ABC of Income from Property
Income from property has changed considerably with the passage of time and especially in the recent years. As we know that for the imposition of tax and computation of total income has to be classified under one of the five heads of income [section 11]. Rent received or receivable by a person [Section 80] in respect of land or building, is charged to tax under the income head ‘Income from property’.
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  |