A Guide to Capital Gains Tax in Pakistan

If you are a Pakistani investor or business owner, understanding capital gains tax is essential. Capital gains tax is a tax imposed on the profits earned from the disposal of capital assets. In this article, we will explain the concept of capital gains tax, how it is calculated, and how to pay taxes on capital gains.

What is a Capital Asset?

A capital asset is any asset that is not specifically excluded by the Income Tax Ordinance 2001. It includes every property except for stock in trade, consumables, depreciable assets, intangible assets for which amortization is allowed, and movable property held for personal use.

Specifically, some assets are classified as capital assets, such as paintings, sculptures, jewelry, rare manuscripts, postage stamps, coins, and antiques.

How is Capital Gain Calculated?

Capital gains are calculated by subtracting the cost of the asset from its selling price. The cost of the asset includes the purchase price and any expenses related to the acquisition of the asset, such as legal fees, registration fees, and transfer fees.

However, if an asset was received as a gift, bequest, will, succession, inheritance, or distribution of assets on the dissolution of an association of persons (AOP) or liquidation of a company, its cost will be equivalent to the fair market value at the time of disposal.

Capital Gains on Sale of Gold:

Despite the clear provisions of the Income Tax Ordinance, the Federal Board of Revenue (FBR) Helpline is reportedly providing incorrect information to taxpayers regarding the taxation of capital gains on gold. TaxationPk

Many taxpayers are being misled into believing that capital gains from the sale of gold are not subject to income tax.

According to the Income Tax Ordinance, capital gains derived from the sale of assets, including gold, are taxable. TaxationPk

Capital Gain Tax Rates 2023-24

Capital gains tax rates in Pakistan vary depending on the holding period of the asset. The holding period refers to the length of time an asset was held before it was sold or disposed of. The tax rates for immovable property are as follows:

• If the holding period is less than one year, @ 15%
• If the holding period is more than one year but less than two years, @ 12.5%
• If the holding period is more than two years but less than three years, @ 10%
• If the holding period is more than three years but less than four years, @ 7.5%
• If the holding period is more than four years, but less than five years, @ 5%
• If the holding period is more than five years, but less than six years, @ 2.5%
• Where the holding period exceeds six year @0%

The government has proposed significant changes to capital gains tax (CGT) in the Finance Act 2024, impacting both immovable property and securities. Tax Rates for Capital Gains 2024-25

How to Pay Capital Gain Tax?

If you have earned a capital gain, you are required to file a tax return with the Federal Board of Revenue (FBR) and pay taxes on the gain. You can do this either online or by visiting the nearest tax office.

To file a tax return, you need to provide details of the asset, such as its purchase price, selling price, holding period, and any expenses related to the acquisition of the asset. You also need to calculate the capital gain tax payable and pay it online or by submitting a payment at the bank.

Conclusion

Capital gains tax is an essential aspect of investing and doing business in Pakistan. By understanding the concept of capital gains tax and how to calculate and pay it, you can avoid penalties and ensure compliance with tax laws. Remember to file your tax return and pay your taxes on time to avoid any legal issues.