Understanding Income Tax on Rental Income in Pakistan

Introduction:

It is quite remarkable that rental income is still among the most dominant form of income for the owners of property in Pakistan. However, few property owners don’t know the income tax implications of receiving rental income. This blog will help the readers understand the income tax on rental income in Pakistan and provide tax tips for property owners as to how they can remain tax compliant and save taxes.

Understanding Income Tax on Rental Income in Pakistan

It is noteworthy that the FBR of Pakistan explains rental income as a taxable income. This reveals that through the tax returns form, the property owners are expected to declare income tax on rental income as a way of discharging their tax obligations. The main reasons for this are to avoid penalties that may arise due to a lack of knowledge of the tax laws regarding income tax on rental income and of course to know the most appropriate ways to optimize the revenue that they get from the property.

What Is Considered Rental Income?

Rental income, therefore, refers to any income that arises from the renting or leasing of any property such as a house, buildings, or land for residential, commercial, industrial, or any other use. The FBR considers the following as taxable rental income:

• Monthly Rent Payments: Payments that accrue from renting or leasing out a property.
• Advance Rent: Advance payment of rent for occupation of the property at a future time.
• Security Deposits: Sometimes refundable security deposits may be considered as taxable income if the landlord does not refund the tenant.

Any income earned from renting or leasehold should be included in this line, that is, according to the FBR all such figures should be reported on tax returns. 

Tax Rates on Rental Income in Pakistan

The taxation standards of rental income differ according to the location of the property and the rental value of the property. The FBR has introduced slabs regarding income tax on rental income Pakistan and the rate corresponds to the total amount of rental income received in a year.

For Individuals:

Rental income is regarded as the income that is charged on progressive scale of tax according to the total income the taxpayer earns (rental income tax rate) which falls between 5% and 35%.

For Companies:

Receipts arising from rentals, being derived from operations, shall be taxed at a flat rate. In general, income tax rate on rental income of corporate (taxation) vary between 29% to 35% on the taxable income.

Taxable Deductions for Property Owners

For implication of taxes, property owners can declare several allowances on the income from rent. These deductions can assist to reduce amount of tax payable.

• Maintenance and Repairs
• Home repairs which are those costs that are incurred within the building such as plumbing, electrical work, and simple maintenance that are necessary for the property is rented out are allowed as deductions from the rental income.
• Depreciation 
• The depreciation claim allows the property owners to decrease their taxable income by claiming it on the property owned. The FBR permits depreciation on buildings at a prescribed rate of 10% of the cost of construction or purchase price.
• Property Management Fees
• If the real estate belongs to a professional management company, then it is allowable to take the management fees as a cost.
• Interest on Loan
  If through a loan a person has acquired or carries out a renovation of the property, then interest on such loan is allowed as a deduction.

Filing Income Tax on Rental Income 

Any property owner has to file an income tax return at least once a year if he has only rental income. The process is relatively straightforward if the following steps are followed:

1. Register with FBR: The first initiation, if you are a new entrant in the Pakistani market, is to contact FBR and apply for NTN.
2. Declare Your Rental Income: In the same line, when filing your income tax on rental income, you are required to disclose all the total rental income you have realized for the year.
3. Claim Deductions: Always remember to take the following items as deduction; expense for the maintenance, cost of repairs, depreciation, and interest charge on loans.
4. Submit Returns on Time: Ensure that you file your taxes on time to avoid being charged an extra amount from your taxes. It is 31st September every year for individuals and within six months from the financial year for any company.

Tax Tips for Property Owners in Pakistan

1. Maintain Accurate Records

An important principle useful to owners of property rented out is that of record retention; where receipt of rental income or expenses incurred must be documented properly. This includes maintaining documents such as receipts, invoices, and expenses on maintenance, repairs and management fees, rent receipts, and lease agreements. Everyone must keep records to make sure they get all the allowable deductions and to minimize any problems with the FBR.

2. Understand the FBR’s Tax Laws

Interestingly, there can be changes in the tax laws and, therefore, it might be important to find out more about the new changes the FBR has put in place. It is recommended to ascertain oneself with FBR’s rules and regulations concerning income tax on rental income or to take account financial expert advice from time to time.

3. Consider Joint Ventures or Partnerships

In case you own one or more houses that are rented out, it will be wise to form a Joint Venture or partnership with other property owners. This can allow you to tax dodge, so to speak, for greater combined tax benefits and possibly, less personal taxation for each of you. However, it is also advisable to seek the consent of a tax consultant before proceeding with the process.

4. Invest in Property Upgrades

Expenditure incurred for energy conservation for the rental unit or building may entitle you to a tax credit or a deduction in some instances. For instance, a homeowner may carry out tasks such as putting up solar panels or improving the insulation of a home; such tasks make properties efficient in terms of tax in the future.

5. Hire a Professional Tax Consultant

In case you are in doubt whether to go for income tax on rental income or you think you may require some help in this area, seeking the services of a tax consultant may be a wise decision. A professional offers assistance in terms of complications from tax laws, conformity to them, and choices for optimum deductions to reduce the amount of tax paid.

Common Mistakes to Avoid. 

• Failure to Report All Sources of Rental Income

Owners of the several properties may pretend not to declare some revenues from rent with an aim of evading taxes. However, this is regarded as tax evasion and this may attract a lot of severe legal repercussions to all the owners and or other stakeholders such as penalties and fines.

• Overlooking Deductions 

A lot of homeowners fail to claim the rightful amount as tax deductions. Do not overlook some allowable expenses that can lower your tax bill including maintenance costs and loan interest.

• Missing Tax Filing Deadlines

If you fail to file your tax return in time then there are other consequences that follow like penalties, fines, and punitive charges on interest. Take reminders that help you to adhere to time-bound targets so that one cannot be charged when they weren’t prepared.

Conclusion

It is important for property owners in Pakistan to have a certain level of comprehension of income tax on rental income. From being knowledgeable about current tax rates to filing the necessary returns and claiming the allowable deductions can help property owners reduce their taxes and be within legal bounds. This can however be irritating and exhausting; hence the best way is to seek the services of a professional tax consultant to help in the matter involving rental income taxation. You can also get help from PK Tax Calculator services you’re hereby recommended to use our Rental Tax Calculator to calculate your rental taxes.

The tips mentioned in this article if adopted will go a long way in helping property owners save on cost and make rental income a viable business.