ISLAMABAD: The Federal Government has officially abolished the controversial deemed income tax on immovable properties by repealing Section 7E of the Income Tax Ordinance, 2001 through the Finance Bill 2026.
The move follows a landmark decision by the Federal Constitutional Court, which declared the provision unconstitutional and ruled that it should be treated as though it had never existed in the law.
The repeal marks the end of one of Pakistan’s most debated tax measures, which had faced widespread criticism from taxpayers, legal experts, and the real estate sector since its introduction in 2022.
What Was Section 7E?
Section 7E was introduced through the Finance Act 2022 as part of the government’s efforts to expand the tax base and increase revenue collection from property owners.
The provision imposed tax on certain immovable properties by treating them as if they generated rental income, even when no actual rent was being earned.
Under the law, taxpayers owning more than one property could be taxed on a deemed rental income calculated on the basis of the property’s value. In some cases, agricultural and business-use properties also came within the scope of the provision.
The tax was calculated by assuming notional rental income equal to 20 percent of the FBR-determined property value and then applying a 5 percent tax rate on that deemed income.
In practical terms, this resulted in an annual tax liability of approximately 1 percent of the property’s assessed value.
Constitutional Court Strikes Down the Law
In May 2026, the Federal Constitutional Court issued a decisive ruling against Section 7E, declaring it unconstitutional and void from the outset.
The court held that the provision was beyond the constitutional powers granted under the law and stated that Section 7E “shall be deemed not to have been part of the Income Tax Ordinance from day one.”
As a result, all actions, notices, assessments, and proceedings initiated under the provision were declared without lawful authority.
The judgment came after years of litigation and conflicting decisions from various high courts across the country.
High Courts Had Issued Conflicting Judgments
Before the Constitutional Court’s ruling, multiple courts had examined the legality of Section 7E.
The Peshawar High Court and Balochistan High Court had declared the provision unconstitutional, while the Islamabad High Court had partially struck down one of its key subsections.
Meanwhile, differing opinions emerged from other courts, leading to legal uncertainty and ultimately requiring intervention by the Constitutional Court.
Chief Justice Amin-ud-Din Khan noted that conflicting judgments from various high courts had made it necessary for the apex constitutional forum to provide a final interpretation.
FBR Aligns Tax Law with Court Verdict
Following the court’s decision, the Federal Board of Revenue (FBR) has moved to formally remove Section 7E from the Income Tax Ordinance through the Finance Bill 2026.
Tax experts say the repeal ensures that Pakistan’s tax laws are brought into conformity with the constitutional ruling and eliminates uncertainty surrounding the taxation of non-income-generating properties.
The withdrawal is expected to provide relief to property owners who had challenged the provision on the grounds that it imposed tax on hypothetical income rather than actual earnings.
Major Relief for Property Owners
The abolition of Section 7E is being viewed as a significant relief measure for the real estate sector and taxpayers holding residential, commercial, or investment properties.
With the repeal, taxpayers will no longer be subject to taxation on deemed rental income from eligible immovable properties, ending a controversial regime that remained in force for nearly four years.
The Finance Bill 2026 formally closes a chapter in Pakistan’s tax history that sparked extensive legal battles and constitutional debate over the limits of taxation on unrealized income.
