Capital Gain and its Taxation.

Capital Gain is Taxation Income and is a separate head of Income. It is taxed not only in cases of Capital Gains on Immovable Properties (Real Estates, or Properties), but also on other Capital Assets.

Lets us have a simple introduction of Capital Gains and its taxation as a source of Income:

Capital Gains[1]

Heads of income

The section 11 of the Income Tax Ordinance, 2001 classify incomes under the following heads, namely:

(1)      Salary;

(1)      Income from Property;

(2)      Income from Business;

(3)      Capital Gains; and

(4)      Income from Other Sources.

Capital Gain is the fourth head of income.

Capital Gain on disposal of Capital Asset

Subject to this Ordinance, a gain arising on the disposal of a Capital Asset by a person in a Tax Year, other than a gain that is exempt from tax under this Ordinance, shall be chargeable to tax in that year under the head “Capital Gains”.

Computation of Capital Gain[2]

The gain arising on the disposal of a Capital Asset by a person shall be computed in accordance with the following formula, namely:

A – B

where:

‘A’is the consideration received by the person on disposal of the asset; and

‘B’is the cost of the asset.

Therefore,

Capital Gains	=	A	–	B
Capital Gains	=	consideration received on disposal of asset	–	cost of asset

Disposal of Capital asset after twelve months[3]

If a Capital Asset has been held by a person for more than one year, other than shares of public companies including the vouchers of Pakistan Telecommunication Corporation, modaraba certificates or any instrument of redeemable capital, the amount of any gain arising on disposal of the asset shall be computed in accordance with the following formula, namely:

A x ¾

where‘A’ is the amount of the gain determined as if the Capital Asset were sold before twelve months.

Therefore,

Capital Gains after 12 months	=	A	X
Capital Gains after 12 months	=	Capital Gains	X

Example

Mr. Jamal Joiya purchased a Capital Asset for Rs. 250,000 and sold it for Rs. 375,000. Calculate Capital Gain on disposal of the asset if: holding period is less than 1 year, and holding period is more than 1 year.

Solution

Case 1: Holding period less than 1 year.

Mr. Jamal Joiya
Tax Year : XXXX
Tax Year Ended : 30-06-XXXX
Residential Status : Resident
Computation of Capital Gains
Particulars	Rs.	Rs.
Capital Gains
Consideration received on disposal	375,000
Less: Cost of asset	250,000
Capital Gains for holding period:	125,000
(Less than 1 year)		125,000

Case 2: Holding period more than 1 year.

Mr. Jamal Joiya
Tax Year : XXXX
Tax Year Ended : 30-06-XXXX
Residential Status : Resident
Computation of Capital Gains
Particulars	Rs.	Rs.
Capital Gains
Consideration received on disposal	375,000
Less: Cost of asset	250,000
Capital Gains for holding period:
(Less than 1 year)	125,000
(More than 1 year)
Capital Gains for less than 1 year x 3/4 (Rs. 125,000 x ¾)		93,750

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[1] See Section 11

[2] See Section 37(2)

[3] See Section 37(3)