Finance Bill 2026 withdraws the controversial deemed income tax on immovable properties after the Federal Constitutional Court declared Section 7E unconstitutional.
ISLAMABAD: The Federal Board of Revenue (FBR) has formally abolished Section 7E of the Income Tax Ordinance, 2001 through the Finance Bill, 2026, bringing an end to the controversial deemed income tax on immovable properties introduced four years ago.
Section 7E was initially incorporated through the Finance Act, 2022 with the objective of imposing tax on deemed rental income arising from certain immovable properties owned by taxpayers.
The government decided to withdraw the provision following a landmark ruling by the Federal Constitutional Court in May 2026, which declared the controversial tax measure unconstitutional.
In its short order, the apex court ruled that Section 7E “shall be deemed not to have been part of the Income Tax Ordinance from day one,” effectively invalidating the provision retrospectively from the date of its introduction.
The court dismissed appeals filed by the FBR and upheld petitions challenging the legality of the provision. It further declared that all actions, notices and proceedings initiated by the FBR and Commissioners of Inland Revenue under Section 7E lacked lawful authority and therefore stood set aside.
Section 7E had imposed tax on certain immovable properties by treating them as generating rental income even when they were self-occupied, remained vacant or were not producing any actual rental income.
Under the provision, any immovable property owned by a taxpayer beyond the first property could be deemed to generate rental income. In certain circumstances, agricultural land and business-use properties also fell within its scope.
The law presumed notional rental income equivalent to 20 per cent of the FBR-assessed value of the property. A tax rate of 5 per cent was then applied to this deemed income, effectively resulting in an annual tax burden of approximately 1 per cent of the property’s assessed value.
After hearing extensive arguments, the Federal Constitutional Court held that Section 7E was “ultra vires the Constitution” and “void ab initio”, declaring the provision unconstitutional from the outset.
Federal Constitutional Court Chief Justice Aminud-Din Khan observed that the provision had been challenged before various high courts across the country on constitutional grounds, leading to conflicting judicial opinions.
Prior to the apex court’s verdict, the Peshawar High Court and the Balochistan High Court had declared the provision unconstitutional. The Islamabad High Court had partially struck down subsection (2) of Section 7E.
Meanwhile, a Lahore High Court ruling that had upheld the provision was subsequently overturned by a division bench. The Sindh High Court had earlier dismissed similar constitutional petitions challenging the tax.
As a consequence of the Federal Constitutional Court’s decision, appeals filed by taxpayers were allowed, while petitions submitted by the FBR and Commissioners of Inland Revenue were dismissed. The court also disposed of all related proceedings concerning Section 7E.
The Federal Constitutional Court had reserved its judgment on April 30, 2026 before issuing the short order in May 2026.
With the Finance Bill, 2026 now proposing the formal repeal of Section 7E from the Income Tax Ordinance, 2001, the government has aligned the country’s tax laws with the constitutional ruling, ending a provision that had remained one of Pakistan’s most contentious tax measures since its introduction in 2022.
