The Federal Board of Revenue (FBR) has introduced updated withholding tax rates on rental income from immovable properties for the tax year 2025–26. The new rates, notified under Section 155 of the Income Tax Ordinance, 2001, will impact individuals, associations of persons (AOPs), and companies earning rental income across the country.
According to the notification, all “prescribed persons” responsible for making payments against rent, whether full, partial, or advance, are required to deduct withholding tax from the gross rent. The definition of gross rent extends beyond the basic property payment to include charges for furniture, fixtures, or services linked to the rented property. This broadened scope ensures that additional benefits received under rental agreements are also subject to taxation.
The list of prescribed persons obligated to deduct tax at source includes federal, provincial, and local government entities, companies, non-profit organizations, charitable institutions, and foreign diplomatic missions. Additionally, private institutions such as schools, boutiques, beauty parlours, hospitals, clinics, and maternity homes fall within this category. Individuals or associations of persons making rental payments exceeding Rs. 1.5 million annually are also covered, along with any other persons notified by FBR.
In a significant move to enforce compliance, the FBR has maintained differential rates for taxpayers who are on the Active Taxpayers List (ATL) and those who are not. Those listed on the ATL will benefit from lower rates, while non-ATL taxpayers will face considerably higher deductions. This measure is part of FBR’s ongoing strategy to incentivize registration and expand the country’s documented economy.
The new withholding tax structure for individuals and AOPs introduces progressive slabs based on annual rental income. For rental income up to Rs. 300,000, no tax is applicable. For income between Rs. 300,000 and Rs. 600,000, a 5 percent rate applies on the amount exceeding Rs. 300,000. Rental income between Rs. 600,000 and Rs. 2,000,000 will be taxed at Rs. 15,000 plus 10 percent of the amount above Rs. 600,000. For annual income exceeding Rs. 2,000,000, the rate rises to Rs. 155,000 plus 25 percent of the amount above this threshold.
Companies, meanwhile, are subject to a flat rate of 15 percent if listed on the ATL, while non-ATL companies will face a much steeper deduction of 30 percent. The sharp contrast in rates highlights FBR’s policy to penalize non-compliance and drive wider participation in the tax net.
FBR officials explained that the purpose of these revised rates is to strengthen documentation of rental income streams and enhance revenue collection. By pushing more property owners to join the Active Taxpayers List, the government aims to improve transparency within the real estate sector, which has historically remained under-documented. The measure is also expected to curb tax evasion by ensuring that income from property rentals, often a significant source of earnings, is properly reported and taxed.
Industry observers believe that the new tax regime will particularly impact urban rental markets where rental yields are high. The structured slabs, combined with differentiated rates for ATL and non-ATL taxpayers, signal a firmer regulatory grip on property income. At the same time, it creates an incentive for landlords to formalize their status by ensuring they appear on the tax authority’s active list.
As the real estate sector continues to play a critical role in Pakistan’s economy, these new tax measures are being closely watched by landlords, tenants, and financial institutions alike. The latest announcement underlines the government’s broader objective of expanding the tax base, digitizing financial records, and creating a more transparent taxation ecosystem for property-linked income.