The basis of taxation of Income from Property is on Gross Amount of Rent basis. Gross Amount of Rent basis of Taxation is further sub-divided into Normal Tax Regime and Final Tax Regime. Income from Property covered in Normal Tax Regime is regulated through section 15 and 16 of the Income Tax Ordinance, 2001 while Income from Property covered under Final Tax Regime is regulated through section 15, 16, 155 and 169 of the ITO, 2001.
Normal Tax Regime
The Income from Property under Normal Tax Regime will be taxable on receipt or receivable basis [Section 15] for a Tax Year [Section 74] and it is taxed @ 5%. The Normal Tax Year runs from July to June. Before moving further, Taxpayers must understand the nature of payments included and excluded from Income from Property.
Inclusions
1. Amount received or receivable by the owner of Land and building as consideration for:
a) Use or right to use
b) Occupation or right to occupy
It is worthwhile here to note that in case the rent received or receivable by the owner is less than the fair market rent of the land or building, the amount chargeable to tax is the Fair Market Rent of the property. As the term Fair Market Rent has not been defined in the tax statute, the Fair Market Rent would normally mean the rent which the property would ordinarily fetch in the open market.
2. Forfeited deposit paid under a contract for the sale of land or building.
3. An amount received by the owner of building which is not adjustable against rent, like security deposit, advance etc.
Exclusions
- 1. Amount received or receivable on account of rent of building together with Plant and machinery.
- Amount received or receivable being included in Rent for the provision of amenities, utilities or any other services connected with the renting of building.
- Income from Property not exceeding Rs.150,000 received or receivable by an individual or Association of person not deriving taxable income under any other head of income. [Refer Example 2]
- Fair market Rent included in the income of lessee chargeable to tax under the head “Salary”.
Gross Amount of Rent is taxed @ 5% on receipt or receivable basis and no deduction is allowed from such gross amount of rent. The tax liability of 5% is discharged after claiming the deduction of Zakat, Worker Welfare Fund and Worker Profit Participation Fund wherever applicable. Moreover, Tax Credits like on Charitable Donation, Investment in Shares, Retirement Annuity Scheme and Profit on Debt should also be calculated after incorporating Income from Property under Normal Tax Regime.
Rent of property normally involves an non-adjustable amount, commonly known as security deposit. Such security deposit is not taxed on receipt or receivable basis but is taxed on receipt basis in ten equal installments, that is, 10% every year [Section 16]. However, the said 10% shall not be included in the total income of a Tax Year where the security deposit was refunded to the tenant on termination of tenancy [Section 16(2)].
In case, the property is let out to a succeeding tenant and security deposit is also received from him/her then such security deposit should be reduced by the total installment of first security deposit already taxed. The balance security deposit will then be taxed in ten equal installments [Section 16(3)].
EXAMPLE 1
Mr. Yousha used to receive an annual rent of Rs180,000, in respect of a Flat located near Saddar, from Mr. Sannan. He also took a security deposit of Rs100,000 from him according to the rent agreement. However, the tenancy agreement was terminated on June 30, 2007, that is, after six years. Mr. Yousha returned the security deposit of Rs100,000 to Mr. Sannan on June 30, 2007. On July 1, 2007, Miss Nabiha took over the property on following terms and condition.
Annual Rent - Rs340,000
Security Deposit - Rs200,000
The annual rent includes Rs100,000 for Security Guard charges for the Tax Year under consideration.
Required
Calculate Taxable Income and Tax Payable of Mr. Yousha for the Tax Year 2008.
Solution
MR. YOUSHA
COMPUTATION OF TAXABALE INCOME AND TAX PAYABLE
TAX YEAR 2008
| Taxable Income [Working 1 & Note 1] | Rs355,000 |
| Tax payable [Working 1] | Rs 12,750 |
| Working 1 | |
| Income from property [working 2] | Rs255,000 |
| Income from Other Sources – Security Guard Charges | Rs100,000 |
| Taxable Income | Rs355,000 |
| Working 2 | |
| Annual Rent | Rs340,000 |
| Less: Security Guard Charges [Note 1] | Rs100,000 |
| Add: Security Deposit [Working 3] | Rs 15,000 |
| Income from Property | Rs255,000 |
| Tax payable [Rs255,000 X 5%] | Rs 12,750 |
| Working 3 | |
| Second Security Deposit | Rs200,000 |
| Less: Security Deposit already Taxed [Rs100,000 X 50% - Note 2] | Rs 50,000 |
| Security Deposit Taxable in Ten Years | Rs150,000 |
| Security Deposit Taxable in Tax Year 2008[Rs150,000 X 10%] | Rs 15,000 |
Note:
- Security Guard Charges will be taxed separately from IFP as Income from Other Sources [Refer S. No. 2 under the heading Exclusions] and 0% rate is prescribed for Taxable Income of Rs100,000.
