Income from Property Chapter-06

Chapter-06 Income from Property

1 - Income from Property-Sec-15(1)

The rent received or receivable by a person for a tax year, other than rent exempt from tax under this
Ordinance, shall be chargeable to tax in that year under the head “Income from Property”.

1.1 - Scope of Property Income

Rent for a tax year will be chargeable on accrual basis (i.e.) rent received and receivable by a person in a
tax year.

1.1.1 - Rent-Sec-15(2)
"Rent" means:
Ø any amount received or receivable by the owner of land or a building as consideration for the use
or occupation of, the land or building; and
Ø a forfeited deposit paid under a contract for the sale of land or a building.
Example:
Mr. Javaid is the owner of a property, which is rented out at a monthly rent of Rs.150,000/- for tax year
2023. During the month of June 2024, he contracted with Mr. Yasir for sale of the property and received
Rs.500,000/- as token money. Thereafter, Mr. Yasir breaches the contract and as per terms of agreement
token money is forfeited by Mr. Javaid.
Required:
Calculate the amount of Rent Chargeable to Tax?
Solution:
Rent Chargeable to Tax:
Rent:
150,000x12 1,800,000
Forfeited Deposit for sale contract 500,000
2,300,000

1.1.2 - LAND OR BUILDING

Includes:
Ø Open plot of land rented out
Ø Land rented along with building

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1.1.3 - Rent for Building along with Plant & Machinery -Sec 15(3)
Any rent received by any person in respect of the lease of a building together with plant and machinery
Shall be chargeable to tax under the head ''Income from Other Sources “

1.1.4 - Rent for Amenities, Utilities and Services -Sec 15(3A)

Where any amount is included in rent received or receivable by any person for the provision of amenities,
utilities or any other service connected with the renting of the building, such amount shall be
chargeable to tax under the head "Income from Other Sources"

Example:
Mr. Mubashir received Rs. 20,000 as monthly rent from his tenant. As per rent agreement, Rs. 2,000 is
included in the amount of rent on account of electricity bill. Actual electricity bill paid by Mr. Mubashir for
the year is Rs.8,000. Calculate his taxable income for the tax year 2023.

Solution:
Income from Property
Property income (assumed after expenses) (20,000 - 2,000) x 12 216,000
Income from Other Sources
Amount received against electricity bills (Rs. 2,000 x 12) 24,000
Less: Expenses
Actual electricity bills paid 8,000
Taxable income from other sources 16,000
Total Taxable income 232,000

1.1.5 - Taxable Rent-Sec 15(4)

The following amount of rent will be added in the income: -
Higher of:
Ø Actual rent
Ø Fair market rent
“Mr. Karim is a relative of Mr. Ovais. Mr. Ovais lets out a house to Mr. Karim at a subsidized rent per month
of Rs.12,000. However, rent prevailing in the market for the house of similar size is Rs.20,000 per month.
For the purpose of rent income under income from property, Rs,.20,000 shall be taken as it is higher than
actual rent received.”

1.1.6 - Fair Market Rent (FMR) as part of Salary-Sec 15(5)

If the FMR is included in the income of Lessee under the head “Salary” if accommodation is provided by
employer.

1.1.7- Allowable Deductions under the head “Income from Property”-Section 15A
List of Allowable Deductions: Sec-15A
a) Repairs of Building only

Allowance equal to 1/5 of Rent Chargeable (Actual repair expenses will be ignored and Rent
Chargeable includes all amounts which comprises of Rent.)

