CAF-2 · Chapter 6
Income from Property MCQs with Answers
15 multiple-choice questions on Income from Property for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under Section 15 of the Income Tax Ordinance, 2001, which of the following amounts is explicitly included in the definition of "rent" for the purpose of taxation under the head 'Income from Property'?
- A) A) Consideration received for the sale of a building.
- B) B) Any forfeited deposit paid under a contract for the sale of land or a building.
- C) C) Amount received for the provision of utilities and amenities connected with the building.
- D) D) Consideration received for leasing out plant and machinery.
Show answer & explanation
Answer: B) B) Any forfeited deposit paid under a contract for the sale of land or a building.
The definition of rent specifically includes any forfeited deposit paid under a contract for the sale of land or a building.
Question 2
Mr. Ali leases out his factory building along with the installed plant and machinery for a composite monthly rent of Rs. 300,000. Under which head of income will this composite rent be chargeable to tax?
- A) A) Income from Property
- B) B) Income from Business
- C) C) Capital Gains
- D) D) Income from Other Sources
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Answer: D) D) Income from Other Sources
Where any amount is included in rent received for the lease of a building together with plant and machinery, such amount shall be chargeable to tax under 'Income from Other Sources', not Income from Property.
Question 3
Mr. Kashif let out his commercial property at a monthly rent of Rs. 100,000. However, the fair market rent for a similar property in the same area is Rs. 130,000 per month. What amount will be considered as gross rent chargeable to tax for the full tax year?
- A) A) Rs. 1,200,000
- B) B) Rs. 1,560,000
- C) C) Rs. 360,000
- D) D) Rs. 2,760,000
Show answer & explanation
Answer: B) B) Rs. 1,560,000
Where the rent received or receivable is less than the fair market rent for the property, the person shall be treated as having received the fair market rent (Rs. 130,000 x 12 = Rs. 1,560,000).
Question 4
Two brothers jointly own a commercial plaza. Their respective shares in the property are NOT definite and ascertainable. For income tax purposes, how will the rental income from this property be assessed?
- A) A) It will be divided equally between the two brothers and taxed individually.
- B) B) The property will be considered as being jointly owned by an Association of Persons (AOP) and taxed as per the principles of an AOP.
- C) C) The elder brother will pay the entire tax on the property.
- D) D) The rental income will be exempt from tax due to a lack of definite ownership shares.
Show answer & explanation
Answer: B) B) The property will be considered as being jointly owned by an Association of Persons (AOP) and taxed as per the principles of an AOP.
Where a property is owned by two or more persons and their respective shares are not definite and ascertainable, the property will be considered as being jointly owned by an AOP, and the taxable income will be computed under AOP taxation principles.
Question 5
Mr. A received Rs. 2,400,000 on 1 July 2025 as two years' advance rent for his building. How much of this amount will be chargeable to tax under 'Income from Property' in the tax year 2026?
- A) A) Rs. 2,400,000
- B) B) Rs. 240,000
- C) C) Rs. 1,200,000
- D) D) Nil, because advance rent is taxed in the year the tenancy ends.
Show answer & explanation
Answer: C) C) Rs. 1,200,000
Rent relating to a tax year, whether received or receivable, is chargeable to tax in that specific tax year. Therefore, advance rent must be apportioned, and only the rent relating to the current tax year (Rs. 1,200,000) will be taxed in tax year 2026.
Question 6
What is the statutory rate for the repair allowance allowed as a deduction against rent chargeable to tax under the head "Income from Property" for an individual?
- A) A) 10% of the rent chargeable to tax.
- B) B) Actual repair expenses incurred during the year.
- C) C) 1/5th (20%) of the rent chargeable to tax.
- D) D) 1/10th of the rent chargeable to tax.
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Answer: C) C) 1/5th (20%) of the rent chargeable to tax.
A statutory allowance equal to one-fifth (20%) of the rent chargeable to tax is allowed for repairs to a building, irrespective of the actual repair expenses incurred.
Question 7
Mr. Saad pays Rs. 150,000 annually to an agency for rent collection and administration of his plaza. His gross rent chargeable to tax for the year is Rs. 3,000,000. What is the maximum deduction he is allowed to claim for administration and collection charges?
- A) A) Rs. 150,000
- B) B) Rs. 120,000
- C) C) Rs. 600,000
- D) D) Nil
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Answer: B) B) Rs. 120,000
The deduction for administration and collection charges cannot exceed 4% of the rent chargeable to tax. Since the actual expense is Rs. 150,000, but 4% of Rs. 3,000,000 is Rs. 120,000, the deduction is restricted to the lower amount of Rs. 120,000.
Question 8
Mr. Dawood incurred Rs. 180,000 as actual repair and maintenance expenses on his rented property during the year. The gross rent chargeable to tax for the property is Rs. 2,000,000. What amount of repair allowance will he be allowed to deduct while computing his taxable income?
- A) A) Rs. 180,000
- B) B) Rs. 200,000
- C) C) Rs. 400,000
- D) D) Nil
Show answer & explanation
Answer: C) C) Rs. 400,000
For individuals and AOPs, the law allows a flat statutory repair allowance equal to 1/5th (20%) of the gross rent chargeable to tax, irrespective of the actual expenses. Therefore, 1/5th of Rs. 2,000,000 = Rs. 400,000 is allowed.
