ISLAMABAD, May 7, 2026 — Pakistan’s Federal Constitutional Court on Thursday declared the tax on deemed property income unlawful, dismissing appeals filed by the Federal Board of Revenue (FBR) and striking down Section 7E of the Income Tax Ordinance, 2001.
The court ruled that the provision “shall be deemed not to have been part of the Income Tax Ordinance from day one,” effectively nullifying the controversial tax measure introduced through the Finance Act 2022.
The short order further declared that all actions, notices, and proceedings initiated by the FBR and Commissioners of Inland Revenue under Section 7E were without lawful authority and stood set aside.
Section 7E imposed tax on certain immovable properties, including plots and properties not under active use, by treating them as generating rental income even if they were not rented out.
Under the provision, any immovable property owned by a taxpayer beyond the first property was considered to generate deemed rental income if it was self-occupied, unused, or not producing rental income. Agricultural land and business-use properties were also covered in certain cases.
The law assumed notional rental income equal to 20% of the property’s FBR-assessed value and imposed a 5% tax on that deemed income, effectively translating into an annual tax of around 1% of the property’s assessed value.
After hearing arguments, the 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 noted in the order that the provision had been challenged before multiple high courts across the country on constitutional grounds.
The ruling follows a series of conflicting judgments by various high courts. The Peshawar High Court and the Balochistan High Court had previously declared the provision unconstitutional, while the Islamabad High Court partially struck down subsection (2) of the law.
A ruling by the Lahore High Court upholding the provision was later overturned by a division bench, whereas the Sindh High Court had dismissed similar petitions.
As a result of Thursday’s judgment, appeals filed by taxpayers were allowed, while petitions filed by the FBR and the Commissioner of Inland Revenue were dismissed. The court also disposed of all related proceedings.
The Federal Constitutional Court had reserved its verdict on April 30 before issuing the short order on Thursday.