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
|
[1]
See Section 11
[2]
See Section 37(2)
[3]
See Section 37(3)