Question 9
Mr. Z received a non-adjustable advance of Rs. 1,000,000 from a tenant in tax year 2023. The tenant vacated the premises in January 2026, and the advance was refunded. A new tenant moved in on 1 February 2026, paying a new non-adjustable advance of Rs. 1,500,000. What amount of the new advance will be added to the rent chargeable to tax in tax year 2026?
- A) A) Rs. 150,000
- B) B) Rs. 120,000
- C) C) Rs. 100,000
- D) D) Rs. 1,200,000
Show answer & explanation
Answer: B) B) Rs. 120,000
The previously taxed amount of the old advance (3 years x Rs. 100,000 = Rs. 300,000) must be subtracted from the new advance. The balance (Rs. 1,500,000 - Rs. 300,000 = Rs. 1,200,000) is then divided by 10. Therefore, Rs. 120,000 is chargeable to tax in tax year 2026.
Question 10
Which of the following local taxes paid in respect of a rented property is NOT allowed as a deduction against 'Income from Property'?
- A) A) Property tax paid to the local municipality.
- B) B) Water tax and conservancy tax.
- C) C) Income tax payable under the Income Tax Ordinance, 2001.
- D) D) Ground rent paid in respect of the property.
Show answer & explanation
Answer: C) C) Income tax payable under the Income Tax Ordinance, 2001.
Any local rate, tax, charge, or cess paid in respect of the property is deductible, excluding any tax payable under the Income Tax Ordinance, 2001.
Question 11
If a taxpayer claims an admissible deduction for an expense (e.g., insurance premium) but fails to actually pay that liability within a specific period, the unpaid amount is added back to his 'Income from Property'. What is the statutory time limit before this add-back occurs?
- A) A) One year from the end of the tax year in which the deduction was allowed.
- B) B) Three years from the end of the tax year in which the deduction was allowed.
- C) C) Five years from the date the expense was incurred.
- D) D) The amount is never added back.
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Answer: B) B) Three years from the end of the tax year in which the deduction was allowed.
If an allowed liability is not paid within three years of the end of the tax year in which the deduction was allowed, the unpaid amount becomes chargeable to tax under 'Income from Property' in the first tax year following the end of those three years.
Question 12
Which of the following is a mandatory condition that must be met to successfully claim a deduction for unpaid (bad) rent?
- A) A) The tenant is still occupying the property but has signed a promissory note.
- B) B) The unpaid rent was never included in the person's taxable income in previous years.
- C) C) The tenancy was bona fide, the tenant has vacated, and legal proceedings for recovery have been instituted or are deemed useless.
- D) D) The landlord must write off the rent in his bank statements.
Show answer & explanation
Answer: C) C) The tenancy was bona fide, the tenant has vacated, and legal proceedings for recovery have been instituted or are deemed useless.
To claim an allowance for unpaid rent, the tenancy must be bona fide, the defaulting tenant must have vacated (or steps taken to compel vacation), reasonable steps for legal recovery must have been initiated, and the unpaid rent must have been previously included in taxable income.
Question 13
Miss Sara's commercial property generated a gross rent of Rs. 1,000,000 for the tax year. She incurred the following actual expenses: Property Tax Rs. 50,000, Insurance Premium Rs. 30,000, Actual Repairs Rs. 100,000, and Legal fees to defend the property's title Rs. 20,000. Calculate her net taxable Income from Property.
- A) A) Rs. 800,000
- B) B) Rs. 700,000
- C) C) Rs. 880,000
- D) D) Rs. 600,000
Show answer & explanation
Answer: B) B) Rs. 700,000
Gross Rent = Rs. 1,000,000. Less statutory deductions: Repair allowance (1/5th of 1,000,000 = Rs. 200,000 - actual repair of 100,000 is ignored), Property Tax (Rs. 50,000), Insurance (Rs. 30,000), Legal fees (Rs. 20,000). Total deductions = Rs. 300,000. Net Taxable Income = Rs. 700,000.
Question 14
Mr. Usman owns 50 acres of agricultural land in Mirpur. He does not cultivate it himself but leases it to a tenant farmer for an annual rent of Rs. 2,500,000. How is this rental income treated under the Income Tax Ordinance, 2001?
- A) A) It is fully taxable under the head 'Income from Property'.
- B) B) It is taxable as 'Income from Other Sources'.
- C) C) It is treated as agricultural income and is entirely exempt from income tax.
- D) D) It is taxed at a flat rate of 15%.
Show answer & explanation
Answer: C) C) It is treated as agricultural income and is entirely exempt from income tax.
Any rent received by the owner of land used for agricultural purposes is treated as agricultural income and is exempt from tax. It is not necessary for the owner to cultivate the land himself to claim this exemption.
Question 15
XYZ Ltd. owns a residential house and provides it as a rent-free accommodation to its Marketing Director. The fair market rent of the house is Rs. 1,200,000. Under the self-hiring rules, what is the tax implication for XYZ Ltd. (the employer) regarding this property?
- A) A) XYZ Ltd. must declare Rs. 1,200,000 as Income from Property.
- B) B) XYZ Ltd. will not be considered to have earned any rental income from this property, and there are no tax consequences for the employer.
- C) C) XYZ Ltd. must pay a 10% penalty tax.
- D) D) XYZ Ltd. can claim the fair market rent as an administrative expense deduction.
Show answer & explanation
Answer: B) B) XYZ Ltd. will not be considered to have earned any rental income from this property, and there are no tax consequences for the employer.
When an employer provides its own residential house to an employee rent-free, the fair market rent is added to the employee's taxable salary as a perquisite. However, the employer is not considered to have earned any rental income from the property, meaning there are no tax consequences for the employer.