Income from Property TAXATION

Zia, born on 10 th June 1967, works at monthly basic salary of Rs. 60,000. Zia is provided rent free accommodation. Zia is also paid medical allowance equal to 10% of salary. During the year the company paid Rs. 210,000 as hospitalization for Zia. This facility is available to all employees of the company. On , Zia inherited Rs. 3,000,000 on death of his father. He invested Rs. 1,200,000 to buy shares of a new company listed on stock exchange through an IPO in month of May During the year, Zia donated Rs. 20,000 to Fatmid Foundation (2 nd Schedule) and Rs. 40,000 to an NPO.

Salary (Rs. 60,000 x 12 months) = 720,000 Medical Allowance(Fully taxable) 72,000 Rent free accom. (min 45% of salary) = 324,000 Salary Income 1,116,000 Less Donation (2 nd Schedule) = (20,000) 1,096,000 Medical Facility is exempt

Tax On 750,00014,500 (1,096,000–750,000)x10% 34,600 49,100 Less: Tax Credit – Donation (1,792) Less: Tax Credit - investment (9,820) 37,488 (40,000 x 4.45%) = 1,792 (219,000 x 4.45%) = 9,820 Investment Paid or 20% of taxable income or Rs. 1,500,000. whichever is less 1,096,000 x 20% = 219,200 Average rate = 49,100 / 1,096,000 = 4.45%

RENT 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”. “Rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building Section 15

EXCLUDED FROM PROPERTY INCOME Income from other sources: 1.Rent in respect of lease of building together with plant and machinery 2.Amount included in rent for the provision of amenities, utilities and any other service connected with renting of the building 3.Rent from sub-lease of land or a building 4.Amount received as consideration for vacating the possession of a building 5.Ground rent

As a legal term, ground rent specifically refers to regular payments made by a holder of a leasehold property to the freeholder or a superior Leaseholder, as required under a lease. In this sense, a ground rent is created when a freehold piece of land is sold on a long lease or leases.

Where rent received or receivable is less than fair market rent for the property, the owner shall be treated as having received the fair market rent for the period the property is let on rent in the tax year. Deductible Expense: In respect of repairs to a building, an allowance equal to one-fifth of the rent chargeable to tax in respect of the building for the year, computed before any deduction allowed under this section will be allowed as deduction. Deductible Expense: Any local rate (property tax, water charges), tax, charge or cess payable in respect of property is deductible expense.

Ali, born on 30 th May 1965, works at monthly basic salary of Rs. 75,000 at a medical Laboratory. Ali is provided a car costing Rs. 1,000,000 for both personal and official use. Ali gave his flat on monthly rent of Rs. 30,000 to Zafar on The rent is payable on first day of next month. During the year, Ali spent Rs. 80,000 on repairs & maintenance of the flat. He also paid property tax of Rs. 5,000 during the tax year, and paid water charges of Rs. 1,500 every month. Ali invested Rs. 360,000 in mutual fund during the tax year. This investment is approved for tax credit.

Salary (Rs. 75,000 x 12 months) = 900,000 Car (1,000,000 x 5%) = 50,000 Salary Income 950,000 Rent (30,000 x 12) = 360,000 Repairs (1/5 of 360,000) = (72,000) Property Tax = (5,000) Water Charges (1,500 x 12) = (18,000) 265,000

Salary Income 950,000 Income from property 265,000 Taxable income 1,215,000 Calculation of tax: On 750,00014,500 (1,215,000 – 750,000 ) x 10%46,500 61,000 Less: Tax credit on investment (12,200) 48,800 61,000 / 1,215,000 = 5.02% x 243,000 = 12,200 Lower: 1,215,000 x 20% = 243,000 or 1,500,000 or 360,000 Income more than one million so age related allowance N/A

Deductible Expense: Insurance premium in respect of property insurance Deductible Expense: ground rent paid or payable. Deductible Expense: profit on money borrowed (profit on debt) by way of mortgage, to acquire, construct, renovate, extend or reconstruct the property. Deductible Expense: share in rent and share towards appreciation in the value of property (excluding the return of capital, if any) paid or payable by the person to the HBFC or any scheduled bank.

Deductible Expense: Any expenditure (not exceeding six per cent of the rent chargeable to tax in respect of the property for the year computed before any deduction allowed under this section) paid or payable by the person in the year for the purpose of collecting the rent due in respect of the property; Deductible Expense: any expenditure paid or payable by the person in the tax year for legal services acquired to defend the person’s title to the property or any suit connected with the property in a court.

Ali, born on 30 th May 1974, works at monthly basic salary of Rs. 75,000 at a Laboratory recognized by HEC. Ali is provided a car costing Rs. 1,000,000 for both personal and official use. Ali gave his flat on monthly rent of Rs. 50,000 to Hamid on He paid property tax of Rs. 5,000, water charges of Rs. 12,000 and insurance premium of Rs. 10,000 in respect of the flat for the tax year. Ali has hired an estate agent who collects the rent and deposits it in Ali’s bank account. The estate agent charged a fee of Rs. 42,000 for the year to provide the collection service. During the year, Ali gave donation to Shaukat Khanum Hospital (listed in 2 nd schedule) of Rs. 20,000.

