Two things happened to property taxation in Pakistan this year that most landlords do not know about. One is excellent news — a tax that should never have existed has been struck down. The other is a reminder that FBR still has a clear claim on your rental income. Here is everything you need to know before July 1, 2026.
The big news: Section 7E is dead — declared unconstitutional
On 7 May 2026, the Federal Constitutional Court of Pakistan declared Section 7E of the Income Tax Ordinance 2001 ultra vires the Constitution — void ab initio. This means it never legally existed from the day it was introduced.
Section 7E had been in force since the Finance Act 2022. It taxed a “deemed” income from immovable property — treating 5% of the Fair Market Value of your property as if you had actually earned it, even if the property was empty, undeveloped, or not generating any real rent. The tax rate was 20% on that deemed 5%, which translated to an effective annual charge of 1% of your property’s Fair Market Value every year.
For a house worth Rs. 25 million, that was Rs. 250,000 per year — whether you received a single rupee in rent or not.
The Finance Bill 2026 has now formally omitted Section 7E from the Ordinance, confirming what the court already ruled. PwC Pakistan’s Tax Memorandum on Finance Bill 2026 notes: “In line with the recent order of the Federal Constitutional Court of Pakistan (FCCP), tax on deemed income from immovable properties under section 7E having already been held as ultra vires has been abolished.”
One important caveat: the court ruling does not automatically trigger refunds. The Finance Bill 2026 did not insert any refund mechanism for Section 7E amounts already paid. If you paid this tax in previous years, you may need to file a formal refund application. Consult a qualified tax advisor on this.
What has NOT changed: Section 155 still applies to actual rental income
Section 7E was about property you own. Section 155 is about rent you actually receive. These are two completely different things, and the abolition of Section 7E does not touch Section 155 at all.
If you are a landlord receiving rent, your tenant — if they are a company, business, or withholding agent — is legally required to deduct tax at source before paying you. The Finance Act 2026 (Finance Bill 2026) has not changed the Section 155 rates. Here is what applies from July 1, 2026:
For individual landlords and AOPs
| Annual gross rent | Tax (filer) |
|---|---|
| Up to Rs. 300,000 | NIL |
| Rs. 300,001 to Rs. 600,000 | 5% of the amount exceeding Rs. 300,000 |
| Rs. 600,001 to Rs. 2,000,000 | Rs. 15,000 + 10% of amount above Rs. 600,000 |
| Above Rs. 2,000,000 | Rs. 155,000 + 25% of amount above Rs. 2,000,000 |
For company landlords, the rate is a flat 15% on the gross rent.
This tax is an advance tax — it is not final. You declare your rental income in your annual tax return, and the amount withheld is credited against your total tax liability. If too much was withheld, you get a refund. If not enough, you pay the balance.
The non-filer penalty: your tenant must withhold double
This is the most important point for landlords who are not on FBR’s Active Taxpayer List.
If your name does not appear on the ATL on the date your tenant makes payment, they are legally required to deduct tax at double the standard rate. For a company landlord not on ATL, that is 30% instead of 15%. For an individual landlord receiving Rs. 3 million per year, the effective rate jumps significantly.
Your tenant is the withholding agent and is legally responsible for this deduction. FBR can hold the tenant liable if they fail to withhold correctly. This means tenants — especially corporate tenants — now routinely check the ATL before making rent payments.
Practical example: what a landlord actually pays
Ahmad owns a shop in Lahore and rents it out for Rs. 100,000 per month — Rs. 1,200,000 per year. His tenant is a private limited company.
If Ahmad is on the ATL: The company deducts Rs. 75,000 as advance tax for the year — calculated as: NIL on the first Rs. 300,000 + 5% on the next Rs. 300,000 (Rs. 15,000) + 10% on the remaining Rs. 600,000 (Rs. 60,000) = Rs. 75,000 total. That is approximately Rs. 6,250 per month withheld.
If Ahmad is NOT on the ATL: The company must withhold at double the rate — so Rs. 150,000 for the year, approximately Rs. 12,500 per month. Ahmad still receives Rs. 87,500 per month instead of Rs. 93,750.
The difference is Rs. 75,000 per year — simply for not being on the taxpayer list. Filing a return puts that money back in Ahmad’s pocket as either a tax credit or reduced withholding going forward.
What about rental income from residential property — does Section 7E abolition help?
Yes, significantly — but in a specific way. Many landlords were paying BOTH Section 7E (deemed income on the property value) AND Section 155 (on actual rent received). From July 1, 2026, the Section 7E charge is gone. You only pay tax on actual rental income you receive, under the Section 155 slabs above.
For a landlord who owns a Rs. 30 million residential property and was paying Rs. 300,000/year under Section 7E on top of their Section 155 liability, that Rs. 300,000 annual saving is now confirmed.
What landlords must do before July 1, 2026
Three things:
1. Confirm you are on the ATL. Check at fbr.gov.pk/atl/. If you are not listed, file your Tax Year 2025 return immediately. Being on the ATL cuts your tenant’s withholding obligation in half.
2. Declare your rental income in your annual return. Section 155 withholding is advance tax — it must be declared in your income tax return. Failure to file means FBR considers the advance tax as a payment against an unfiled return, which triggers compliance notices.
3. Review if you paid Section 7E in previous years. If you did, consult a tax advisor about whether a refund application is possible given the FCC ruling and the void ab initio status of Section 7E.
ClearConcept Academy offers Pakistan Taxation consultancy services alongside FIA, ACCA, and Tax Training. For personalised advice on your rental income situation, contact us on WhatsApp: +92 309 6755747 or email info@clearconcept.academy.
Sources: Income Tax Ordinance 2001 (as amended), Finance Act 2025, Finance Bill 2026, FBR Withholding Tax Rate Card (Finance Act 2025), PwC Pakistan Tax Memorandum on Finance Bill 2026, Federal Constitutional Court of Pakistan ruling May 7, 2026. All rates verified from official documents.