Federal Constitutional Court invalidates deemed rental income levy introduced in 2022 and annuls all enforcement actions by tax authorities.Â
The Federal Constitutional Court of Pakistan has struck down Section 7E of the Income Tax Ordinance, 2001, ruling that the controversial tax on deemed rental income is unconstitutional and void from the beginning.
In a Short Order issued on 7 May 2026, the Court declared Section 7E ultra vires the Constitution and set aside all actions, proceedings, and notices initiated by the Federal Board of Revenue (FBR) and Commissioners of Inland Revenue under the provision.
Section 7E was introduced through the Finance Act 2022 and imposed a tax on deemed rental income of residents owning immovable property with a fair market value exceeding PKR 25 million. The tax was calculated at a rate equal to 20% on 5% of the fair market value, subject to certain exclusions.
The case before the Federal Constitutional Court involved the consolidation of more than 200 petitions and appeals filed by individuals, companies, trade bodies, and professional associations challenging the legality of the provision. The bench was presided over by Chief Justice Amin-Ud-Din Khan and Justice Ali Baqar Najafi.
Prior to the final ruling, Pakistan’s High Courts had issued conflicting decisions on the matter. The Peshawar and Balochistan High Courts declared Section 7E unconstitutional, while the Sindh High Court upheld the law by dismissing taxpayers’ petitions. At the Lahore High Court, a Single Judge initially ruled in favour of taxpayers before a Division Bench reversed the decision and upheld the provision. The Islamabad High Court partially struck down subsection (2) of the law before related matters were transferred to the Federal Constitutional Court.
The Court ultimately allowed all taxpayer appeals and dismissed petitions filed by the FBR against earlier judgments that had struck down the provision.
