FBR explains rental income, fair market rent, allowable deductions and non-adjustable tenant payments under Pakistan’s tax law.
ISLAMABAD: The Federal Board of Revenue (FBR) has set out the rules governing income from property in Pakistan for Tax Year 2027 under the Income Tax Ordinance, 2001.
The FBR has issued the updated Income Tax Ordinance, incorporating amendments up to June 30, 2026, and outlined how rental income is taxed, which deductions property owners can claim and how certain payments received from tenants are treated.
Rent taxable as property income
Under Section 15, rent received or receivable by a person during a tax year, unless exempt from tax, is chargeable under the head “Income from Property.”
Rent includes any amount received or receivable by the owner of land or a building as consideration for its use or occupation, or for the right to use or occupy it.
The definition also covers a deposit forfeited under an agreement for the sale of land or a building.
However, not all income associated with a rented property falls under property income.
Where a building is leased together with plant and machinery, the resulting income is chargeable under the head “Income from Other Sources.”
Similarly, amounts received or receivable for amenities, utilities or other services connected with the rental of a building are treated as income from other sources.
Fair market rent rules
The law contains a specific provision for cases where the rent received or receivable is lower than the property’s fair market rent.
In such circumstances, the taxpayer is generally treated as having derived the fair market rent for the period during which the property was rented during the tax year.
This rule does not apply where the fair market rent has already been included in the lessee’s salary income.
Deductions allowed against property income
Section 15A specifies the expenditures and allowances that may be deducted when calculating taxable income from property.
One of the principal allowances is for repairs to a building. A taxpayer can claim an allowance equal to one-fifth of the rent chargeable to tax in respect of the building, calculated before other deductions under the section.
Other allowable deductions include:
•Premiums paid to insure the building against damage or destruction.
•Local rates, taxes, charges or cess relating to the property or rent, paid to a local authority or government, excluding income tax.
•Ground rent paid or payable for the property.
•Profit paid or payable on money borrowed, including mortgages, for acquiring, constructing, renovating, extending or reconstructing the property.
•Certain payments made under property investment schemes involving the House Building Finance Corporation or a scheduled bank.
•Profit or interest paid on a mortgage or other capital charge against the property.
•Certain expenditure incurred wholly and exclusively to earn rental income, including administration and collection expenses, subject to a 4% limit of the rent chargeable to tax.
•Legal expenses incurred to defend title to the property or in connection with court proceedings involving the property.
•Certain unpaid rent where there are reasonable grounds to believe that it is irrecoverable and the prescribed conditions have been met.
Recovered unpaid rent becomes taxable
The law also specifies the treatment of rent that was previously unpaid and subsequently recovered.
Where unpaid rent was allowed as a deduction in an earlier tax year and is later recovered, the recovered amount becomes chargeable to tax in the tax year in which it is received.
There are also rules covering unpaid liabilities relating to expenditure for which a deduction was previously allowed.
If such a liability remains unpaid for three years after the end of the relevant tax year, the unpaid amount becomes chargeable to tax under the head “Income from Property”.
If the liability is subsequently paid, a deduction may be claimed in the tax year in which the payment is made.
The same expenditure cannot be claimed as a deduction under Section 15A when calculating income under another head.
Non-adjustable amounts received from tenants
Section 16 deals with amounts received by a building owner from a tenant that are not adjustable against rent.
Such an amount is treated as rent chargeable to tax in the year it is received and in each of the following nine tax years, in equal proportions.
This effectively spreads the taxable amount over a total period of 10 tax years.
Where the owner refunds the amount to the tenant after the tenancy ends before the 10-year period is completed, the law provides specific rules governing the tax treatment of the refund and any subsequent non-adjustable amount received from a new tenant.
Property owners face detailed tax rules
The provisions establish a detailed framework for calculating income from property for Tax Year 2027.
Property owners need to consider not only rent received or receivable but also fair market rent provisions, allowable deductions, recovered unpaid rent, unpaid liabilities and non-adjustable payments received from tenants when determining their taxable property income.