x 12 960,000
10% of deposit from the tenant 80,000
Chargeable rent 1,040,000
Less: Admissible deductions
1/5th repairs allowance 208,000
Insurance premium 28,000
Property tax 25,000
Interest expense 180,000 x 60% 108,000
Other expenses
Collection charges 36,000
Legal charges for rent agreement 45,000
81,000
Restricted to 6% of chargeable rent 62,400 431,400
608,600
Business income
Business income 1,200,000
Interest expense 180,000 x 40% 72,000 1,128,000
Taxable income 1,736,600

Tax liability
Income tax on Rs.1,736,600 @ 29% 503,614
Less: Advance Tax paid 400,000
Tax payable with the return of income 103,614

Answer to Question 2:
Rent of shop
1.7.20X7 – 30.9.20X7 @ Rs.100,000 per month 300,000
1.1.20X8 – 30.6.20X8 @ Rs.150,000 per month 900,000 1,200,000

Forfeited deposit / token money under an agreement to sell 200,000

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Unadjustable advance
Amount received from the new tenant 2,000,000
Less: Amount already taxed:
In the tax year 20X5 Rs.140,000
In the tax year 20X6 Rs.140,000
In the tax year 20X7 Rs.140,000 420,000
1,580,000
10% of Rs.1,580,000 is included in the chargeable rent. 158,000
Total chargeable rent (i.e. Taxable property income) 1,558,000

Tax liability
Income tax on Rs.1 million 60,000
Income tax on Rs.558,000 @ 15% 83,700
Total tax liability 143,700

Answer to Question 3:

Chargeable rent
Annual rent received from the tenant 1,800,000
Less: amount pertains to the next two years 400,000
1,400,000
Municipal taxes paid by the tenant 100,000
Total actual rent 1,500,000
Chargeable rent is actual rent Rs.1,500,000 or 70% of ALV Rs.1,400,000 whichever is higher =
Rs.1,500,000
Income from Property
Chargeable rent 1,500,000
Less: Repairs allowance 1/5th of Rs.1,500,000 300,000
70% of property tax 70,000
70% of municipal taxes 70,000
Other expenses i.e. admn 70% of expense Rs.140,000
Restricted to 6% of chargeable rent 90,000 530,000
Taxable property income 970,000

Answer to Question 4:

Chargeable rent
Annual rent received 1,150,000
Rent for the year due but irrecoverable 50,000
Signing amount 100,000
Total chargeable rent 1,300,000
Income from Property
Chargeable rent 1,300,000
Less:

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th
Repairs allowance 1/5 of Rs.1,300,000 260,000
Unpaid rent 50,000
Fire and water tax 20,000
Lawyer’s fee for suit to recover rent 50,000
Insurance premium 200,000
Other expenses:
Collection charges 36,000
For drafting of rent agreement 10,000 46,000 626,000
Taxable property income 674,000

Note 1: It is assumed that all the requirements of unpaid rent have been complied with
Note 2: Actual repairs expenses are not allowable under the head income from property.

Answer to Question 5:

Income from Property

Rent for 10 months 6.5m / 12 x 10 5,416,667
Less: utilities taxable under other source 1,860,000
Chargeable rent 3,556,667

Income from other sources

Utilities from tenants 1,860,000
Less: utilities expenses 650,000 1,210,000
Total taxable income 4,766,667

Taxable income of Bashir and Jameel

Bashir Jameel
Total 75% share 25% share
Income from:
Property 3,556,667 2,667,500 889,167
Other sources 1,210,000 907,500 302,500
Taxable income 3,575,000 1,191,667

Questions ICAP CAF

*Q.4(a) March 2009 Mr. Bukhari is a resident person and owns a property abroad. During the
year, he received rent amounting to Rs.3 million from that property. The tax on rental income
has been duly paid abroad and there is no tax treaty between Pakistan and the country in which
the property is situated.
Explain the tax treatment of rental income received by Mr. Bukhari in Pakistan. (Marks 3)

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Answers ICAP CAF
Answer to Q.4(a) March 2009
A resident person is taxable in Pakistan for his worldover income subject to tax treaty. In the
absence of tax treaty, Mr. Bukhari will be taxable in Pakistan for his income from property
situated abroad.
However, as he has already paid tax in the foreign country he will be entitled to claim foreign tax
credit as lower of:
(a) tax paid in the foreign country; and
(b) tax payable in Pakistan on income from property situated abroad on average rate of tax.

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