- 1/10th [10%] of security deposit should be taxed every year, hence, 50% represents 10% for each of five years of occupation by Mr. Sannan. Although, Mr. Sannan stayed for six year but 10% of Security deposit will not be taxed in the year of termination of rent agreement [Section 16(2)].
EXAMPLE 2
Mr. Mazhar is employed by Apex Consulting International as Manager on the basis that he will take Pakistan variant for Tax and Law paper in his forthcoming Exam. He annual salary after increment is Rs164,450 including Rs14,950 as medical allowance. The employer does not provide free medical treatment of hospitalization or reimbursement of such charges.
Mr. Mazhar also owns a house near Lahore Stock Exchange. He rented out the property to Mr. Abdul Ghafoor on July 1, 2007 on an annual rent of Rs144,000.
Required
Calculate Taxable Income and Tax Payable of Mr. Mazhar for the Tax Year 2008.
Solution
MR. MAZHAR
COMPUTATION OF TAXABALE INCOME AND TAX PAYABLE
TAX YEAR 2008
| Income from Property | Rs144,000 |
| Income from Salary [Working 1] | Rs149,500 |
| Taxable Income | Rs293,500 |
| Tax on Taxable Income from Property [Rs144,000 @ 5%] | Rs7,200 |
| Tax on Taxable Income from Salary [0% prescribed upto Rs150,000] | Rs 0 |
| Tax payable | Rs7,200 |
| Working 1 | |
| Annual Salary | Rs164,450 |
| Less: 10% Medical Allowance | Rs 14,950 |
| Income from Salary | Rs144,500 |
Note:
- Refer S. No. 3 under the heading Exclusions
- 10% Medical Allowance is exempt under clause 139 of Part 1 of Second Schedule provided that free medical treatment of hospitalization or reimbursement of such charges is not provided for in the terms of employment.
EXAMPLE 3
The following information is furnished to you by Mr. Subaiyal for his accounting year ended 30 June 2008.
- Mr. Subaiyal has a building which he lets to Mr. Wail on 1 July 2007 on which date Mr. Wail pays the annual rent of Rs. 700,000 and a security deposit of Rs. 1,000,000 which is not adjustable against the rent payable. Rs. 700,000 is inclusive of Rs. 100,000 for the provision of electricity and the services of a gardener.
- Subaiyal’s salary income is Rs. 1,000,000 on which his employer has deducted tax of Rs. 100,000.
- The expenditure incurred by Subaiyal (deductible for tax purposes) for providing electricity and the services for the gardener is Rs. 128,600.
Required
Compute Mr. Subaiyal’s taxable income and tax payable for the relevant tax year.
Solution
MR. SUBAIYAL
COMPUTATION OF TAXABALE INCOME AND TAX PAYABLE
TAX YEAR 2008
Taxable Income [working 1] - Rs 1,671,400
Tax Payable [working 4] - Rs 32,140
Working 1
| Rupees |
Salary | 1,000,000 |
Income from property (working 2) | 700,000 |
Income from other sources (working 3) | (28,600) |
Taxable income | 1,671,400 |
Working 2
| Rupees |
Annual rent received | 600,000 |
10% of security deposit of Rs. 1,000,000 | 100,000 |
| 700,000 |
Working 3
| Rupees |
Amount received for electricity and services of gardener [Note 1] | 100,000 |
Deductible expenditure | (128,600) |
Income from Other Sources - Loss | 28,600 |
Working 4
| Rupees |
Income from property @ 5% (Rs. 700,000 x 5%) | 35,000 |
On Rs. 971,400 [Rs. 1,671,000 less Rs. 700,000] @ 10% | 97,140 |
| 132,140 |
Less: Tax deducted at source from salary income under section 149 | 100,000 |
Tax payable | 32,140 |
Note
- Any amount included in the rent for the provision for amenities, utilities or any other services is not rent chargeable to tax under the head Income from property. Such amounts are chargeable to tax as income from other sources.
Final Tax Regime
The Income from Property under Final Tax Regime is taxable on receipt basis during a Tax Year while the Normal Tax Year runs from July to June. Final Tax Regime income is also taxed @ 5% including the security deposit in accordance with section 16. In other words, the Tax Deduction from security deposit should be to the extent of 10% and after giving due consideration to section 16(1) and (3).
Income from Property falls under Final Tax Regime where the rented property is let out to a tenant who is prescribed person. The following tenants, being prescribed person, is required to withhold tax from the payment of rent @ 5%.
