CHAPTER 7

PROVIDENT FUND
 PROVIDENT FUND

• The provident fund is a fund created by an employer for the future welfare and benefits of his employees. Under this
scheme a certain percentage of an employee's salary is deducted every month. Generally, the employer also
contributes an equal amount. contribution of both the employer and the employee is handed over to a fund known as
Provident Fund. The amount is invested in securities and the income generated from the investment is
proportionately credited to the employees' accounts. Upon retirement total amount standing to the credit of an
employee is paid to him. The final payment represents the followings:
1. The employee's contribution.
2. The employers contribution
3. The interest on both contributions.
 TAXATION OF PROVIDENT FUND

• For taxation the provident fund is categorized into the following three categories:
1. Government provident fund.
2.Recognized provident fund.
3.Unrecognized provident fund
• The provisions relating to the taxability of the contributions made by the employee and the employer, credit
of interest and receipt of accumulated balance at the time of termination of service are tabulated hereunder:
TAXATION OF PROVIDENT FUND
 CHAPTER 8

INCOME FROM PROPERTY , CAPITAL

GAIN
 RENT

• The 'rent' received or receivable by a person for a tax year is taxable under the head
'Income from Property'. However, any rent which is exempt from tax under any provision
of the Income Tax Ordinance shall be ignored while computing the "Rent Chargeable to
Tax" (RCT) under this head.
• "Rent‘’ means any amount received or receivable for a tax year by the owner of the land or
the building for its use or occupation by some other person.
• Generally, the amount received or receivable is taken as rent. However, where the 'fair
market rent'(FMR) is more than the actual rent, then the fair market rent shall be taken as
rent.
 CONTINUE

For the purposes of the Income Tax, following amounts are also included in "Rent
Chargeable to Tax“
1. Any forfeited deposit received under a contract for the sale of land or a building.
2. Any obligation of the owner (e.g., property tax, etc.,) paid by the tenant.
3. Any amount received by the owner from his tenant as advance, which is not adjustable
against rent. (Amount determined as per section 16 of the Income Tax Ordinance shall
be included in RCT. Generally, one-tenth of such advance is charged to tax every
year.)
 SUMMARY

"Rent Chargeable to Tax (RCT)" shall include the following amounts:

1. Higher of the rent received/receivable or the fair market rent for the
period for which the property was actually rented out
2. Forfeited deposit received under a contract for the sale of land or a
building
3. Any obligation of the owner paid by the tenant
4. One-tenth (1/10th) of the advance not adjustable against rent.
 RENT OF PROPERTIES NOT TAXABLE
AS "INCOME FROM PROPERTY"

Rental income of the following properties shall not be chargeable to tax under the head "Income
from Property
1. Any building which is let out together with the plant and machinery installed therein shall not
be taxable under this head. Rather, it shall be taxable under "Income from Other Sources“
Examples of such buildings are cotton ginning factories, rice mills, etc. [15(3) & 39(1)(f)]
2. Any agricultural building whose income is treated as agricultural income. [41(2)(c)]
3. Any property which is sublet by the tenant.
Only the rental income of the owner is taxable under this head and the income of the tenant from
subletting the property is chargeable to tax as "Income from Other Sources".
 ADVANCES NOT ADJUSTABLE AGAINST TAX

Where an advance is not adjustable against rent it is treated as income which requires a special treatment. The
provisions of the law in this regard are summarized below:
1. Any amount received as advance not adjustable against rent is divided by ten (10) and the resultant figure is
added in the RCT of the property in the tax year in which it is received and nine (9) tax years next following
that year [16(1)].
2. If the tenant has vacated the building and the amount of advance has been refunded before the expiry of ten (10)
years, nothing shall be added in the RCT of the property in the year of refund and subsequent tax years. [16(2)]
3. Where the same building is rented out to another tenant, the amount to be included in the RCT shall be
calculated as follows (16(3)]
 ADVANCES NOT ADJUSTABLE AGAINST TAX

Amount of advance received from new tenant XXX

Less: Amount already charged to tax out of advance from previous tenants (XXX)
The balance to be charged to tax during 10 years XXX
 RENT CHARGEABLE TO TAX AS
'SALARY INCOME'

Where the lessee (tenant) is a salaried person and the fair market rent' of the
property is treated as a perquisite while determining his taxable salary income,
it is a case where the property is hired by the employee and the rent is payable
by the employer, then the treatment of the rent shall be as below
1. The fair market rent shall be taken into account while determining value
of the rent-free accommodation at the time of computing taxable salary
income of the person.
2. The actual rent received or receivable shall be taken as rent chargeable to
tax under "Income from property" of the owner. Under this case the
comparison of the actual rent and the fair market rent shall not be made.
 WITHHOLDING TAX ON 'RENT'