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Rent Chargeable to Tax shall include the following amounts:

Ø Higher of the rent received/receivable or the fair market rent for the period for which the
property was rented out.
Ø Forfeited deposit received under a contract for the sale of land or a building.
Ø Any obligation of the owner paid by the tenant.
Ø 1/10th of the advance not adjustable against rent.

b) Insurance Premium paid or payable for building only.

c) Property related tax like Local Rates, Taxes & Charges etc. (not Income tax)

d) Ground Rent

e) Profit/Interest or Markup paid or payable on Money Borrowed for purchase/acquire/construct house

f) Share in rent or appreciation in value of HBFC or Schedule Bank for purchase/acquire/construct

house

g) Profit or interest paid on Mortgage of house

h) Rent Collection Charges

Ø Any administration and rent collection charges in respect of the property, paid or payable, in the
year not exceeding 4% of the rent chargeable to tax before any deduction allowed.

i) Legal advisor Fee to Defend the Title of Property (charges of rent agreement or other than court
legal consultation will not be allowed.
j) Unpaid Rent =Provided that:
Ø Tenancy was bonafide;
Ø Defaulting tenant has vacated the property, or Steps has been taken to vacate the property;
Ø Defaulting tenant is not in occupation of any other property of the person;
Ø All reasonable steps have been taken for the recovery of unpaid rent or there are reasonable
grounds to believe that legal proceeding would be useless.
Ø Unpaid rent has been included in the income chargeable to tax and due tax was paid.

Example:
Mr. Ahsan rented out his own house to Mr. Baqar against a rent of Rs.500,000/month. As per the terms
R s . 5 0 , 0 0 0 /month is charged against rendering of utility & sweeper services. This Rs. 50,000 is
included in Rs.500,000. The actual expenditures incurred by Mr. Ahsan are:
Rs.
Repair of house 70,000/month
Property tax of house 20,000/month
Utility bills 18,000/month
Sweeper wages 10,000/month
His income from business in current year is Rs.5,000,000.
Required:
Calculate his tax liability?
1.1.8 - Recovery of Unpaid Rent-Sec 15A(2)
If unpaid rent is allowed as deduction, then on its recovery later, the same shall be chargeable to tax in the
year of recovery.

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1.1.9 - Allowable deduction not paid within 3 years-Sec15A (3 & 4)

If deduction is allowed in a tax year on accrual basis, any amount not paid within 3 year from the end of
said tax year, shall be included in the income of 4th year.
If subsequently paid in any tax year, same shall be allowed as deduction in the year of actual payment.
1.1.10 - Deductions will not be allowed for any other head of income-Sec15A (5)
Deduction allowed under this section shall not be allowed under any other head of income.
1.1.11 - Deduction not allowed under Income from business will not be allowed
Sec15A (6)
The deductions which are not allowed under the head 'income from business’ will also not be allowed under
the Income from property.

2 - Treatment of Different types of Advances received in Income from Property

2.1 - Non-Adjustable/Non-Refundable Advance

Fully Taxable in year of receipt

2.2 - Advance Adjustable against Rent

No treatment is required as it is already added in rent for the year

2.3 - Non-adjustable but Refundable Advance

2.3.1 - Non-adjustable amounts received in relation to buildings-Sec-16(1)

The amount shall be treated as rent chargeable in the year of receipt and next nine years equally.

2.3.2 - Refund of Non-adjustable amount before 10 years-Sec-16(2)

If amount is refunded before expiry of ten years, no addition in income in the year of refund and onward.

2.4 - Non-adjustable amounts received again from succeeding tenant-Sec-16 (3)

If again received from succeeding tenant, the amount chargeable to tax shall be:
Amount received from succeeding tenant XXXXX
Less: Amount already charged to tax (XXX)
XXXX
Example:
Mr. Sarfraz let out his house at a rent of Rs.10,000 p.m. He received a deposit of Rs.200,000 not adjustable
against rent, out of which he refunded Rs.100,000 to previous tenant, who vacated the house after 3 years’
tenancy. Calculate rent chargeable to tax for the tax year 2024.
Solution: Rs.
Calculation of rent chargeable to tax:
Rent receivable (10,000 x 12) 120,000
Not adjustable ( 200,000 – amount already charged to tax [Rs.100,000 x 3 / 10)] /10 17,000
Rent chargeable to tax 137,000
Example:
Mr. Ah m a d has rented o u t his house t o Mr. Hassan on 1 September 2020 for a monthly rental of
Rs.350,000 due to his friendship. Fair market rental o f house is Rs.400,000/month. He a l s o received
Rs.3,000,000 as Non-adjustable amount on 1 September 2020. Further the house was given on rent by

