Karachi, August 29, 2024 – In a notable update for property owners across Pakistan, the Federal Board of Revenue (FBR) has announced several deductions available under the Income Tax Ordinance, 2001, for calculating tax on income derived from property.
The announcement, which is part of the ordinance updated up to June 30, 2024, details the various expenses and allowances that property owners can claim when computing their taxable income under the category “Income from Property.”
Key Deductions Under Section 15A
The deductions, outlined in Section 15A of the ordinance, are aimed at providing relief to property owners by reducing their taxable income through various allowable expenses. Here’s a breakdown of the key deductions:
1. Repairs Allowance: Property owners can claim an allowance for repairs equal to one-fifth (20%) of the rent chargeable to tax on the building for the year. This deduction is calculated before applying any other deductions under this section, providing significant relief for maintaining property standards.
2. Insurance Premiums: Any premium paid by the property owner to insure the building against risks such as damage or destruction is deductible. This encourages property owners to safeguard their investments without bearing the full tax burden on insurance costs.
3. Local Taxes and Charges: Deductions are also allowed for local rates, taxes, charges, or cess paid to any local authority or government, provided these are not taxes payable under the Income Tax Ordinance. This helps in mitigating the financial impact of local property-related levies.
4. Ground Rent: If a property owner pays ground rent, this amount is deductible when calculating the income tax on the property, recognizing the cost associated with leasing land.
5. Interest on Loans: The ordinance allows for the deduction of any profit or interest paid on loans or mortgages taken to acquire, construct, renovate, extend, or reconstruct the property. This provision is particularly beneficial for property investors and homeowners who rely on financing to manage their properties.
6. House Building Finance Corporation and Bank Investments: For properties financed through schemes with the House Building Finance Corporation or banks, deductions are available for the share in rent and appreciation in property value (excluding the return of capital) paid to these institutions. This supports collaborative investments and incentivizes property development.
7. Mortgage Interest: Property owners can also deduct the interest paid on mortgages or other capital charges. This deduction helps offset the costs of borrowing against the property, making it easier to manage loans.
8. Administrative and Collection Costs: An expenditure up to 4% of the rent chargeable to tax is deductible if it’s incurred exclusively for deriving rent. This includes administration and collection charges, recognizing the costs involved in property management.
9. Legal Expenses: Any expenditure incurred for legal services to defend the title of the property or in legal suits related to the property is deductible. This provision ensures that property owners are not financially penalized for protecting their property rights.
10. Bad Debts from Unpaid Rent: If rent is deemed irrecoverable under certain conditions, an allowance for unpaid rent can be claimed. However, if this rent is subsequently recovered, it becomes taxable in the year of recovery.
Provisions for Unpaid Liabilities and Recouped Deductions
The FBR has also outlined conditions under which unpaid liabilities, if not settled within three years of the deduction, will be charged back as taxable income. Conversely, if these liabilities are later paid, a deduction is allowed in the year of payment. This ensures fairness in the tax system by preventing indefinite deferral of liabilities while allowing flexibility for eventual payments.
Ensuring Fair Tax Practices
The newly announced deductions underscore the FBR’s commitment to creating a fair and balanced tax environment for property owners, promoting transparency, and ensuring compliance with tax laws. Property owners are encouraged to take note of these deductions and consult with tax professionals to maximize their tax benefits while adhering to legal obligations.
By clarifying these deductions, the FBR aims to simplify the tax filing process and provide property owners with the necessary tools to accurately compute their taxable income. As the tax year progresses, property owners should remain vigilant and proactive in understanding their rights and responsibilities under the Income Tax Ordinance.
For further details, property owners can refer to the FBR’s official website or consult with tax experts to ensure compliance and optimize their tax planning strategies.