Introduction
In Pakistan, rental income is subject to taxation, whether it’s earned by an individual, an Association of Persons (AOP), or a company. Understanding the nuances of how Taxation on Rental Income for each entity type is crucial for landlords and property owners. In this article, we’ll delve into the differences between how rental income is taxed for individuals/AOPs and companies in Pakistan.
Table of Contents
Basis of Chargeability
Accrual Basis
Both individuals/AOPs and companies are taxed on rental income based on accrual.
Rent Amount
Higher of: Actual Amount or FMV of Rent
Whether you’re an individual/AOP or a company, you’re taxed on the higher of the actual rent received or the Fair Market Value (FMV) of the rent.
Forfeited Deposit
Taxable as Rent Income
For both individuals/AOPs and companies, any forfeited deposit is considered taxable as rent income.
Adjustable Advance
Not Taxable
Adjustable advances are not subject to taxation for both individuals/AOPs and companies.
Un-adjustable Advance
Taxable Equally in 10 Years Period
Un-adjustable advances are taxed equally over a 10-year period, starting from the year in which they were received, for both individuals/AOPs and companies.
Expenses Borne by Tenant
Taxable as Rent Income
Any expenses borne by the tenant are considered taxable as rent income for both individuals/AOPs and companies.
Tax Regime
NTR (Normal Tax Regime)
Both individuals/AOPs and companies fall under the Normal Tax Regime.
Tax Rates
Individuals/AOPs:
- Slab Rates
Companies:
- 29% for Normal Companies
- 20% for Small Companies
Income Tax Withholding from Receipt of Rent
Individuals/AOPs:
- No withholding up to Rs. 300,000
- On amounts exceeding Rs. 300,000, slab rates are applicable with a maximum rate of 25%
Companies:
- At the rate of 15%
Amounts Allowed as Deduction from Rent Income
Repair Allowance
- Equaling to 20% of Rent Amount
Insurance Premium
- Local Taxes/Charges Relating to Property
- Ground Rent
- Profit on Debt on Loan/Mortgage Relating to Property
- Admin/Collection Expense up to 4% of Rent Amount
- Legal Expense for Defending Property Title
- Irrecoverable Unpaid Rent
Rent Amount in Case of Self-Hiring
Actual Amount of Rent Received/Receivable
This applies to both individuals/AOPs and companies.
Rent from Property Situated Outside Pakistan
Net Rent is Taxed as Foreign Source Income
This is applicable for both individuals/AOPs and companies.
Conclusion
Understanding how rental income is taxed in Pakistan is essential for individuals, AOPs, and companies involved in property rental. By grasping the variances in taxation policies, landlords can effectively manage their tax liabilities and ensure compliance with the law.
Table Format
| Description | Individual/AOP | Company |
|---|---|---|
| Basis of Chargeability | Accrual | Accrual |
| Rent Amount | Higher of: Actual Amount or FMV of Rent | Higher of: Actual Amount or FMV of Rent |
| Forfeited Deposit | Taxable as Rent Income | Taxable as Rent Income |
| Adjustable Advance | Not taxable | Not taxable |
| Un-adjustable Advance | Taxable equally in 10 years period starting from the year in which it was received. | Taxable equally in 10 years period starting from the year in which it was received. |
| Expenses borne by the tenant | Taxable as Rent Income | Taxable as Rent Income |
| Tax Regime | NTR | NTR |
| Tax Rates | Slab Rates | – 29% for normal company |
| – 20% for small company | ||
| Income Tax Withholding from Receipt of Rent | No withholding up to Rs. 300,000. | At the rate of 15% |
| On amounts exceeding Rs. 300,000 slab rates are | ||
| applicable with a maximum rate of 25%. | ||
| Amounts Allowed as Deduction from Rent Income | – Repair allowance equaling to 20% of Rent amount | – Repair allowance equaling to 20% of Rent amount |
| – Insurance Premium | – Insurance Premium | |
| – Local taxes/charges relating to property | – Local taxes/charges relating to property | |
| – Ground Rent | – Ground Rent | |
| – Profit on Debt on Loan/Mortgage relating to | – Profit on Debt on Loan/Mortgage relating to property | |
| property | ||
| – Admin/Collection expense up to 4% of Rent | – Admin/Collection expense up to 4% of Rent amount | |
| amount | ||
| – Legal Expense for Defending Property Title | – Legal Expense for Defending Property Title | |
| – Irrecoverable Unpaid Rent | – Irrecoverable Unpaid Rent | |
| Rent Amount in case of Self-Hiring | Actual amount of Rent received/receivable | Actual amount of Rent received/receivable |
| Rent from Property Situated outside Pakistan | Net Rent is taxed as Foreign Source Income | Net Rent is taxed as Foreign Source Income |
FAQs (Frequently Asked Questions)
Question: What does “Basis of Chargeability” mean in rental income taxation?
Answer: Basis of chargeability refers to the method used to determine when rental income should be reported for tax purposes. In the accrual basis, rent is recognized as income when it becomes due, regardless of whether it has been received.