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Mr. Ahmad to Mr. Sattar on 1 June, 2024 at a monthly rental of Rs.450,000/month. Mr. Sattar gave
Rs.5,000,000 as non-adjustable amount which was partly used to make payment of Rs.3,000,000 to Mr.
Hassan who vacated house on 31 May 2024.
Assuming FMR for the TY 2023 is Rs.450,000/-
Required:
Calculate Income from Property for Tax Year 2021, 2022, 2023 and 2024?
2.5 - Apportionment of Common expenses
Common expenses shall be apportioned if the building or land is:
1. Not available for rent for the whole year such as land or building is in owner’s use for a part of the
year (e.g.) building is used by the owner himself for 4 months.

2. Partly rented out and a part is used for other purpose (e.g.) 40% of the building is used for owner’s
residence or his own business; or

3. Expenditure is partly used for some other purposes (e.g.) loan taken for property is partly used for
personal purpose.

Note: Expenses would not be apportioned if land or building is available for rent for the whole tax year but
actually rented out a part of the year due to any reason including non-availability of tenant.

3 - Income of Joint Owners- Sec-66 (Already discussed in Common Rules)

Where any property is owned by two or more persons and their respective shares are definite and
ascertainable: -
(a) The persons shall not be assessed as an AOP in respect of the property; and
(b) The share of each person in the income from the property for a tax year shall be taxable in their
own hands respectively and not as AOP.
Example:
Mr. X and Mr. Y are joint owners of a house and they have provided the following data:
Profit sharing ratio amongst X and Y 60:40
Rental income earned from house for Tax Year 2023 Rs.3,000,000

Required:
Calculate tax liability for X and Y?
This section shall not apply in computing income chargeable under the head "Income from Business"

4 - Rental Income from Land used for Agricultural Purpose-Sec-41

Letting out Land in Pakistan which is used for agricultural purposes is included in the definition of agricultural
income which is exempt from tax under section 41 of the Income Tax Ordinance, 2001.

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Practice Questions
Q-1
Mr. Asad owns some buildings which are given on rent. The following information is available:
Rupees
Annual rent received from tenants 1,800,000
Depreciation on building under the tax laws 400,000
Property tax 100,000
Municipal/local government taxes 100,000
(Agreement with tenants provide that tenants should pay the taxes,)
General and administration expenses 200,000
Rent received includes Rs. 600,000 for three years commencing from July 01 of the current tax year. Mr.
Asad follow accrual basis of accounting and its income year is July-June 2021.
Required:
Compute the income of Mr. Asad under the heading „income from property‟ for the tax year 2021.
(ICAP Question Bank)
Q-2
Mr. Akmal purchased four same-sized similar flats at top floor of an apartment block in Karachi in June
2020. He let out two flats at fair market rent of Rs.25,000/- (per month) from the next month onwards. He
also received security deposit at Rs. 200,000/- in connection with each of these two flats. Mr. Akmal entered
into an agreement to sale of third flat, and received Rs.100,000/- as token money on
25/06/2020, the rest of the proceeds amount was to be paid in 15 days‟ time. However, the buyer failed to
make the payment by the due date and the amount of token money was forfeited by Mr. Akmal. The said
flat was then rented to his cousin at monthly rent of Rs.15,000/- on 01/08/2020 with a security deposit of
Rs. 50,000/-. Fourth flat was used by Mr. Akmal for his own residential purposes. Mr. Akmal paid property
tax at Rs. 20,000/- in connection with each of his four flats.
Required:
You are required to compute Mr. Akmal’s taxable income and tax liability for Tax Year 2020.
(ICAP Question Bank)
Q-3
On 1 July 2020 Farrukh borrowed Rs. 8,000,000 from star Bank Limited and acquired a plot of land in hub industrial
zone of Rs. 6,500,000. He invested the rest of the loan in a business venture with his friend. The above loan carries
mark-up at a rate of 12% per annum and is repayable in eight equals quarterly instalments starting from 1 July 2020.
On 1 August 2020 Farrukh decided to sell the plot of land to Zufiqar Motors for Rs. 10,000,000 and received a deposit
of Rs. 500,000 form them. On 15 August 2020 Farrukh forfeited the deposit on refusal of Zulfiqar Motors to purchases
the plot of land.
On 1 September 2020 Farrukh let out the plot of land to his friend Atif at a monthly rent of Rs. 150,000. He received an
un-adjustable deposit of Rs. 200,000 from Atif and paid Rs. 80,000 for levelling the ground, Rs.50,000 as ground rent,
Rs. 12,000 as insurance premium against the risk of damage or destruction by water logging and Rs.140,000 against
rent collection charges. Farrukh had paid Rs. 25,000 to a firm of professional valuers which determined the annual
rental value of the plot of land at Rs. 2,160,000
Required:

