Rental income withholding tax under section 155

Rent is one of the most heavily withheld payments in the Pakistani tax system, and also one of the most misunderstood. The confusion is almost always the same: a landlord treats the tax the tenant deducted as the end of the matter, or a business tenant does not realise the obligation to deduct sits on them. Section 155 of the Income Tax Ordinance governs both sides. This guide sets out who must deduct, how much, and how the deduction lands back in the landlord's return.

Who has to deduct — the prescribed-person test

Section 155 does not ask every tenant to withhold. It applies only where the payer is a prescribed person. The category is defined in the Ordinance and includes:

• Companies of every kind, and associations of persons (AOPs) with turnover above the threshold the Ordinance sets.
• The Federal and Provincial Governments and local authorities.
• Diplomatic missions and certain other bodies specifically named.
• Individuals only where they fall inside the defined class — an ordinary person renting a home for personal use generally does not.

The practical rule for a business is simple: if you are renting premises — an office, a shop, a warehouse — you are almost certainly a prescribed person and must deduct on the rent you pay. If you are an individual renting a house to live in, you generally do not. The test turns on who the tenant is, not on the property.

How much to deduct

The rate depends on the landlord's legal character. For an individual or AOP landlord, section 155 uses a rent slab: no deduction up to an annual rent exemption floor, then rising percentages on the slices above it. For a company landlord, a flat percentage applies to the gross rent. Because the exact figures are re-set by each Finance Act, confirm the current slab against the FBR withholding rate card before running payroll or a rent schedule.

The deduction is on the gross rent, and where the same landlord receives rent from several tenants, each prescribed-person tenant applies the slab to the rent it pays. This can mean a landlord with multiple commercial tenants has more tax withheld across the year than the annual slab on total rent would produce — which is exactly why the reconciliation in the return matters.

A worked example

Take a company tenant paying Rs 200,000 a month for an office — Rs 2,400,000 a year — to an individual landlord.

1. Establish the tenant is a prescribed person. A company always is, so deduction is mandatory.
2. Apply the individual rent slab to the annual rent of Rs 2,400,000, taking the base amount for the band and the marginal rate on the excess over the band floor.
3. Divide across the year. The annual figure is spread over the twelve monthly payments so each month's deduction is consistent.
4. Deposit and report. Each deduction goes on a challan under section 155 and appears in the tenant's withholding statement.

The deduction at a glance

Two things to read out of it. The individual column is progressive — it follows the property-income slabs, so a doubling of rent more than doubles the deduction. The company column is a flat 15 per cent of gross rent from the first rupee, which is why a company landlord suffers a deduction on rents where an individual landlord suffers none. And the inactive column is exactly double throughout, which on the Rs 6,000,000 line is Rs 1,005,000 of extra cash withheld from a landlord who simply has not filed.

Reconciling withholding against the return

This is where most landlords lose money or invite a notice. The tax deducted under section 155 is, for the ordinary landlord, adjustable — a prepayment, not a final tax. The property income still has to be computed and declared. Three things follow:

• Keep every challan. The claim in the return is only as good as the evidence that the tax was actually deposited under the landlord's name and tax number.
• Match the deductions to the rent declared. A mismatch between rent shown in the return and rent implied by the withholding statements is a routine trigger for scrutiny.
• Where too much was withheld — common for individual landlords with several commercial tenants — the return is the route to the refund. See rental income tax in Pakistan for how the property head is computed, and the property income head for allowable deductions against rent.

Common mistakes

Two errors dominate. The first is a business tenant not deducting at all, then finding the rent disallowed as an expense and the tax charged to them personally with surcharge. The second is a landlord treating the deducted tax as final and not filing the property income — which both overstates the tax actually due (the slab on total rent is usually less than the sum of per-tenant deductions) and leaves a refund unclaimed. If either has already happened, the correction runs through a revised return or, where a notice has issued, the appeals process. Active Taxpayer List status also affects the rate on many transactions, so confirm filer status before assuming a figure.

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 Ordinance 2001, updated (FBR)
• Withholding Tax Rate Cards (FBR)
• Income Tax Basics (FBR)

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