Pakistan: Income from Property

Under the Income Tax Ordinance, 2001 of Pakistan, rental income derived from any property—whether residential, commercial, or otherwise—is chargeable to tax under the head “Income from Property.” This provision ensures that all income earned through renting or leasing property is appropriately brought within the tax net. The law further provides that if the rent declared by a taxpayer is considered to be lower than the fair market rent, the Federal Board of Revenue (FBR) has the authority to deem the income as equivalent to the fair market value, ensuring that taxpayers do not understate rental income to evade taxes.

Through a proposed amendment to the Ordinance, a specific mechanism has been introduced for determining the minimum fair market rent of commercial properties. According to this amendment, the minimum fair market rent shall be deemed to be 4% of the fair market value of the property as determined under the FBR’s valuation tables. These valuation tables, periodically issued by the FBR, specify the per-square-yard or per-square-foot values of properties in different cities and localities across Pakistan. The intent of linking rent to the FBR valuation tables is to introduce an objective and standardized method for determining the fair rental value, thereby reducing discretion and potential disputes between taxpayers and the tax authorities.

For example, if a commercial property has a fair market value of PKR 50 million according to the FBR valuation table, the minimum fair market rent would be deemed to be 4% of this value, i.e., PKR 2 million per annum. This deemed rent acts as a benchmark—if a taxpayer reports a rent lower than this amount, the tax authorities can treat the deemed 4% rent as the actual income for taxation purposes.

However, the amendment also provides an important safeguard for genuine cases where the actual rent may indeed be lower than the deemed minimum fair market rent. If the taxpayer can provide satisfactory evidence to the Commissioner of Inland Revenue demonstrating that the rent received is genuinely less than the 4% benchmark, then the actual rent will be accepted for taxation purposes. Such evidence may include tenancy agreements, market surveys, valuation reports, or other documentary proof showing that lower rents are prevailing in similar properties in the same area.

The objective of this amendment is twofold. Firstly, it aims to curb underreporting of rental income, which has been a common issue in Pakistan’s property sector. Many landlords declare nominal rents to minimize their tax liabilities while actually receiving higher amounts in cash or through informal arrangements. Secondly, the amendment seeks to create uniformity and transparency in determining taxable rental income, especially for high-value commercial properties, which form a significant part of the real estate market.

In summary, the proposed amendment represents an effort by the government to strike a balance between ensuring tax compliance and accommodating genuine taxpayers. By introducing a standard minimum deemed rent linked to FBR valuation tables and simultaneously allowing flexibility through evidence-based exceptions, the provision enhances both fairness and administrative efficiency in the taxation of rental income from commercial properties.

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Reference/ Citation

Federal Budget 2025 - PWC

https://www.pwc.com.pk/en/tax-memorandum/AFFs%20Tax%20Memorandum%20on%20Finance%20Bill%202025.pdf