1. Federal & Provincial Government.
2. Local authorities
3. Company
4. Non Profit organization
5. Diplomatic mission of foreign State
6. Any other person notified by the Brand.
Taxpayers must note that a prescribed person is required to deduct tax from the gross amount of rent which includes payments on account of rent of immovable property, payment on account of rent of furniture and fixtures in such immovable property and payments for any services relating to such property.
The WHT deducted by such prescribed person shall be the final discharge of tax liability on the income from property. The concept of Full and Final Discharge of Tax Liability enunciates that no deduction of expenses and no Tax Credits shall be allowed from the gross receipts.
However, the Tax deducted shall be refundable where IFP is owned by an individual or an AOP and the rent does not exceed Rs150,000. Similarly, the Tax Deduction from the payments shall be treated as Advance Tax where the amounts are covered in the exclusions from Income from Property and taxed under Income from other sources.
The prescribed person normally provided a Tax Payment Receipt to the Landlord which need to be submitted along with statement under section 115(4) on September 30 following normal Tax Year. However, in IFP under FTR, the prescribed person is also required to withhold tax on total security deposit at the time of payment. Consequently, the security deposit is not taxed in installments as evidenced in Income from Property under Normal Tax Regime.
Moreover, the tax liability of 5% under section 155 which is treated as Full and Final Discharge of Tax Liability can neither be reduced by claiming the deduction of Zakat, WWF and WPPF wherever applicable nor any Tax Credits like on Charitable Donation, Investment in Shares, Retirement Annuity Scheme and Profit on Debt will be available in contrast to Income from Property under Normal Tax Regime.
EXAMPLE 4
Assume that the scenario is the same as given in Example 4 except that on 1 July 2007 the building was let to the diplomatic mission of the Kingdom of Saudi Arabia in Pakistan instead of Mr. Wail.
Required
a) Compute the taxable income of Mr. Subaiyal for the tax year 2008.
b) Compute the tax payable to Mr. Subaiyal for the tax year 2008.
Solution
a)
MR. SUBAIYAL
COMPUTATION OF TAXABALE INCOME
TAX YEAR 2008
Rupees | |
| Income from Salary | Rs1,000,000 |
| Loss under Income from Other Sources | Rs 28,600 |
| Taxable Income | Rs 971,400 |
| b) | |
| MR. SUBAIYAL - COMPUTATION OF TAX PAYABLE | |
| TAX YEAR 2008 | |
Rupees | |
| Tax on Taxable Income [971,400 @ 10%] | Rs. 97,140 |
| Tax on Income under section 155 [working 1] | Rs 40,000 |
| Less: Withholding Tax u/s 155 [working 1] | Rs 40,000 |
| Less : Advance Tax under section 149 from Salary | Rs.100,000 |
| Tax Refundable | Rs. 2,860 |
Working 1
| Annual rent paid by the diplomatic mission | 700,000 |
Non-adjustable deposit | 1,000,000 |
| 1,700,000 |
Tax Deduction by Diplomatic Mission under section 155 being Full and Final Tax – 5% of. 800,000 [700,000 + [10% x 1,000,000 (Note 2)]] |
40,000 |
Working 2
| Rupees |
Amount received for electricity and services of gardener | 100,000 |
Deductible expenditure | (128,600) |
Income from Other Sources - Loss | 28,600 |
Note:
- Diplomatic Mission of the Kingdom of Saudi Arabia is a Withholding Tax Agent and is required deduct tax under section 155
- Diplomatic Mission is required to Withhold Tax on all payments on account of rent including Rs. 100,000 for electricity and services of gardener and 10% of Security Deposit and 10% of Security Deposit.
Income from Propeprty of Joint Owners
The Income from Property under Normal Tax Regime shall not be assessed as Association of Person where the property is owned by two or more persons have definite and ascertainable share in such property. However, each person is required to account for his respective share of Income from Property in his taxable income for the Tax Year.
EXAMPLE 5 - Normal Tax Regime
Mr. Yousha and Mr. Yasaa purchased a building for Rs. 2,000,000 in the name of Yousha Yasaa Associates each investing Rs. 1,000,000. Profits or losses from the building are shared equally. The building was rented to Mr. Young on 1 July 2002 when Mr. Young besides paying the annual rent also paid Rs. 100,000 as a deposit which was not adjustable against the rent payable. On 1 June 2006, Mr. Young terminated the tenancy and the deposit of Rs. 100,000 was refunded to him on 15 June 2006. On 1 July 2006, the building was rented out to Mr. Old for an annual rent of Rs. 600,000 and Mr. Old also paid a non-adjustable deposit of Rs. 400,000.
