Rental income tax in Pakistan: the full computation
Rental income has its own head of income, its own withholding provision and its own deduction rules. Treating it as ordinary business income, or assuming the tenant deduction settles the position, are the two errors that produce most rental tax problems.
Section 155: what the tenant deducts
Where the tenant is a prescribed person, tax is withheld on gross annual rent — before any deduction. For individuals and associations of persons the rates are tiered:
| Gross annual rent | Withholding (active taxpayer) |
|---|---|
| Up to Rs 300,000 | Nil |
| Rs 300,001 – 600,000 | 5% of the amount over Rs 300,000 |
| Rs 600,001 – 2,000,000 | Rs 15,000 + 10% over Rs 600,000 |
| Above Rs 2,000,000 | Rs 155,000 + 25% over Rs 2,000,000 |
Companies are withheld at a flat rate rather than on the tiered scale. Rates increase substantially where the recipient is not on the Active Taxpayer List — see filer versus non-filer rates. Tax deducted is deposited by the tenant in the month following deduction, and you should obtain the deduction certificate as a matter of routine.
Getting from gross rent to net rental income
Deductions available against rental income typically include:
- Repairs and maintenance — a standard allowance of 20% of rent, available regardless of what you actually spent.
- Property tax and local rates paid on the property.
- Insurance premiums on the property.
- Ground rent where the land is held on lease.
- Interest on borrowing used to acquire, construct or improve the property, subject to conditions.
- Rent collection and administration costs, within prescribed limits.
- Irrecoverable rent, where the statutory conditions for writing it off are met.
You bought or sold property this year, tax was deducted at the time of registration, and nobody explained whether you get it back.
A worked computation
Gross annual rent of Rs 2,400,000 on a residential property let to a company tenant, landlord an active-taxpayer individual:
| Step | Amount |
|---|---|
| Gross annual rent | Rs 2,400,000 |
| Tenant withholding under s.155: Rs 155,000 + 25% × Rs 400,000 | Rs 255,000 |
| Less repairs allowance at 20% | (Rs 480,000) |
| Less property tax paid | (Rs 60,000) |
| Less insurance | (Rs 25,000) |
| Net rental income | Rs 1,835,000 |
The Rs 255,000 already withheld was computed on Rs 2,400,000; the liability is computed on Rs 1,835,000. Whether the difference comes back to you depends on whether the deduction is adjustable for your tax year — establish that before treating the withheld amount as a sunk cost. The refund guide covers recovery where an excess exists.
Commercial property and the deemed rent floor
For commercial property, a minimum fair market rent can be deemed at 4% of the FBR-assessed value of the property. A lower actual rent can be accepted where sufficient evidence is presented to the Commissioner.
The practical consequence is for related-party letting. A shop let to a family member at a nominal rent does not produce a nominal tax figure by itself — the deemed floor can apply, and the burden of showing the lower rent is genuine falls on you. If you let commercial property below market for a real commercial reason, document that reason at the time.
Three situations with their own treatment
- Sub-letting. Where a tenant sub-lets, withholding obligations can attach to payments made under the sub-lease as well as the head lease. If you are in the middle of a chain, establish whether you are a payer, a recipient or both, because you may have obligations in both directions on the same property.
- Non-resident landlords. Non-residence does not remove Pakistan-source obligations on Pakistani property. Rental income remains taxable, section 155 withholding still operates where the tenant is a prescribed person, and Active Taxpayer List status still drives the rate. Where a treaty applies, relief has to be claimed on the basis of established residence rather than assumed — see overseas Pakistanis.
- Property let with furniture, fixtures or amenities. Section 155 reaches rent for land, buildings, and furniture and fixtures. Splitting a single letting into a low property rent plus a large separate charge for amenities does not automatically move that second amount outside the charge, and an artificial split invites challenge. Describe the arrangement accurately in the agreement.
In each case the driver is the same: the agreement and the banking trail decide the treatment, so both need to reflect what is actually happening.
The records this head requires
- Written tenancy agreement, with rent, term, and who bears which costs.
- Rent receipts or bank credits matching the agreement — rent received in cash with no trail is difficult to defend in either direction.
- Section 155 deduction certificates from each prescribed-person tenant.
- Property tax and insurance receipts.
- Loan documentation and interest statements where interest is claimed.
- The property in your wealth statement, at a consistent basis, with the funding source traced — wealth statement.
Two structural points worth registering. Advance rent and non-refundable deposits are generally part of the rent for tax purposes rather than being outside it — check the treatment before excluding them. And rental income sits alongside any future capital gain: the cost file you keep for the property serves both, so keep the acquisition documents with the annual rental records rather than separately. Property capital gains covers the disposal side.
Sources
This guide is written against the official and clearly labelled professional references below. Rates, thresholds and portal procedures change between reviews, so open the primary source before relying on a figure.
- Income Tax Basics (FBR)
- Withholding Tax Rate Cards (FBR)
- Tax Year 2027 withholding rate summary (KPMG Pakistan)
- File an Income Tax Return (FBR)
Questions people also ask
My tenant is not deducting any tax. Am I in the clear?
No. Withholding under section 155 applies where the tenant is a prescribed person — broadly companies, government bodies and other specified categories. A private individual tenant frequently is not, so no tax is deducted at source. That does not remove your liability; it means the whole amount falls due through your return instead, and nothing has been paid on account.
Is the tax deducted by my tenant the end of the matter?
Commentary is not uniform on whether section 155 deduction is final or adjustable for individuals and associations of persons, and the treatment has moved across Finance Acts. Because the difference decides whether you owe more, owe nothing, or are due a refund, confirm the character for your tax year rather than assuming either. Where it is adjustable, the deduction is a credit and any excess is recoverable.
Can I claim actual repair costs above 20 percent of rent?
The standard repairs and maintenance allowance is a fixed percentage of rent rather than a reimbursement of actual spend, so it applies whether you spent more or nothing at all. Substantial capital improvement is a different question from repairs and is generally treated as adding to the cost of the asset for a future gain computation rather than as an annual deduction.
What is the 4 percent deemed rent rule?
For commercial property, a minimum fair market rent can be deemed at 4% of the FBR-assessed property value. A lower actual rent can be accepted where sufficient evidence is presented to the Commissioner. The practical effect is that letting commercial property well below market to a related party does not reduce the taxable figure by itself.
I own the property jointly with my brother. How is the rent taxed?
Rental income follows beneficial ownership shares, so each co-owner returns their own share and each applies the slabs to that share rather than to the whole rent. Each owner Active Taxpayer List status also drives their own withholding rate. Document the ownership shares, because splitting income without an evidenced ownership basis will not hold.
Send the tax year and the transaction or filing involved, and we will tell you what is actually required.
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