Rental Income Tax Rates

This guide simplifies the process for Pakistani property owners, outlining tax rates of rental income, allowable deductions for reducing taxes on rental income, and potential savings strategies. This article is specific to rental income from immovable properties like land and buildings.

What is Rental Income?

Rental income is the income generated by renting a property to a tenant. It encompasses all payments received from the tenant, including:

• Monthly Rent: The recurring payment for occupying the property.
• Security Deposits: Deposits held by the landlord as security against potential damage or unpaid rent.
• Key Money: An upfront payment sometimes demanded by landlords, though its legality can vary.
• Premiums: Upfront payments exceeding the regular rent.

Withholding Tax on Rental Income:

This tax is collected at source from the owner by the tenant each month and deposited with the government. Here’s a table highlighting withholding tax on rent applicable from July 1, 2024.

Companies face a simpler flat tax rate of 15% on the gross rental income if active, otherwise 30%.

Final Tax on Rental Income:

This tax is payable by the owner at the time of filing annual tax return. Here’s a table highlighting final tax on rent applicable from July 1, 2024.

Monthly withholding tax on rental income deducted from owner is adjustable in final taxes at the time of filing tax return. Deductions are not allowed in withholding tax on rental income.

Reduce Tax on Rental Income:

Taxpayers can reduce taxes on rental income at the time of filing tax-returns. Property owners can deduct legitimate expenses from rental income, thereby reducing taxable rental income and rental tax liability. Here are some key deductible expenses:

• Building Repairs and Maintenance: Claim up to 20% of your annual rent for repairs that keep your property in good condition.
• Insurance Premiums: Protect your investment and deduct premiums paid to insure the building against unforeseen events.
• Local Taxes and Charges: Local rates, property taxes, and cess all qualify as deductible expenses.
• Ground Rent (Leasehold Properties): If you lease the land your property sits on, deduct the annual ground rent paid to the landowner.
• Loan Interest: Deduct the interest paid on loans used for acquiring, constructing, renovating, or expanding your rental property.
• Management and Collection Expenses: Reimbursement for professional property management and rent collection is allowed up to 4% of the annual rent.
• Legal Expenses: Protect your ownership rights by deducting legal fees incurred for defending your property title or resolving property-related lawsuits.
• Irrecoverable Rent (Under Specific Conditions): If you have tenants who default on rent, and you’ve made a bona fide effort to collect, the unpaid rent can be deducted under specific circumstances.

Deductions are not allowed while calculating withholding taxes on income from rent. Deductions are allowed in calculation of final tax liability at the time of filing tax-returns.

Rental Tax Calculator:

With the help of this calculator you can easily calculate tax on income from rent. Here’s a rental tax calculator applicable from July 1, 2024.

To calculate withholding taxes on rental income and deductions allowed in rental income, you can visit Rental Income Tax Calculator

By understanding and applying these deductions strategically, you can significantly reduce your tax burden and maximize the returns from your rental property investment. Remember, consulting a tax professional is always recommended for personalized guidance and ensuring compliance with all regulations.

Investing in rental property can be a sound financial decision. By understanding tax regulations and utilizing allowable deductions, you can ensure your investment generates optimal returns.

Key Takeaways:

• There are two types of taxes on rental income from properties like land, plots and buildings etc.
• Withholding tax is deducted from the owner and deposited with FBR by tenant.
• Local taxes paid are not adjustable in final taxes.
• Local taxes if paid, can be deducted from rental income as expenses to reduce rental income tax.
• Withholding tax deducted by tentant is adjustable in final tax at the time of filing tax-return.
• Section 15A allows deductions for various expenses related to property ownership and maintenance.
• Deductions are allowed only in final taxes. Withholding taxes are taxed at total rent paid.
• Filers face low tax rates on rental income from properties than non filers.
• Strategic use of deductions helps you minimize your tax liability and maximize rental income profits.