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Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute under the relevant
head of income, taxable income of Farrukh of tax year 2021. (ICAP Question Bank)

Past Paper Questions

Q-1
Kashif is a resident filer who owns a single-storey bungalow in Karachi, including a basement. He solely
uses the basement portion of the bungalow which constitutes 20% of the total bungalow area, for storing
his personal belongings.
On 1 October 2019, he rented his bungalow, excluding the basement portion, to Ahmed under a three-year
rental agreement. Other details of the rental agreement are given below:
Rupees
Monthly rent 300,000
Non-adjustable security deposit 3,500,000
Monthly security charges 40,000
In addition to the above, Kashif also provides Ahmed with backup electricity from a generator during load
shedding at a fixed monthly charge of Rs. 50,000. The electricity connection of the basement is separate
from the rest of the bungalow.
On 30 September 2022, the rental agreement concluded, and Kashif agreed to sell the entire bungalow to
Ahmed. The non-adjustable security deposit was retained as a down payment for the purchase.
On 25 October 2022, Ahmed backed out of the deal and declined to purchase the bungalow. As per the
agreement, Kashif forfeited the non-adjustable security deposit.
On 1 November 2022, Kashif rented the bungalow to a new tenant, Rashid, under a rental agreement with
the same terms as above.
During the year, Kashif paid salary of Rs. 360,000 to the security guard of the bungalow and incurred Rs.
450,000 for running the electricity generator.
Required:
Under the provisions of the Income Tax Ordinance, 2001 and Rules made thereunder, compute the total
income of Kashif under appropriate heads of income for the tax year 2023. (Aut.23, Q2)

Q-2
On 1 October 2020, Nauman received advance rent of Rs. 1,200,000 for 12 months for renting
office premises. This amount includes Rs. 400,000 for utilities, cleaning and security. During
the tax year 2021, Nauman incurred following expenditures in relation to the premises:

Rupees
Repair and maintenance 70,000
Insurance premium 50,000
Administration and collection charges of rent 30,000
Utility, cleaning and security 250,000

(Aut.21, Q1)

Q-3
(i) Farheen owns a bungalow situated in Multan which was given on rent to Abbas under a
rental agreement of five years which expired on 31 March 2020. Details of payments received as
per the rent agreement are given below.