Salary (Rs. 75,000 x 12 months) = 900,000 Car (1,000,000 x 5%) = 50,000 Salary Income 950,000 Rent (50,000 x 12) = 600,000 Repairs (1/5 of 600,000) = (120,000) Property Tax & Water Chg (5 + 12) (17,000) Insurance premium = (10,000) Collection charges (max. 6% of 600,000) = (36,000) 417,000

Salary Income 950,000 Income from property 411,000 Taxable income 1,367,000 Less: Donation under 2 nd Sch. (20,000) 1,347,000 Calculation of tax: On 750,00014,500 (1,347,000 – 750,000) x 10%59,700 74,200 Less: 40% rebate (29,680) 44,520

RENT 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”. “Rent” means any amount received or receivable by the owner of land or a building as consideration for the use or occupation of, or the right to use or occupy, the land or building, and includes any forfeited deposit paid under a contract for the sale of land or a building Section 15

Rent = Rent + forfeited deposit (not less than fair market value – accrual basis). Repairs - allowance equal to one-fifth of the rent Local rate and taxes (property tax, water charges) Insurance premium Ground Rent Profit on debt (purchase, construction, renovation) Collection charges (not exceeding six percent of rent) Legal charges (defending title of property)

Irrecoverable Loans: Where any unpaid rent in respect of the property is irrecoverable, an allowance equal to the unpaid rent may be deducted from income. the defaulting tenant has vacated the property or steps have been taken to vacate the property and the defaulting tenant is not in occupation of any other property of the person; the person has taken all steps to institute legal proceedings for recovery; the unpaid rent has been included in the income of the person

Ali, born on 30 th May 1954, works at monthly basic salary of Rs. 40,000 at a medical lab. Ali is provided a car costing Rs. 600,000 for both personal and official use, and is paid medical allowance equal to 10% of salary. Ali gave his flat on monthly rent of Rs. 47,000 to Hamid on for two years. Hamid vacated the flat on 30 th June 2016 without paying the rent for month of April to June Ali paid property tax of Rs. 5,000, water charges of Rs. 12,000 and insurance premium of Rs. 4,200 in respect of the flat for the year. On , he inherited Rs. 3,000,000 on death of his father, and gave 10% of his inheritance to a local hospital that is approved as an NPO.

Salary (Rs. 40,000 x 12 months) = 480,000 Medical Allowance(exempt upto 10%) 0 Car (600,000 x 5%) = 30,000 Salary Income 510,000 Rent (47,000 x 12) = 564,000 Repairs (1/5 of 564,000) = (112,800) Property Tax & Water Chg (5 + 12) (17,000) Insurance premium = (4,200) Bad debts (47,000 x 3 months) = (141,000) 289,000 Inheritance is not income. Rent is for 12 months (Accrual)

Salary Income 510,000 Income from property 289,000 Taxable income 799,000 Tax On 750,00014,500 (799,000 – 750,000) x 10% 4,900 19,400 50% rebate age (60 year) (9,700) 9,700 Less: Tax Credit on donation (2,910) 6,790 Donation To NPO Paid or 30% of taxable income, whichever is less 799,000 x 30% = 239,700 Average rate = 9,700 / 799,000 = 1.21%

NON-ADJUSTABLE RENT Where the owner of a building receives from a tenant an amount which is not adjustable against the rent payable by the tenant, the amount shall be treated as rent chargeable to tax under the head “Income from Property” in the tax year in which it was received and the following nine tax years in equal proportion. Rent = Rent + Forfeited deposit + Non-adjustable rent Section 16

Zia, born on 10 th June 1977, works at monthly basic salary of Rs. 60,000. Zia is provided rent free accommodation that has market rent of Rs. 25,000 per month by his company. Zia is also paid medical allowance equal to 10% of salary. Zia gave his flat on 15 years lease at monthly rent of Rs. 32,000 to Zafar on Zia received two years advance rent on the first day of lease. He also received Rs. 100,000 as non-adjustable rent. He paid property tax of Rs. 3,400, water charges of Rs. 12,000 during the year. During the year, Zia inherited Rs. 3,000,000 on death of his father. He invested Rs. 1,200,000 to buy shares of a new company listed on stock exchange through an IPO in month of May 2016.

