Does our firm have to deduct tax from the rent it pays for its office or shop?

A partnership firm has to deduct income tax from the rent it pays once its gross rent for the year reaches Rs. 1.5 million. Below that, the firm is usually not a withholding agent for rent, unless it is one of the specific businesses the section lists. The rate depends on whether the landlord is an individual or AOP, or a company.

What does the law say?

Who must deduct. Section 155(1) says every “prescribed person” making a payment of rent of immovable property, in full or in part, including an advance, must deduct tax from the gross amount of rent paid at the rate in Division V of Part III of the First Schedule. Rent includes rent of furniture and fixtures and amounts for services relating to the property.

Where a firm fits in. Section 155(3) lists the prescribed persons. Two clauses matter for a firm:

• Clause (vib): individuals or associations of persons paying gross rent of Rs. 1.5 million or more in a year.
• Clause (via): a private educational institution, a boutique, a beauty parlour, a hospital, a clinic or a maternity home. This clause sets no rent threshold.

The list also covers companies, governments, non-profit organisations and anyone the Board notifies under clause (vii).

Head of income does not matter. An Explanation to section 155(1) says it applies to rent of immovable property irrespective of head of income.

What rate does the firm deduct?

Division V of Part III of the First Schedule sets two scales, based on who the landlord is.

Clause (a): landlord is an individual or an association of persons

Gross amount of rent	Rate of tax
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 plus 10% of the amount exceeding Rs. 600,000
Above Rs. 2,000,000	Rs. 155,000 plus 25% of the amount exceeding Rs. 2,000,000

Clause (b): landlord is a company. The rate is 15% of the gross amount of rent.

These are the rates in the Ordinance as amended to 30 June 2026, which apply for tax year 2027.

How does it work in practice?

The firm totals the rent it pays in the year. If the total is Rs. 1.5 million or more, section 155 applies. The firm deducts the tax when it pays the landlord, and section 160 requires it to pay the deducted tax to the Commissioner within the time and in the manner prescribed. The prescribed time and manner are in the Income Tax Rules, not in section 160 itself.

Section 155 once had a sub-section (2) making the deduction a final tax on the landlord’s property income. The Finance Act, 2010 omitted it, and the current section contains no such provision.

Worked example (illustrative figures)

Zafar & Sons, a partnership running a hardware shop in Gujranwala, rents its shop from an individual, Mr. Rashid, at Rs. 200,000 a month for tax year 2027.

1. Gross rent for the year: Rs. 200,000 x 12 = Rs. 2,400,000.
2. That is above Rs. 1.5 million, so the firm is a prescribed person under clause (vib).
3. The landlord is an individual, so clause (a) applies. Rent exceeds Rs. 2,000,000.
4. Amount above Rs. 2,000,000: Rs. 2,400,000 minus Rs. 2,000,000 = Rs. 400,000.
5. 25% of Rs. 400,000 = Rs. 100,000.
6. Tax on the year’s rent: Rs. 155,000 + Rs. 100,000 = Rs. 255,000.

Spread evenly over twelve payments, that would be Rs. 21,250 a month. Division V gives the scale by “gross amount of rent” and does not itself set out how to split the annual figure across monthly payments, so the even split here is only for illustration.

If the same shop were owned by a private limited company, clause (b) would apply: 15% of Rs. 2,400,000 = Rs. 360,000.

What if …?

What if the firm pays less than Rs. 1.5 million a year? Clause (vib) does not apply. The firm is still a prescribed person if it runs one of the businesses in clause (via), such as a clinic or a private school, or if the Board has notified it under clause (vii). Board notifications are outside this corpus.

What if the rent crosses Rs. 1.5 million partway through the year? The clause speaks of rent “in a year” but does not say from which payment deduction starts when the threshold is crossed mid-year. The text is silent on this point.

What if the firm pays rent in advance? Section 155(1) expressly covers payments “including a payment by way of advance”, so an advance is subject to deduction as well.

Common mistakes

• Using the company scale for every landlord. The 15% flat rate is only for company landlords. Individuals and AOPs use the slab scale in clause (a).
• Forgetting furniture and service charges. Section 155(1) includes rent of furniture and fixtures and amounts for services relating to the property.
• Assuming a missed deduction only affects the landlord. Section 161 makes the firm personally liable for tax it failed to deduct or, having deducted, failed to pay over. Section 21(c) also bars a deduction for expenditure on which tax had to be deducted until the tax is deducted and paid.

What to check in the official text

Read section 155(1) and the full list in section 155(3), including clauses (via), (vib) and (vii). Check the rate scales in Division V of Part III of the First Schedule in the official PDF, since the site text drops tables. Read sections 160 and 161 for payment and default, and section 21(c) for the expense disallowance. Any notification issued under clause (vii) would need to be checked separately.