Navigating the Tax Labyrinth: A Comprehensive Guide to Property Income Tax in Pakistan

Pakistan’s real estate sector has long been a magnet for investors, offering promising returns and a tangible asset. However, understanding the intricate web of tax implications on property income is crucial for both local and overseas Pakistanis. The Federal Board of Revenue (FBR) https://fbr.gov.pk/ continuously updates its policies, making it imperative to stay informed to avoid penalties and optimize your investments. This blog post delves into the various taxes levied on property income in Pakistan, providing a comprehensive overview for taxpayers.

1. Income from Property (Rental Income)

Rental income generated from immovable property is a primary source of tax revenue for the FBR. The tax rates on rental income are progressive, meaning the higher the income, the higher the tax rate. These rates apply to individuals and Associations of Persons (AOPs).

Current Tax Rates for Rental Income (Individuals and AOPs):

• Up to PKR 600,000: 0%
• PKR 600,001 to PKR 1,200,000: 5% of the amount exceeding PKR 600,000
• PKR 1,200,001 to PKR 2,200,000: PKR 30,000 + 15% of the amount exceeding PKR 1,200,000
• PKR 2,200,001 to PKR 3,200,000: PKR 180,000 + 25% of the amount exceeding PKR 2,200,000
• PKR 3,200,001 to PKR 4,100,000: PKR 430,000 + 30% of the amount exceeding PKR 3,200,000
• Above PKR 4,100,000: PKR 700,000 + 35% of the amount exceeding PKR 4,100,000

It’s important to note that certain deductions are allowed when computing net rental income, such as administration and collection charges (up to 4% of gross receipts).

Withholding Tax on Rental Income:

A withholding tax (WHT) is deducted at source on rental payments. For filers, the WHT rates vary based on the gross amount of rent. For non-filers, the WHT rates are significantly higher, often double that of filers. This disparity underscores the importance of being on the Active Taxpayers List (ATL).

2. Capital Gains Tax (CGT) on Sale of Immovable Property

Capital Gains Tax is levied on the profit earned from the sale of immovable property. The tax regime for CGT has seen recent amendments.

For properties acquired on or after July 1, 2024:

The concept of a “holding period” has been largely eliminated. Gains from the disposal of immovable property will now be taxed at a flat rate.

• Filers: A flat rate of 15% on the capital gain.
• Non-Filers: Progressive tax rates apply, with a minimum tax of 15%, but can go up to 45% based on the property value and overall income.

For properties acquired before June 30, 2024:

The previous tax regime, which considered the holding period, remains applicable. Under this regime, the CGT rate decreases progressively with the holding period. For instance, properties held for longer periods (e.g., more than six years for open plots, four years for constructed properties, and two years for flats) may attract a 0% tax.

This distinction is crucial for investors holding older properties, as they may benefit from the previous, more favorable holding period-based rates.

3. Deemed Income from Immovable Property (Section 7E)

A significant recent addition to Pakistan’s tax laws is the “deemed income” under Section 7E of the Income Tax Ordinance, 2001. This provision aims to tax individuals owning high-value immovable properties that may not be generating declared income.

• Taxable Event: A resident person owning immovable property in Pakistan is taxed on deemed income.
• Calculation: This deemed income is computed as 5% of the fair market value of the immovable property.
• Tax Rate: The tax rate on this deemed income is 20%.

Exemptions to Section 7E:

There are certain exemptions to this deemed income tax, which include:

• One self-owned residential house.
• Agricultural land used for agricultural purposes.
• Properties owned by provincial governments, local governments, or recognized charities.
• Properties of a corporate entity and a developer/builder.
• Properties acquired through inheritance or gifts (with certain conditions).

It’s crucial for property owners to understand these exemptions to determine their liability under Section 7E.

4. Other Related Taxes and Considerations

Beyond rental income, CGT, and deemed income, property transactions in Pakistan involve several other taxes:

• Withholding Tax on Property Purchases (Section 236K) & Sales (Section 236C): These are advance taxes paid at the time of property purchase and sale. The rates differ for filers and non-filers, with non-filers facing considerably higher rates. The IMF has recently agreed to a 2% cut in WHT on property purchases, aiming to reduce transaction costs and stimulate the real estate sector.
• Federal Excise Duty (FED): FED is also levied on property transactions. While the FED on buyers may see some reduction, the FED on sellers is expected to remain at current levels.
• Stamp Duty: This is a provincial tax levied on the registration of property transactions.
• Urban Immovable Property Tax (UIPT): This is a recurring provincial tax levied on the annual rental value of urban immovable property. The rates and exemptions vary by province. For instance, residential homes built on less than 5 marla (outside category “A” localities) or properties generating very low annual rent may be exempt. Properties owned by physically challenged persons, widows, minors, or orphans also often receive exemptions up to a certain limit. Religious buildings like mosques are generally exempt.
• Active Taxpayers List (ATL): Being on the ATL is paramount for minimizing tax liabilities. Non-filers consistently face higher tax rates and stricter regulations across almost all property-related transactions.
• Overseas Pakistanis: The FBR has made efforts to simplify property tax processes for overseas Pakistanis, even exempting them from higher taxes on property transactions (Sections 236C and 236K) if they hold a POC or NICOP and follow the online verification process through IRIS. This is a significant incentive to encourage foreign remittances and investment in the real estate sector.

Conclusion:

The tax landscape for property income in Pakistan is dynamic and requires careful attention. From recurring rental income tax and urban immovable property tax to capital gains tax on disposal and the newer deemed income tax, investors must be fully aware of their obligations. Staying on the Active Taxpayers List is a fundamental step to avoid punitive higher tax rates. As the FBR continues to reform and introduce new measures, consulting with a tax professional is highly recommended to ensure compliance and make informed decisions regarding property investments in Pakistan.

               For all taxation services, contact us at https://taxaccountant.pk/.We make sure timely and efficient response with confidentiality.