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Rent Rs. 175,000 per month

Security guards’ salaries Rs. 50,000 per month
Non-adjustable security deposit Rs. 2,500,000
On expiry of the rental agreement, Farheen refunded the security deposit to Abbas and rented
out the bungalow to a new tenant Zafar on the same terms and conditions.
Farheen pays Rs. 40,000 per month to a security services company which provides security
guards at the bungalow.
(ii) She owns a residential plot in Karachi. On 1 March 2020, she decided to sell the plot to Mehreen
for Rs. 2,200,000 and received a deposit of Rs. 220,000. On 1 June 2020, she forfeited the deposit
on refusal of Mehreen to purchase the plot.
(iii) Legal and professional charges of Rs. 40,000 were paid for preparation of rental agreements.
(Aut.20, Q4 (a))
Q-4
(a) Explain the term ‘Rent’ with relation to ‘Income from property’.
(b) During the tax year 20X9, Amjad carried out the following transactions in respect of his properties:
(i) On 1 July 20X8, Amjad purchased a factory building in Sukkur along with the installed machinery
at the price of Rs. 9 million and Rs. 3 million respectively. To manage the shortage of funds of Rs.
2,000,000, he borrowed the same on 1 July 20X8 from his friend Shamshad through a crossed
cheque. The loan carries interest at the rate of 18% per annum.
On 1 January 20X9, he let out this building along with the machinery to Basit at a monthly rent of
Rs. 500,000 payable in advance.
(ii) On 1 July 20X8, Amjad let out his residential property situated in DHA Karachi to Mirza Limited at
a monthly rent of Rs. 300,000. Rent for the two years was received in advance on 1 August 20X8.
(iii) On 1 July 20X8, Amjad also entered into an agreement with Zeeshan for the sale of his plot situated
in Quetta for Rs. 50 million. The plot had been purchased for Rs. 40 million in 20X4. Under the
terms of sale agreement, he received Rs. 5 million at the time of signing the agreement and the
balance was to be received on 30 September 20X8. However, due to financial difficulties, Zeeshan
failed to pay the balance amount on the due date and consequently, Amjad forfeited the advance
in accordance with the terms of the agreement.
(iv) Following expenditures were incurred by Amjad in respect of his properties in Sukkur and Karachi:
Details of expenditures Property situated in
Sukkur Karachi
Repair & maintenance - building 270,000 70,000
- machinery 50,000 -
Ground rent 50,000 10,000
Insurance - building 150,000 20,000
Total 520,000 100,000
Required: In view of the provisions of the Income Tax Ordinance, 2001 compute under appropriate head
of income, taxable income of Amjad for the tax year 20X9. (Aut.19, Q-2)

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Q-5
Farhan and Imran jointly own a building in Quetta. The building has been rented out to a company. Discuss
the tax treatment of income from such property. (Aut.19, Q-3 (e))
Q-6
On 1 July 20X8, Zahid rented out his properties as follows:
(i) An apartment was rented to Abdul Qadir at a monthly rent of Rs. 40,000. Zahid received a non-
adjustable security deposit of Rs. 300,000 which was partly used to repay the non-adjustable
security deposit amounting to Rs. 175,000 received from the previous tenant in July 20X3. He also
spent Rs. 20,000 on repairs of the apartment in February 20X9.
(ii) A bungalow was rented to a bank. Zahid and his younger brother are joint owners of the bungalow
in the ratio of 60:40 respectively. The annual rent agreed with the bank was Rs. 6,000,000 which
is inclusive of Rs. 100,000 per month for utilities, cleaning, and security. Zahid paid Rs. 35,000
per month for providing these services.
Required: Under the provisions of Income Tax Ordinance, 2001 compute total and taxable income of Zahid
for the tax year 20X9 under appropriate heads of income. (Spr.19, Q-3 (c))
Q-7
(a) On 1 June 20X6 Dawood and Dewan jointly purchased a bungalow for Rs.35 million. They paid the
amount in the ratio of 65:35 respectively. To arrange funds for the deal, Dawood borrowed
Rs.3,000,000 in cash from Shameem who is in the business of lending money. The rate of interest
is agreed @ 20% per annum.
On 1 July 20X6, the house was let out to a company at annual rent of Rs.4,500,000 inclusive of an
amount of Rs.75,000 per month for utilities, cleaning, and security. For providing these services
Dawood and Dewan paid Rs. 35,000 per month. During the tax year 20X7 they also paid Rs. 10,000
as collection charges and Rs. 230,000 for administering the property.
Required:
Compute taxable income of Dawood and Dewan under appropriate heads of income for the tax year
20X7.
(b) Najam had purchased a house in 20X2 for Rs. 20 million. On 1 July 20X6, Najam entered into an
agreement with Zameer for sale of the house for Rs. 25 million. As per the terms of the agreement,
Najam received Rs. 5 million on the day the contract was signed, and balance amount was to be
paid on 30 September 20X6. However, due to financial difficulties, Zameer failed to pay the balance
amount on the due date and consequently, Najam forfeited the advance in accordance with the terms
of the agreement.
Required:
Advise Najam about the taxability of the above transaction under the Income Tax Ordinance, 2001.
(Spr. 17, Q-3)
Q-8
(a) Explain the term ‘Rent’ in context of ‘Income from property’.
(b) On 1 July 2014, Fahim agreed to rent out a house to Mirza at a monthly rent ofRs. 180,000 with
effect from 1 August 2014 and received one year’s rent in advance.
He also received Rs. 800,000 as a security deposit which was partly used to repay the security deposit
amounting to Rs. 400,000 received from the previous tenant in July 2010 and partly used for renovation of
the house. Fahim also incurred the following expenses in respect of the above house:
Ø Property tax of Rs. 15,000.