Mr. Yousha has a salary income of Rs. 500,000 in the year ended 30 June 2007 and has paid Rs. 10,000 as zakat. Rs. 15,000 has been deducted at source by Yousha’s employer on the salary income. Mr Yasa has no taxable income other than his share of income from the building in the tax year 2007.
Required
a) Compute the taxable income of Yousha Yasaa Associates for their accounting year 30 June 2007 and the tax payable for the relevant tax year
b) Compute the taxable income of Mr. Yousha and Mr. Yasaa respectively for the year ended 30 June 2007
c) Calculate the tax payable by Mr. Yousha and Mr. Yasaa for the relevant tax year.
Solution
a) As the shares of Mr. Yousha and Mr. Yasaa in the income from the building are definite and ascertainable (50% each). Yousha Yasaa Associates will not be taxable as an AOP and no tax is payable by Yousha Yasaa Associates.
b) Computation of tax payable for the tax year 2007:
| Mr. Yousha | Mr. Yasa |
| Rupees | Rupees |
Salary | 500,000 | - |
Income from property (working 1) | 318,500 | 318,500 |
Total income | 818,500 | 318,500 |
Zakat paid | 10,000 | - |
Taxable income | 808,500 | 318,500 |
Working 1
| Total | Mr. Yousha | Mr. Yasa |
| Rupees | Rupees | Rupees |
|
|
|
|
Annual rent received from Mr. Old | 600,000 | 300,000 | 300,000 |
|
|
|
|
Non-adjustable deposit (NAD) received from Mr. Old | 400,000 | - | - |
|
|
|
|
Less: Portion of NAD received from Mr. Young treated as rent |
|
|
|
- 2003 | (10,000) |
|
|
- 2004 | (10,000) |
|
|
- 2005 | (10,000) |
|
|
- 2006 [Note 1] | - |
|
|
| 370,000 |
|
|
10% of Rs. 370,000 chargeable to tax | 37,000 | 18,500 | 18,500 |
| 637,000 | 318,500 | 318,500 |
c) Tax payable
| Rupees |
Mr. Yousha |
|
|
|
Tax on income from property [Rs. 318,500 x 5%] | 15,925 |
|
|
Tax on balance of taxable income of Rs. 490,000 at 3.50% [Note 2] | 17,150 |
| 33,075 |
Less: Tax deducted on salary income | 15,000 |
Tax payable | 18,075 |
|
|
Mr. Yasaa |
|
Tax on income from property at the rate of 5% [Rs. 318,500 x 5%] | 15,925 |
NOTE
- No amount chargeable to tax as the deposit was refunded
- There are two types of tax rates prescribed for individuals in the Part 1 of First Schedule of Income Tax Ordinance, 2001, one is meant for salaried individuals and other is meant for individuals other than salaried individual. Mr. Yousha’s salary income [Rs500,000] is more than 50% of his taxable income [Rs808,500], hence, the salaried individual rates will be applicable. Consequently, Income Tax on balance of taxable income of Rs. 490,000 (Rs. 808,500 less Rs. 318,500) at 3.50% [Rate card will be provided with examination paper]
EXAMPLE 6 – Final Tax Regime
Assume that the scenario is the same as given in the Example 5 except that on 1 July 2006, instead of the building being rented to Mr. Old, it was rented to Old (Private) Ltd.
Required
What differences would arise on computation of Income covered under section 155. Your answer should include Withholding Tax Payment Receipt, Computation of Total Income and tax payable. You may refer to working in the above referred example.
Solution
Old (Private) Limited will be required to Deduct 5% Withholding Tax from Rs637,000 [refer working 1 in example 6]. However, the Tax Payment Receipt must contain the names and Computerized National Identity Card [CNIC] or National Tax Number [NTN] of Mr. Yousha and Yasaa as follows.
| S.No. | Name | CNIC/NTN | GROSS AMOUNT | TAX |
| 1. | Mr. Yousha | xxxxx | 318,500 | 15,925 |
| 2. | Mr. Yasaa | xxxxx | 318,500 | 15,925 |
| There would be no difference on Computation of Total Income but the Tax Payable would be as follows. | ||||
Yousha | Yasaa | |||
| Tax Payable as per Part c of example 5 | 18,075 | 15,925 | ||
| Less: WHT deducted under section 155 | 15,925 | 15,925 | ||
| Tax Payable | 2,150 | 0 | ||
However, Mr. Yousha and Yasaa will be required to obtain the Withholding Tax Payment Receipt from Old (Private) Limited and attach it with the Return of Total Income.
Article courtesy of Muhammad Ashraf
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