FBR explains incidence of capital gains tax on disposal of property

KARACHI: Through the Finance Act, 2019, the holding period for taxation of capital gain of open plots has been increased to eight years and for constructed properties it has been increased to four years.

In an explanation issued on Tuesday, FBR explained that where the holding period does not exceed one year, the total amount of gain will be taxed. The gain will be calculated by deducting the cost from the consideration received.

If the holding period is more than one year but does not exceed eight years in the case of open plot or four years in the case of constructed property, 75% of the gain will be taxed.

According to the applicable rates of tax, the rate of tax is 5.0% where the gain is up to Rs5 million; the rate of tax is 10% where the gain is more than Rs5 million but not more than Rs10 million; the rate of tax is 15% where the gain is more than Rs10 million but not more than Rs15 million; the rate of tax is 20% where the gain is more than Rs15 million.

It is further clarified that form of immoveable property, whether open plot or constructed, will be determined at the time of sale of immoveable property.

Example: Mr. B purchased an open plot on 22.09.2019 which cost him Rs 2,000,000. The plot was sold on 25.03.2020 at Rs.8,000,000. Another constructed property was acquired on 05.09.2019 at Rs.8,000,000 and sold at Rs. 12,000,000 on 23.05.2020.

Assuming that both properties were acquired and sold as per value notified by the Board, the capital gain and tax thereon is calculated as under:-

As the holding period of plot is up to one year, gain on sale of plot = 8,000,000 -2,000,000 = Rs.6,000,000

As the holding period of constructed property is up to one year, gain on sale of constructed property = 8,000,000 – 2,000,000 = Rs.6,000,000

Total capital gain Rs.6,000,000 + Rs.6,000,000 = 12,000,000

As the total capital gain is more than Rs.10 million but less than Rs 15 million, it will be taxed at 15% and tax payable will be Rs.1,800,000.

Prior to the Finance Act, 2019, capital gain on immovable property was separately taxed on the basis of holding period of property. The gain was taxed at the rate of 10% if the holding period is up to one year, 7.5% if the holding period was more than or equal to one year but less than two years and  5% if the holding period was equal to or more than two years but less than three years.

The rate of tax was zero where the holding period was more than three years. The gain was calculated by deducting the cost of the asset from the consideration received by the person on disposal of the asset.

 

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