Karachi, November 2, 2024 – The Federal Board of Revenue (FBR) has issued detailed guidance on the taxation of rental income for the tax year 2024-25. Outlined under Section 155 of the Income Tax Ordinance, 2001, this guidance aims to clarify the obligations of individuals, companies, and other entities with respect to rental income from immovable property.
According to the FBR, Section 155 mandates that a “prescribed person” must deduct tax on any rent payment made for immovable property. This includes payments for the rental of fixtures, furniture, or related services. The tax is deducted from the gross amount of rent, which encompasses any advanced payments, under the rates specified in Division V of Part III of the First Schedule.
To remove ambiguity, the FBR clarified that this section applies irrespective of the head of income under which the rent is reported. In other words, rent from immovable property is taxable, regardless of how the recipient accounts for it in their income sources.
The FBR defines a “prescribed person” to include several categories, such as the Federal and Provincial Governments, local governments, companies, non-profit organizations, and diplomatic missions. Additionally, private entities like educational institutions, boutiques, beauty salons, hospitals, clinics, and maternity homes also fall under this requirement if they pay rent above Rs.1.5 million annually. Any other person notified by the FBR for this purpose is also included.
Tax Rates for Rental Income
The FBR provided specific tax rates based on the type of taxpayer and the gross rental amount:
1. For individuals and associations of persons (AOPs):
o Up to Rs.300,000: No tax is applicable.
o Between Rs.300,000 and Rs.600,000: 5% tax on the amount exceeding Rs.300,000.
o Between Rs.600,000 and Rs.2,000,000: Rs.15,000 plus 10% on the amount exceeding Rs.600,000.
o Above Rs.2,000,000: Rs.155,000 plus 25% on the amount exceeding Rs.2,000,000.
2. For companies: A flat tax rate of 15% applies to the total gross rental income.
Implications for Rent Payers
The FBR’s clarification serves to ensure that all eligible entities accurately deduct and remit taxes on rental payments, enhancing compliance and transparency in rental income taxation. By providing clear guidelines and precise tax rates, the FBR aims to streamline the collection process and prevent potential revenue loss.
With the real estate sector being a significant contributor to the economy, these regulations are a step towards a more robust taxation framework, supporting revenue generation and the national exchequer. This initiative reflects the FBR’s commitment to enforcing transparent taxation policies and ensuring that all rent-related income is duly taxed.
