Income from Property under Pakistan Tax Laws: Understanding the Basics
Pakistan’s tax
laws outline the principles of taxation for various sources of income,
including income from property. Income from property refers to any revenue
generated from the use or sale of land, buildings, or other real estate assets.
Property income is subject to tax under the Income Tax Ordinance, 2001, which
defines property income as ‘income from house property’. In this article, we
will explore the basics of income from property under Pakistan tax laws.
What is Income from Property?
Income from
property refers to the income received by an individual or entity from the use,
rental or sale of a property. The property may include land, buildings, or any
other real estate asset that generates income. The income from property can be
either rental income or capital gains from the sale of a property.
Types of Property Income
The Income Tax
Ordinance, 2001, classifies property income into two types:
1. Income from
House Property: Income from house property refers to the income generated from
a residential or commercial property. It includes rental income and imputed
rental income from a self-occupied property.
2. Capital Gains
from the Sale of Property: Capital gains refer to the profit earned from the
sale of a property. It includes both short-term capital gains and long-term
capital gains.
Taxation of Income from House Property
Income from
house property is taxed under the head ‘Income from Business or Profession’.
The calculation of income from house property is based on the annual value of
the property, which is determined by the following formula:
Annual Value =
Rent Received or Receivable x 12
If the property
is self-occupied, the annual value is calculated as follows:
Annual Value =
Fair Rental Value x 12
The Fair Rental
Value is the rent that the property could have fetched if it were rented out in
the open market. If the property is let out for a part of the year, the annual
value is calculated on a proportionate basis.
The taxable income from house property is calculated as follows:
Taxable Income =
Annual Value
Less
- 1/5th of Rent of Building for Repairs
- Municipal
Taxes Paid
- Ground Rent
- Share in
Rental Income paid to HBFC / Bank
- Profit on
Capital borrowed for investment in Property
- Insurance Premium
- Legal Service
Charges
- Rent
Collection Expenditure
- Payment of
Liabilities treated as income
- Other
Deductions against Rent
The tax rate on
income from house property is based on the taxpayer’s slab rate. The slab rates
for individuals and Association of Persons (AOPs) are as follows:
Tax Slabs for Individuals and AOPs
Income Tax Rates
Up to PKR 600,000
- 0%
PKR 600,001 to
PKR 800,000 - 5%
PKR 800,001 to
PKR 1,200,000 - 10,000 + 12.5% of the amount exceeding Rs. 800,000
PKR 1,200,001 to
PKR 2,400,000 - 60,000 + 17.5% of the amount exceeding Rs. 1,200,000
PKR 2,400,001 to
PKR 3,000,000 - 270,000 + 22.5% of the amount exceeding Rs. 2,400,000
PKR 3,000,001 to
PKR 4,000,000 - 405,000 + 27.5% of the amount exceeding Rs. 3,000,000
PKR 4,000,001 to
PKR 6,000,000 - 680,000 + 32.5% of the amount exceeding Rs. 4,000,000
Above PKR 6,000,000
– 1,330,000 + 35% of the amount exceeding Rs.6,000,000
Taxation of Capital Gains from Sale of Property
Capital gains
from the sale of property are taxed under the head ‘Capital Gains’. The tax
rate on capital gains depends on the holding period of the property. The tax
rates for capital gains are as follows:
Tax Rates for
Capital Gains
|
Holding Period |
Open Plots |
Constructed Property |
Flats |
|
Under
1 Year |
15% |
15% |
15% |
|
More
than 1 year but less than 2 Years |
12.5% |
10% |
7.5% |
|
More
than 2 years but less than 3 Years |
10% |
7.5% |
0% |
|
More
than 3 years but less than 4 Years |
7.5% |
5% |
- |
|
More
than 4 years but less than 5 Years |
5% |
0% |
- |
|
More
than 5 years but less than 6 Years |
2.5% |
- |
- |
|
After
6 Years |
0% |
- |
- |
Conclusion
In conclusion,
income from property in Pakistan is subject to taxation under the Income Tax
Ordinance, 2001. The income from property can be either rental income or
capital gains from the sale of a property. Income from house property is taxed
under the head ‘Income from Business or Profession,’ while capital gains from
the sale of property are taxed under the head ‘Capital Gains.’ The tax rates
for income from house property and capital gains vary based on the taxpayer’s
slab rate and the holding period of the property. It is important for individuals
and entities to understand the basics of income from property under Pakistan
tax laws to comply with tax obligations and avoid penalties.