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Ø payment of interest amounting to Rs. 200,000 to his friend against amount borrowed for renovation
of the house.
Ø insurance premium of Rs. 110,000.
Ø Rs. 5,000 per month to Wasif for collection of rent.
Required:
Under the provisions of the Income Tax Ordinance, 2001 compute the taxable income of Fahim for tax year
2015 assuming he has no other income. (Spr.15, Q-4)
Q-9
Bashir and Jameel jointly own a house in Karachi. Bashir has 75% share in the house. On
1 September 20X3, the house was let out at an annual rental value of Rs. 6,500,000. This amount includes
Rs.186,000 per month for utilities, cleaning, and security.
During the tax year 20X4, the owners incurred the following expenditures in relation tothe house:
Rupees
Utilities, cleaning and security 650,000
Repair and maintenance 810,000
Insurance premium 240,000
Collection charges 25,400
Mark-up on amount borrowed for extension of the house 840,000
Bashir and Jameel have no other source of income. All the above expenses were incurred by them jointly.
Required:
Calculate taxable income of Bashir and Jameel under appropriate heads of income for the tax year 20X4.
(Spr.14, Q-4)
Q-10
Pervaiz owns a piece of agricultural land in Sehwan. On 1 July 2019, Pervaiz rented out the land for poultry
farming on commercial basis to one of its friends, at a monthly rent of Rs.500,000. However, the annual
letting value of similar land in the area is estimated at Rs.6,880,000. Pervaiz also received a non-adjustable
deposit of Rs.1,800,000 from his friend.
Following expenses were incurred by Pervaiz in respect of the land during the year ended 30 June 2020:
(i) Ground levelling expenses Rs.50,000.
(ii) Property tax Rs.150,000.
(iii) Rent collection charges Rs.12,000.
(iv) Interest accrued on mortgage of land Rs.75,000.
(v) Insurance premium against the risk of water logging Rs.30,000.

Required:
Under the provisions of the Income Tax Ordinance, 2001 calculate Pervaiz taxable income for tax year
2020.
Past Paper Solutions
A-1
See Chapter # 13, Answers
A-2
See Chapter # 13, Answers

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A-3
See Chapter # 13, Answers
A-4
See Chapter # 13, Answers
A-5
See Chapter # 13, Answers
A-6
See Chapter # 13, Answers
A-7
See Chapter # 13, Answers
A-8
See Chapter # 13, Answers
A-9
See Chapter # 13, Answers
A-10
See Chapter # 13, Answers

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