ISLAMABAD: The Federal Board of Revenue (FBR) has released updated guidance on how income from property will be taxed in Pakistan for Tax Year 2027, drawing on provisions of the Income Tax Ordinance, 2001, as amended through June 2026.
Under Section 15 of the Ordinance, rental income remains taxable under the head “Income from Property,” covering not just periodic rent but also forfeited deposits from failed property sale agreements.
However, the FBR clarified that income tied to leased plant and machinery, or payments for utilities and amenities bundled with a tenancy, will instead be classified as “Income from Other Sources.”
A notable feature of the framework is the fair market rent provision. Where actual rent falls below prevailing market rates, tax authorities may assess the property owner on the basis of fair market rent rather than the lower amount actually collected unless that market-rate value has already been taxed through the tenant’s salary.
Section 15A sets out permissible deductions, the most significant being a standard repair allowance equal to one-fifth of taxable rent. Property owners may also deduct insurance premiums, local taxes, ground rent, and profit paid on loans used to acquire or improve the property, among other itemised costs. Administrative and collection expenses are deductible but capped at 4% of chargeable rent.
The rules further address previously written-off unpaid rent that is later recovered, which becomes taxable in the year of recovery, and unpaid expense liabilities that remain outstanding three years after being claimed, which then become taxable income.
Separately, under Section 16, non-adjustable payments collected from tenants are not taxed immediately in full. Instead, they are treated as rental income spread evenly across ten tax years, with special provisions governing early refunds to outgoing tenants.
The FBR said the framework is intended to give property owners clarity on their tax obligations ahead of the new filing year.
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