Like other policy papers, tax policy has always been a complicated document in Pakistan. It has always been way more difficult to comprehend any new tax law in the land of pure. The Capital Gain Tax on Property in Pakistan is also one of them.
In this informative blog, we will dissect this law in detail to make it easy for a common taxpayer to understand.
What is the meaning of Capital Gain in real estate?
In the realm of real estate, capital gain means the profit margins earned after the sale of any real estate product such as a plot, plot file, constructed property, or a flat. It is the calculation of the difference amount between the price at the time of sale and purchase. This profit in reality is earned when the selling price surpasses the purchasing price.
What is the meaning of Capital Gain Tax on Property in Pakistan?
The tax applicable on the profit earned from the sale of a real estate product such as a plot, plot file, or constructed property after holding for a specific period is called Capital Gain Tax on Property. According to the Finance Act of 2017, the Capital Gain Tax is evaluated only when a real estate product is put for sale within three years of the purchase date.
The further application of this tax varies with the extended rules of the Capital Gain Tax gazette. The complete details can be checked in the Capital Gain Tax table by the Federal Board of Revenue (FBR) given below.
Applicability Conditions of Capital Gain Tax on Property in Pakistan
The following are the conditions that must be considered before calculations of Capital Gain tax.
- The seller ( Profit winner) will only be responsible for payment of Capital Gain Tax. Contrarily, the buyer of the property does not have to pay a single penny in the name of tax.
- This CGT has to be filed at the time of filing annual tax returns.
- The Capital Gain Tax is only applicable to the net Capital Gain (Profit) in the property deal. It is not calculated on the selling price of the property.
For example, if a seller has bought a plot worth 20,00,000/0 rupees and sold it at 25,00,000/-. Thereby, he made PKR 5,00,000/- profit out of it. So, the Capital Gain Tax will only be applicable on the 5,00,000/- rupees instead of 25,00,000 /- rupees.
Ways to assess Capital Gain Tax on Property in Pakistan?
As a taxpayer, you can calculate the Capital Gain tax (CGT) through the following three ways.
Calculating through quoting the actual value of property
Under this method, you have to quote the actual selling and buying value of the property and the profit earned. Ultimately, the CGT will also based on this actual value of the profit.
Assessment using a combination of the old DC rate and the New FBR Rate
Under this formula, you have to put in the Deputy Commissioner (DC) rate of the property while making a purchase. While at the time of sale, FBR’s New rate policy will be applicable.
Finally, the CGT will be calculated using the given tax calculation formula:
DC rate at the time of purchase – FBR value at the time of sale = Total Profit (5% CGT on profit )
Calculating through the latest FBR Value
Under this approach, you have to apply property value under the FBR new rate policy both at selling and buying. You can calculate under this formula:
FBR Value at the time of purchase – FBR value at the time of sale = Total Profit (CGT = 10%,7.5%,5% respectively for 1st , 2nd and 3rd year on profit )
The detailed calculations under this formula can be seen in the below table.
|
Sr.No |
Holding Period |
Open Plots |
Constructed Property |
Flats
|
|
1 |
Less than one year
|
15 % |
Same as previous (15 %) |
Same as previous (15 %)
|
|
2 |
More than one year and less than two years
|
12.5 % |
10 % |
7.5 % |
|
3 |
Between two to three years
|
10 % |
7.5 % |
0% |
|
4 |
Falling between three to four years
|
7.5% |
5 % |
– |
|
5 |
Between four to five years
|
5 % |
0 |
– |
|
6 |
Falling between five to six years
|
2.5% |
– |
– |
|
7 |
Where the holding period exceeds seven years
|
0% |
– |
– |
Exemption of Capital Gain Tax on Property in Pakistan?
Properties mentioned under the following list are exempted from the Capital Gain Tax (CGT) as per the Finance Act 2017.
- Any immovable property falls under the given category:
- Any property belongs to the Mart-yard of the Armed forces of Pakistan or his family.
- The property is under the ownership of a government employee who died under the service of the provincial or federal government.
- A property belongs to a war-wounded person.
- Any property being allotted as a service reward to any employee of the provincial or federal government.
- A stable property is in the possession of a permanent resident.
- The property is under use for a taxable business purpose.
- Any property listed under the property tax by a provincial or federal government.
- Any property under the use of a local, provincial, or federal government.