Income from Property

Chapter 7
Rent for the tax year is chargeable on accrual basis under ‘income from
property’.

Rent means a consideration due to 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 (ALV) whichever is higher is taxable.

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.

Up to the tax year 2006, yearly taxable value of unfurnished accommodation was fixed.
Few examples are:
- Rs.40,000 where land area is up to 250 sq. yards
- Rs.106,000 where land area is 251 to 500 sq. yards
- Rs.199,000 where land area is 501 to 1,000 sq. yards
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.
The following are taxable under the head ‘income from other
sources’:
 Rent in respect of a building together with plant and
machinery
 Any amount in respect of amenities, utilities or other
service charges in respect of land or building.
Self hiring
Portion of Q.6 June 2016 ICAP CFAP
Yawar is working in Lajawab Chemicals (Pvt) Ltd (LCL).
Following further information is also available:
Basic salary (per month) 225,000
(i) Yawar has rented out his bungalow to LCL at an annual rent of Rs.1,092,000. The rent
is inclusive of the salary of a security guard at Rs.8,000 per month. However, ALV of the
bungalow was estimated to be Rs.1,260,000 per annum. LCL has provided the same
bungalow to Yawar for his accommodation.
Solution:
Total annual rent 1,092,000
Taxable under other source Rs.8,000 x 12 96,000
Actual rent under property income 996,000
ALV 1,260,000
Chargeable rent under property income 996,000
20X4 Deposit of Rs.300,000 received from Mr. A
20X4 10% of deposit Rs.30,000
20X5 10% of deposit Rs.30,000
20X6 10% of deposit Rs.30,000
20X7 Deposit of Rs.300,000 refunded to Mr. A
10% of deposit NIL
20X8 Deposit of Rs.320,000 received from Mr. B
Total deposit Rs.320,000 If deposit is refunded in
Less: Already taxed 90,000 the same tax year then
there will be no tax
Balance 230,000
treatment in respect of
10% of Rs.230,000 23,000 deposit
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.
Unadjustable amount received in respect of open plot of land is not
Co-ownership of property – section 66
Where any property is owned by two or more persons and their respective shares
in that property are definite and ascertainable then 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 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.

Similarly, if any property is owned by two or more persons and their respective shares in
that property are not definite and ascertainable, the property will be considered as being
jointly owned by an AOP and taxable income and tax payable thereon will be computed as
per the principles of taxation for AOP.

5. Signing amount from the tenant is taxable under the head “income from property”.

Signing amount is an 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.
Components of chargeable rent:

(a) Rent of building or open plot (Actual rent or fair market rent, whichever is higher.
Actual rent in case of self-hiring)

(b) Forfeited deposit under sale agreement

(c) 10% of deposit from the tenant (not in case of open plot)

(d) Signing amount

Question
Mr. A rented his house on 1.9.20X4 to Mr. K at a monthly rent of Rs.200,000 and received a
deposit of Rs.500,000
Previous tenant was Mr. Z @ Rs.180,000 per month who vacated the house on 31.7.20X4
and the deposit of Rs.300,000 was refunded to Mr. Z that was received on 1.8.20X1
Calculate the amount of chargeable rent for the tax year 20X5

Solution
Rent from Mr. Z 180,000
Rent from Mr. K 200,000 x 10 2,000,000
Deposit from Mr. K 500,000
Less: Amount already taxed 300,000 x 10% x 3 90,000
410,000
10% of Rs.410,000 41,000
Chargeable rent 2,221,000
Example 2
Mr. Annathe Parsanna rented his house on 1.10.20X4 to Ms. Kukoo at a monthly rent of
Rs.400,000 and received a deposit of Rs.1,200,000.

Previous tenant was Mr. Zannate Peerana @ Rs.360,000 per month who vacated the
house on 31.7.20X4 and the deposit of Rs.800,000 was refunded to Mr. Peerana that was
received on 1.6.20X1.

During the month of August 20X4, Mr. Parsanna signed a sale agreement of his house
with Mr. Zardaana and received a token deposit of Rs.3,000,000 against agreed sale
value of Rs.120 million. However, Mr. Zardaana could not fulfill his commitment to
purchase the house and the deposit of Rs.3,000,000 was forfeited.

Calculate the amount of chargeable rent for the tax year 20X5
Solution 2
Rent from Mr. previous tenant 360,000
Rent from Mr. new tenant 400,000 x 9 3,600,000
Forfeited deposit 3,000,000
Deposit from new tenant 1,200,000
Less: Amount already taxed 800,000 x 10% x 4 320,000
880,000
10% of Rs.880,000 88,000
Chargeable rent 7,048,000
Taxability of property income
6. Taxability of property income
6.1 Income from property is taxable under NTR 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]

(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
govt 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

(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 4% 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 4% 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”.

Other expense = actual expense or 4% of chargeable rent, whichever is

lower.
Examples of other expense

Collection charges
Administration expense
Actual repairs in respect of open plot
Insurance premium in respect of open plot
Drafting of rent agreement
Broker’s commission
 (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.
6.2 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 4th 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 4% of chargeable rent.
6.3 Apportionment of common expenses
Common expenses shall be apportioned if the building or land is:
a) not available for rent for the whole year such as land or building is in owner’s
use for a part of the year e.g. building is used by the owner itself for 4 months
b) partly rented out and a part is used for other purpose e.g. 40% of the building is
used by the owner for its own business / residence; or
c) expenditure is partly used for some other purposes e.g. loan taken for property
is partly used for the purchase of car for personal use.
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.
7. 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.

Definition of Agricultural Income

8. Loss under the head income from property:
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 except salary
income and 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.

Case 1 Case 2 .
Income from property (90,000) Income from Property (75,000) lapsed
Business 800,000 Salary 1,200,000
Taxable income 710,000 1,200,000
9. Tax deduction at source from property income – s 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;
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.

If the owner is an individual or AOP tax shall be deducted at the rates mentioned in the
chart below:
S# Gross amount of rent Rate of tax deduction
1 Up to Rs.300,000 Nil
2 Rs.300,001 – 600,000 5% of gross amount exceeding
Rs.300,000
3 Rs.600,001 – 2,000,000 Rs.15,000 plus 10% of gross amount
exceeding Rs.600,000

4 Exceeding Rs.2,000,000 Rs.155,000 plus 25% of gross amount

exceeding Rs.2 million
Now you can solve the questions in chapter 7