Salary (Rs. 60,000 x 12 months) = 720,000 Medical Allowance(exempt upto 10%) 0 Rent free accom. (min 45% of salary) = 324,000 Salary Income1,044,000 Rent (32,000 x 9 month – accrual basis) = 288,000 Non- adjustable deposit (100,000/10) = 10,000 Repairs (1/5 of 298,000) (Rent + deposit) = (59,600) Property Tax & Water Chg (12, ,400) (15,400) 223,000 1/5 th of rent (rent = rent + non-adjustable deposit)

Salary Income 1.044,000 Income from property 223,000 Taxable income 1,267,000 Tax On 750,00014,500 (1,267,000–750,000)x10% 51,700 66,200 Less: Tax Credit - investment (13,240) 52,960 (253,400 x 5.23%) = 13,240 Investment Paid or 20% of taxable income or Rs. 1,500,000. whichever is less 1,267,000 x 20% = 253,400 Average rate = 66,200 / 1,267,000 = 5.23%

REFUND OF DEPOSIT (2) When the non-adjustable deposit is refunded by the owner to the tenant on termination of the tenancy before the expiry of ten years, no portion of the amount shall be allocated to the tax year in which it is refunded or to any subsequent tax year except as provided for in sub-section (3) Where the circumstances specified in sub-section (2) occur and the owner lets out the building to another person (“succeeding tenant”) and receives from the succeeding tenant any amount (“succeeding amount”) which is not adjustable against the rent payable by the succeeding tenant, the succeeding amount as reduced by such portion of the earlier amount as was charged to tax shall be treated as rent chargeable to tax under the head “Income from Property” as specified in sub-section (1). Section 16

INTEREST FREE LOAN Where the employee uses a loan taken from employer at a rate lower than benchmark rate (10%) wholly or partly for the acquisition of any asset or property producing income chargeable to tax under any head of income, the employee shall be treated as having paid an amount as profit equal to the benchmark rate on the loan. Salary

Arif, born on 21 st June1953, gave his flat on 15 years lease to Hamid at monthly rent of Rs. 40,000 on He received non-adjustable rent of Rs. 150,000 at the start of the lease term. On 31 st December 2015, Arif terminated that lease prematurely, and returned the non-adjustable amount to Hamid. On 1 st February 2016, Arif gave the same flat to Zahid on lease for 15 years at monthly rent of 60,000. Zahid paid Rs. 400,000 as non-adjustable rent to Arif on that day. During the tax year 2016, Arif paid property tax of Rs. 3,000, water charges of Rs. 8,000 and insurance premium of Rs. 10,000 in relation to the flat.

Rent (40,000 x 6 month ) = 240,000 Rent (60,000 x 5 month) = 300,000 Non- adjustable deposit (355,000/10) = 35,500 Repairs allowance (1/5 of 575,500) = (115,100) Property tax + water = (3, ,000) (11,000) Insurance premium =(10,000) Income from property439,400 Tax year 2013 (30 June 2013), TY 2014, TY 2015 = 45,000. Non-adjustable rent = 400,000 – 45,000 = 355,000

Income from property 439,400 Taxable income 439,400 Tax rates will be of non-salaried (Less than 50% salary income) Tax On 400,000 0 (439,400 – 400,000) x 7% 2,730 2,730

HOUSE LOAN Every individual shall be entitled to a deductible allowance for the amount of any profit or share in rent and share in appreciation for value of house paid by the individual in a tax year on a loan by a scheduled bank or non-banking finance institution regulated by the SECP or advanced by Government or the Local Government, Provincial Government or a statutory body or a public company listed on a registered stock exchange in Pakistan where the individual utilizes the loan for the construction of a new house or the acquisition of a house. The amount of an individual’s deductible allowance allowed under sub-section (1) for a tax year shall not exceed fifty percent of taxable income or one million rupees, whichever is lower Section = 64A

Ali, born on 10 th April 1978, works at monthly basic salary of Rs. 180,000 at a Public Listed Company. Ali received an interest free loan of Rs. 3,000,000 to purchase a flat on from his company. Loan is repayable after 10 years. Ali lives at his parents house, so gave his flat on 15 years lease at monthly rent of Rs. 35,000 to Samad on Ali received non-adjustable deposit of Rs. 300,000 and three years advance rent on the first day of lease. In November 2015, Zafar made an offer to purchase Ali’s flat for 9.6 million. Ali agreed, and received Rs. 250,000 as token money with promise to receive remaining amount within 6 months. Zafar could not pay on time, and consequently the amount was forfeited by Ali.

Salary (Rs. 180,000 x 12 months) = 2,160,000 Interest free Loan(3,000,000 x 10%) = 300,000 Salary Income2,460,000 Rent (35,000 x 12 month – accrual basis) = 420,000 Non- adjustable deposit (300,000/10) = 30,000 Forfeited deposit = 250,000 Repairs allowance (1/5 of 700,000) = (140,000) Income from Property 560,000

Salary Income 2.460,000 Income from property 560,000 3,020,000 Less: Interest on House Loan (300,000) Taxable income 2,720,000 Tax On 2,500, ,500 (2,720,000–2,500,000) x 20% 44, ,500