How is a non-refundable advance, security deposit or pagri from a tenant taxed?

Landlords in Pakistan often take a lump sum at the start of a tenancy, sometimes called pagri, key money or a non-refundable advance. The Income Tax Ordinance, 2001 does not use the word “pagri”. It deals with these receipts by what they are: an amount from a tenant that is not adjustable against rent. This page uses the Ordinance as amended to 30 June 2026, which applies to tax year 2027.

What does the law say?

Section 16(1) applies where the owner of a building receives from a tenant an amount that is not adjustable against the rent payable. That amount is treated as rent chargeable under “Income from Property” in the tax year of receipt and the following nine tax years, in equal proportion. In plain terms, one-tenth is taxed in each of ten tax years.

Section 16 has two further rules:

• Refund before ten years (section 16(2)). If the owner refunds the amount (the “earlier amount”) when the tenancy ends before ten years, no portion is allocated to the year of refund or any later year.
• New tenant pays a fresh sum (section 16(3)). If the owner then lets the building to a “succeeding tenant” and receives a new non-adjustable amount, that “succeeding amount” is reduced by the part of the earlier amount already charged to tax. The reduced figure is spread over ten years under section 16(1).

Which receipts fall under section 16?

The test in section 16(1) is whether the amount is adjustable against rent. Three common arrangements separate as follows:

Receipt	How the Ordinance treats it
Advance rent set off against future monthly rent	Rent under section 15, taxed as rent for the period; section 155(1) expressly covers payments “by way of advance”
Lump sum from the tenant not set off against rent	Section 16: spread equally over ten tax years
Deposit held and returned in full at the end	Not expressly addressed by section 16 or section 15; the text is silent

Section 15(2) includes in rent “any forfeited deposit paid under a contract for the sale of land or a building”. That wording is about sale contracts, not tenancy deposits, so it does not answer the security deposit question.

How does withholding under section 155 apply?

Section 155(1) requires a prescribed person paying rent, such as a company, a government body, a private educational institution, a clinic, or an individual or AOP paying gross rent of Rs. 1.5 million or more in a year, to deduct tax from the gross amount of rent. The Explanation to section 155(1) says the gross amount of rent includes an amount under section 16(1) or (3). So a company tenant paying a non-adjustable lump sum deducts tax on that payment too, at the rate in Division V of Part III of the First Schedule.

Worked example (illustrative figures)

Imran owns a shop in Saddar, Rawalpindi. The figures are invented; the rules are section 16.

1. Tax year 2027: a tenant pays Rs. 1,000,000 not adjustable against rent. Rent under section 16(1) is Rs. 1,000,000 / 10 = Rs. 100,000 in each of tax years 2027 to 2036.
2. Tax year 2030: the tenancy ends and Imran refunds the Rs. 1,000,000. Tax years 2027, 2028 and 2029 have each carried Rs. 100,000, so Rs. 300,000 has been charged. Under section 16(2), nothing is allocated to 2030 or later.
3. Tax year 2030: a succeeding tenant pays Rs. 1,200,000 not adjustable against rent. Under section 16(3), the succeeding amount is reduced by the Rs. 300,000 already charged: Rs. 1,200,000 - Rs. 300,000 = Rs. 900,000.
4. Rs. 900,000 is spread over tax years 2030 to 2039: Rs. 900,000 / 10 = Rs. 90,000 a year.

Check: Rs. 300,000 taxed from the first tenant plus Rs. 900,000 from the second equals Rs. 1,200,000, which is the amount Imran keeps.

What if I am the tenant and I am paid to leave?

This is the other side of pagri. Section 39(1)(k) makes chargeable under “Income from Other Sources” any amount received as consideration for vacating possession of a building or part of it, reduced by any amount the person paid to acquire possession. Section 39(2) spreads that amount over the year of receipt and the following nine tax years in equal proportion, the same ten-year pattern as section 16.

Common mistakes

• Taxing the full lump sum in year one. Section 16(1) requires equal spreading over ten tax years.
• Forgetting the ten-year tail after a refund. Portions already taxed are not reversed by section 16(2); only future years drop out.
• Assuming a company tenant can skip withholding on the lump sum. The Explanation to section 155(1) pulls section 16 amounts into gross rent.
• Treating money received for vacating as property income. Section 39(1)(k) places it under Income from Other Sources, net of what was paid to acquire possession.

What to check in the official text

Read section 16 in full, the Explanation to section 155(1), and section 39(1)(k) with section 39(2). The section 155 withholding rates are in Division V of Part III of the First Schedule. Whether a particular deposit is “adjustable against the rent” depends on the tenancy agreement, which the Ordinance does not define further.