Karachi, August 28, 2024 – The Federal Board of Revenue (FBR) has provided a comprehensive explanation of the tax implications on income derived from property for the tax year 2024-25.
This clarification follows the issuance of the updated Income Tax Ordinance, 2001, which is effective as of June 30, 2024.
The FBR has specifically outlined that income from property is governed under Section 15 of the Ordinance. This section details the circumstances under which property income is taxable and offers clarity on what constitutes “rent” for tax purposes.
Under Section 15(1), any rent received or receivable by a person within a tax year, except rent that is exempt under the Ordinance, will be taxable under the head “Income from Property.” This means all rental income, unless specifically excluded by the law, is subject to taxation.
Section 15(2) provides a more detailed definition of what qualifies as “rent.” It states that rent encompasses any amount received or receivable by the owner of land or a building as consideration for its use, occupation, or the right to use or occupy it. This also includes any forfeited deposits paid under a contract for the sale of land or a building.
However, the FBR highlights exceptions to this rule in Section 15(3). If a building is leased out together with plant and machinery, any rent received for such a lease is not classified as income from property. Instead, it is taxed under the head “Income from Other Sources.”
Further, Section 15(3A) addresses situations where rental income includes amounts for amenities, utilities, or other services connected with the property. In such cases, the income derived from these additional provisions is also chargeable under “Income from Other Sources” rather than being treated as pure rental income.
An interesting aspect of the ordinance is laid out in Section 15(4). It stipulates that if the rent received or receivable is less than the fair market rent, the individual is treated as having received the fair market rent for the duration the property is rented out during the tax year. This provision ensures that properties are taxed on a fair market value basis, preventing tax avoidance through undervaluing rental agreements.
However, there is a critical exception under Section 15(5). This sub-section specifies that the rule of fair market rent does not apply if the fair market rent is already included in the lessee’s income under the head “Salary.”
These clarifications from the FBR aim to ensure transparency and fairness in the taxation of property income, aligning with broader efforts to streamline tax regulations and improve compliance. Property owners and investors are encouraged to familiarize themselves with these provisions to ensure proper tax filing and avoid potential penalties. The FBR’s updated ordinance provides a clear framework for taxpayers, ensuring all forms of property income are adequately accounted for in the coming tax year.
