Income tax is an important source of revenue for any country, and Pakistan is no exception. The Income Tax Ordinance, 2001, is the main legislation governing the taxation of income in Pakistan.
Under this ordinance, income from property is a significant source of revenue for the government.
Section 15 of the Income Tax Ordinance, 2001, defines the income from property for tax determination in Pakistan. It states that any rent received or receivable by a person, other than rent exempt from tax under this ordinance, shall be chargeable to tax in that year under the head “Income from Property.”
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“Rent” in this context means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building. It also includes any forfeited deposit paid under a contract for the sale of land or a building.
However, there are certain exceptions to this rule. Section 15(3) states that this section shall not apply to any rent received or receivable by any person in respect of the lease of a building together with plant and machinery. Such rent shall be chargeable to tax under the head “Income from Other Sources.” Additionally, any amount included in rent received or receivable for the provision of amenities, utilities, or any other service connected with the renting of the building shall also be chargeable to tax under the head “Income from Other Sources.”
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If the rent received or receivable by a person is less than the fair market rent for the property, Section 15(4) treats the person as having derived the fair market rent for the period the property is let on rent in the tax year. However, this provision does not apply where the fair market rent is included in the income of the lessee chargeable to tax under the head “Salary.”
In computing the income of a person chargeable to tax under the head “Income from Property” for a tax year, a deduction shall be allowed for certain expenditures or allowances under Section 15A. These include repairs to a building, insurance premiums, local rates, taxes, charges, or cess in respect of the property or the rent from the property paid to any local authority or government, ground rent, profit paid on any money borrowed to acquire, construct, renovate, extend, or reconstruct the property, and legal services acquired to defend the person’s title to the property or any suit connected with the property in a court.
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Additionally, any expenditure paid or payable by the person in the tax year for the purpose of deriving rent chargeable to tax under the head “Income from Property,” including administration and collection charges, may also be allowed as a deduction. Furthermore, where there are reasonable grounds for believing that any unpaid rent in respect of the property is irrecoverable, an allowance equal to the unpaid rent may also be granted.
It is important to note that any unpaid rent allowed as a deduction under Section 15A(1)(j) that is wholly or partly recovered shall be chargeable to tax in the tax year in which it is recovered. Moreover, where a person has been allowed a deduction for any expenditure incurred in deriving rent chargeable to tax under the head “Income from Property,” and the person has not paid the liability or a part of the liability to which the deduction relates within three years of the end of the tax year in which the deduction was allowed, the unpaid amount of the liability shall be chargeable to tax under the head “Income from Property” in the first tax year following the end of the three years.
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In conclusion, understanding income from property is essential for individuals in Pakistan who own or lease properties and are liable to pay taxes. The Income Tax Ordinance, 2001 provides clear guidelines on what constitutes income from property and the deductions that can be made to compute taxable income. It is important for property owners and lessees to familiarize themselves with the provisions of the Income Tax Ordinance, 2001 and seek professional advice when necessary to ensure compliance with tax laws and regulations. By doing so, they can avoid penalties and fines, and contribute to the development of Pakistan’s economy through the payment of taxes.