Question: How is the rent amount determined for taxation purposes?
Answer: The rent amount for taxation is the higher of the actual amount received or the fair market value (FMV) of the rent. This ensures that the taxable income accurately reflects the economic benefit derived from the property.
Question: Is a forfeited deposit considered taxable income?
Answer: Yes, a forfeited deposit is taxable as rent income. When a tenant breaks the lease agreement and forfeits their security deposit, the landlord needs to report this amount as taxable income.
Question: Are adjustable advances taxable?
Answer: No, adjustable advances are not taxable until they are adjusted. This means that any security deposit or advance payment that is subject to adjustment based on certain conditions, such as damages to the property, is not taxable until the adjustment occurs.
Question: How is an un-adjustable advance taxed?
Answer: An un-adjustable advance, such as a non-refundable deposit for a long-term lease, is taxed by spreading the amount equally over a specified period, usually the term of the lease.
Question: Are expenses borne by the tenant taxable?
Answer: Yes, expenses borne by the tenant that are normally payable by the landlord, such as property taxes and repair charges, are taxable as rent income.
Question: What is the tax regime for rental income for individuals and associations of persons (AOP)?
Answer: Rental income for individuals and AOPs falls under the Normal Tax Regime (NTR).
Question: What are the tax rates for rental income for companies?
Answer: The tax rates for rental income for companies vary depending on their size. Normal companies are subject to a tax rate of 29%, while small companies are taxed at 20%.
Question: Is income tax withheld from rental income?
Answer: Yes, income tax is withheld from rental income. If the rent received exceeds a certain threshold, the tenant is required to withhold income tax at a specified rate.
Question: What deductions are allowed from rental income?
Answer: Various deductions are allowed from rental income, including repair allowances, insurance premiums, local taxes/charges, ground rent, administrative expenses, legal expenses, and irrecoverable unpaid rent.
Question: How is the rent amount calculated if the property is self-hired?
Answer: If the property is self-hired or used for personal purposes instead of being rented out, the actual amount of rent that could have been received if it were rented to someone else is considered for taxation purposes.
Question: How is rental income from property situated outside Pakistan taxed?
Answer: Rental income from property situated outside Pakistan is taxed as foreign source income, and the net rent received is subject to taxation in accordance with the relevant tax laws.
Question: Do I need to pay tax on forfeited deposits from tenants?
Yes, any forfeited deposit is considered taxable as rent income.
Question: What is the tax rate for companies on rental income?
For normal companies, the tax rate is 29%, and for small companies, it’s 20%.
Question: Are adjustable advances subject to taxation?
No, adjustable advances are not taxable for both individuals/AOPs and companies.
Question: Can I deduct repair expenses from my rental income?
Yes, repair expenses equaling to 20% of the rent amount are deductible.
Question: Is rental income from properties outside Pakistan taxable?
Yes, net rent from properties situated outside Pakistan is taxed as foreign source income.
Practice Examples on Taxation on Rental Income
- Basis of Chargeability: Let’s say you own a commercial property and the basis of chargeability for the rent you receive from your tenant is accrual. This means you need to report the rent as income when it becomes due, regardless of whether it has been received or not.
- Rent Amount: If your tenant owes you Rs. 176,000 per month in rent, but the fair market value (FMV) of similar properties in the area is Rs. 211,200 per month, you would report Rs. 211,200 as your rent income for that period.
- Forfeited Deposit: If your tenant breaks the lease agreement and forfeits their security deposit of Rs. 88,000, you would need to report this amount as taxable rent income in your books.
- Adjustable Advance: If your tenant provides you with a security deposit that can be adjusted based on certain conditions, such as damages to the property, this amount is not taxable until it is adjusted.
- Un-adjustable Advance: Suppose your tenant pays you a non-refundable advance of Rs. 1,760,000 for a 10-year lease. In this case, you would need to spread the taxation of this amount equally over the 10-year period.
- Expenses borne by tenant: If your tenant agrees to pay for property taxes and repair charges directly, you would need to include these amounts as taxable rent income.
- Tax Regime: If you are an individual or an association of persons (AOP), your rental income falls under the Normal Tax Regime (NTR).
- Tax Rates: For a company, the tax rates vary depending on its size. A normal company is subject to a tax rate of 29%, while a small company is taxed at 20%.
- Income Tax Withholding: If the rent you receive exceeds Rs. 52,800,00, your tenant is required to withhold income tax at a rate of 15% on the amount exceeding Rs. 52,800,00.
- Deductions from Rent Income: Let’s say you spent Rs. 35,200 on property repairs, Rs. 17,600 on insurance premiums, and Rs. 8,800 on legal expenses related to defending your property title. You can deduct these amounts from your rent income before calculating your taxable income.
- Rent Amount in case of Self-Hiring: If you decide to use the property for your own business instead of renting it out, you would report the actual amount of rent you would have received if it were rented to someone else.
- Rent from Property Situated outside Pakistan: If you own a property in another country and receive rent from it, you would need to report the net rent as foreign source income.
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