Is “Deemed Income” Tax on Property Legal? Court Reviews Section 7E in 2026
Section 7E of the Income Tax Ordinance, 2001, related to taxation of “deemed income” earned on immovable properties, is the most relevant area in relation to the taxation laws of Pakistan. This matter is pending before the Federal Constitutional Court (FCC), and its outcome could have far-reaching consequences for the holders of immovable property in Pakistan.
Deeming Income Tax: Simplified Explanation
Section 7E came into existence via the Finance Act, 2022.
It provides that:
• Some immovable property will be treated as earning rent
• The deemed income from these properties will be computed at 20% of their FBR valuation
• Taxation will be imposed at 5% on the above-calculated income
In simple terms, Section 7E will levy roughly 1% of your property’s valuation every year as tax, regardless of whether the property is being rented or not.
The Following Properties Have Been Excluded:
• The first immovable property owned by you (not rented)
• The business premises of the owner
• Agricultural lands
What Is Being Challenged in Court?
The question of law before the Court is quite simple:
Is it lawful for the State to levy a tax on income which is not actually earned?
Legal Questions Brought Up by the Petitioners
It is a tax on property, not on income.
Some people say that the tax under Section 7E is a tax on property itself.
The Constitution says that the National Government might not have the power to collect this kind of tax.
Constitutional Limits After the 18th Amendment
It was highlighted that after the 18th Amendment, the federal government’s power to tax the capital value of immovable property became restricted.
It further reinforces the claim that Section 7E might have exceeded its legal scope.
No Income Is Really Earned
One more compelling argument:
• Taxes are levied despite the lack of income from the property
• Whereas rental properties, which do earn income, are taxed differently
Such issues cast doubt on fairness and legality.
Legal Precedents in History
Furthermore, the defense cited some legal precedents in history, such as the precedent set by Elahi Cotton, which asserted that:
• “The Imaginary Taxation” is legally permissible only if:
o The conditions are met
o The procedure should relate to the actual transaction of business
o It is not merely performed without any cause
What Transpired during Legal Proceedings?
At present, the matter is pending in the court under the jurisdiction of Chief Justice Amin-ud-Din Khan, who is hearing appeals against various High Court rulings, such as those by Sindh, Lahore, Peshawar, and Islamabad.
At this stage, the court will need to determine if:
• S7E is an income tax law
• or S7E is a capital value tax law
The Significance of This Case in 2026
This is not only a matter of legality but also one that can have serious implications for:
• Property owners
• Investors
• The real estate market as a whole
In case the court rules Section 7E invalid, then it would mean:
• Striking out the deemed income tax on properties
• A basis for refunds or legal action
• Necessitating changes in property taxation by the government
However, if the court upholds Section 7E, enforcement will likely be more stringent from 2026 onwards.
What Should the Taxpayers do Right Now?
Until the final ruling is made:
• Abide by all prevailing tax laws
• Conduct proper declaration of property in tax forms
• Monitor developments in the courts
Conclusion
The case against Section 7E presents a very important point of consideration:
Is tax levied on real income or does the government have the right to make assumptions and then impose taxes?
It remains to be seen what kind of decision the court delivers as it could have far-reaching implications for property tax in Pakistan.