Following prescribed persons' are required to deduct lax at the prescribed rales while
making payment of rent, whether full, part or advance, (of immovable property,
furniture and fixtures, and amount for services for such property):
1. The Government (Federal, Provincial or Local)
2. A company
3. A non-profit organization or a charitable institution
4. A diplomatic mission of a foreign state
5. A private educational institution, a boutique, a beauty parlour, a hospital, a clinic
or a maternity home
6. Individuals or AOPs paying an annual gross rent of Rs. 1,500,000 or above
7. Any other person notified by the Board.
 INDIVIDUALS OR AOPS:

• Tax shall be deducted from rent paid to an individual or AOP by

applying the following rates on the gross amount of rent:
 COMPANIES

Tax shall be deducted from rent paid to a company @ 15% of the gross amount of
rent received Tax so deducted shall be treated as advance tax adjustable against
tax liability of the person for the tax year.
'Gross rent' includes any part of the amount received as advance not adjustable
against rent.
 CHAPTER 12
CAPITAL GAIN
 CAPITAL ASSET

Profit and gain arising from the 'disposal' of 'capital assets' is taxable under the head 'Capital Gains'. [37(1)]The term 'Capital
Asset' has been defined as follows:
CAPITAL ASSET
1. Any stock-in-trade, consumable stores or raw materials
2. Any depreciable assets
3. Any intangible asset on which amortization is allowed u/s 24
4. Any movable property held for personal use by the person or his family member dependent upon him. However the
following assets shall be treated as capital assets:
• A painting, sculpture, drawing or other work of art
• Jewelry
• A rare manuscript, folio or book
• A just age stamp or first day cover
• A coin or medallion; or An antique
 EXAMPLES OF CAPITAL ASSETS

1. Modaraba Certificates
2. Participation Term Certificates.
3. Term Finance Certificates.
4. Musharika Certificates.
5. Shares of companies.
6. PTC vouchers issued by Government of Pakistan.
7. Leasehold rights.
8. Partner's share in an AOP
9. Immovable property.
 COMPUTATION OF CAPITAL GAIN

in order to charge an income under this head there should be a gain on

'disposal' of the 'capital asset', which is computed as below:
Consideration received on disposal of asset xxx
Less: Cost of the asset xxx
Gain / (Loss) on disposal of asset xxx
 FAIR MARKET VALUE AS COST OF
CAPITAL ASSET

The fair market value on the date on which an asset is transferred or acquired by a
person shall be treated as its cost if the capital asset becomes the property of a
person under any of the following cases:
1. Gift from 'relative’
2. Bequest,
3. Will,
4. Inheritance
5. Succession
6. Devolution
7. Distribution of asset on dissolution of an AOP
8. Distribution of asset on liquidation of a company.
 ACQUISITION THROUGH GIFT

Where the capital asset acquired through gift is disposed of within two years
of acquisition and the Commissioner is satisfied that such gift arrangement is
a part of tax avoidance scheme, then the cost of asset in the hands of recipient
of the gift shall be equal to the cost of the asset for the person disposing of the
asset at the time of the disposal. 'Relative', in relation to an individual, means:
1. An ancestor, a descendant of any of the grandparents, or an adopted
child, of the individual, or of a spouse of the individual
2. A spouse of the individual or of any person specified above
 CAPITAL GAIN ON IMMOVABLE
PROPERTY

Gain on disposal of immovable property is taxable as a separate block of

income. For the purpose of charging tax on this income immovable
properties are divided into the following three categories:
1. Open plots
2. Constructed properties
3. Flats
TAX ON CAPITAL GAIN
 CAPITAL GAIN

Capital gain on immovable property shall be determined as below:

Disposal consideration XXX

Less: cost of acquisition (XXX)
Gain / (Loss) on disposal XXX
REDUCTION IN TAX LIABILITY
 'DEBT SECURITIES '

'Debt Securities' means-

1. 'Corporate Debt Securities' such as Term Finance Certificates (FCs), Sukuk
Certificates(Shariah Compliant Bonds), Registered Bonds, Commercial Papers,
Participation Term Certificates (PTCs) and all kinds of debt instruments issued by
any Pakistani or foreign company or corporation registered in Pakistan
2. 'Government Debt Securities' such as Treasury Bills (T-Bills), Federal Investment
Bonds(FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency Bonds,
Government Papers, Municipal Bonds, Infrastructure Bonds and all kinds of debt
instrument issued by Federal Government, Provincial Government, Local
Authorities and other statutory bodies.
Note: The 'derivative products' include future commodity contracts entered into by the
members of Pakistan Mercantile Exchange whether or not settled by physical delivery.