Gross rental income: Individuals, AOPs allowed to claim deductions

ISLAMABAD: The Federal Board of Revenue (FBR) has allowed all individuals and association of persons (AOPs) to claim deductions against gross rental income if they opt to pay tax at the specified rates under the Income Tax Ordinance 2001.

According to the FBR's circular number 3 of 2020, the FBR has explained the enabling adjustability of property expenses against income from property for all individuals and AOP's.

By the Finance Act, 2016, a dual tax treatment was introduced for property income of individuals/A0Ps and companies. Individuals and AOPs had to pay fixed amount of tax on gross rentals at the rates specified in Division VIA of Part-I of First Schedule. However, certain deductions were allowable for computing property income in case of a company.

A new sub-section (7) was added to Section 15A through Finance Act, 2019 to enable Individuals/AOPs to opt for normal tax regime and claim deductions against gross rentals as provided in the law, but that option was available only to those individuals and AOPs who derived income from property in excess of Rs4 million.

Finance Act, 2020 has removed this condition by making amendment in sub-section 7 of section 15A. Now all individuals/AOPs are allowed to claim deductions against gross rental income if they opt to pay tax at rates given in Divisions I of Part-I of First schedule to the Ordinance. Furthermore, deduction in respect of administration and collection charges under clause (h) of Section 15A has been reduced from 6% to 4% of the rent chargeable to tax, FBR stated. The section 21(l) of the Ordinance does not allow deduction against business income if claim of a business expenditure exceeds Rs 50,000/- under a single account head in aggregate and payment is made otherwise than through crossed banking instrument, online transfer of payment or credit card from business account of the taxpayer. However, this inadmissibility of deduction did not apply if a single transaction on account of such business expenditure remained at Rs 10,000/- or below. Finance Act, 2020 has increased these thresholds from Rs 50,000 to Rs 250,000/- and from Rs 10,000/- to 25,000/-respectively.

Increase in threshold of salary payments required to be made through banking channels under section 21(m) of the Ordinance.

Similarly, section 21(m) disallows expenditure on account of monthly salary against business income if it was paid in excess of threshold of Rs 15,000 per month per employee and payment was made otherwise than through crossed cheque or direct transfer of funds to the employees bank account. Finance Act, 2020, has increased this threshold to Rs 25,000 per month per employee for payment of salary otherwise than through crossed cheque or direct transfer of funds to the employees' bank account.

Expense on utility bills to be treated as an inadmissible business deduction subject to certain conditions [section 21(p)1.

Expenditure on account of utility bills is allowed against business income under section 20 of the Ordinance. A new clause (p) has been added to Section 21 to disallow it if it is incurred in excess of certain limits and is in violation of certain conditions as may be prescribed by the Board.