Sharif ud din Khilji

Chief Executive
Khilji & Co. Chartered Accountants

CAPITAL GAINS

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Presentation Agenda
• SECTION 37 TO 38
• SECTION 101

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• SECTION 100B & EIGHTH
SCHEDULE

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Capital Gains
• 37. Capital gains.— (1) 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”.
• Definition – Capital Assets
• (5) In this section, “capital asset” means property of any kind held by a

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person, whether or not connected with a business, but does not include
—
• [(a) any stock-in-trade [ ], consumable stores or raw materials held for the
purpose of business;]
• (b) any property with respect to which the person is entitled to a
depreciation deduction under section 22 or amortisation deduction under
section 24; [or]
• (d) any movable property [excluding capital assets specified in sub-
section (5) of section 38] held for personal use by the person or any 3
member of the person’s family dependent on the person[.]
Personal Assets
• No personal movable property is included in definition of
capital asset except for the following:
• (a) A painting, sculpture, drawing or other work of art;
• (b) jewellery;

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• (c) a rare manuscript, folio or book;
• (d) a postage stamp or first day cover;
• (e) a coin or medallion; or
• (f) an antique.
• No loss on above mentioned assets is recognized under
law but gain is taxable.
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CAPITAL GAINS – EXAM FOCUS

• From exam perspective following capital

assets treatment is usually questioned:
• Sale of personal movable property (except

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for six items) – exempt
• Sale of shares of private company –
discussed later
• Sale of share of public company – discussed
later
• Sale of immovable property – discussed later 5
Private Company & Public Company
(45)“private company” means a company that is not a public
company;
• (47)“public company” means —
• a company in which not less than fifty per cent of the shares are
held by the Federal Government [or Provincial Government];

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• (ab)a company in which [not less than fifty per cent of the]
shares are held by a foreign Government, or a foreign company
owned by a foreign Government [;]]
• (b) a company whose shares were traded on a registered stock
exchange in Pakistan at any time in the tax year and which
remained listed on that exchange [ ] at the end of that year; or
• (c) a unit trust whose units are widely available to the public and
any other trust as defined in the Trusts Act, 1882 (II of 1882);] 6
Private Company & Public Company
UK Government owns 50% shares in ABC Pvt Ltd, a Pakistan
incorporated company. ABC = Public company

UK Govt owns 100% shares in XYZ LLC, a foreign company and

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XYZ LLC owns 50% shares in ABC Pvt Ltd, a Pakistan incorporated
company. ABC = Public company

UK Govt owns 90% shares in XYZ LLC, a foreign company and XYZ
LLC owns 70% shares in ABC Pvt Ltd, a Pakistan incorporated
company. ABC = Private company

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Capital Gains – Private Company Shares
and Taxable Personal movable Property
• Section 37(2) Subject to sub-sections (3) and (4), 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 —

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• A is the consideration received by the person on disposal of the asset; and
• B is the cost of the asset.
• Section 37(3) Where 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 as defined in the Companies Ordinance,
1984 (XLVII of 1984),] the amount of any gain arising on disposal of the asset
shall be computed in accordance with the following formula, namely: —
• Ax¾
• where A is the amount of the gain determined under sub-section (2). 8
Capital Gains – Private Company Shares
and Taxable Personal movable Property
• Say Painting or Shares of CDE Pvt Ltd, a company owned by
private individuals
• Cost of capital asset = Rs.200,000
• Sale Price = Rs. 250,000

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• Capital Gain = Rs.50,000
• Holding period – from date of purchase to date of sale
• Say date of purchase January 01, 2015 date of sale Jan 15,
2020 = holding period is more than one year
• If holding period is more than one year, 25 % gain exempt
• Taxable gain = 37,500 out of 50,000 is taxable capital asset
held for more than one year
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Capital Gains – Private Company Shares
and Taxable Personal movable Property
• Mr. A has salary = 400,000 p.m.
• Income from property = 50,000 p.m.
• Capital gain = 50,000

• Taxable income

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• Income from salary = 4,800,000
• Income from property = 480,000
• Capital Gain = 37,500
• Total Taxable Income (NTR) = 5,317,500
• Since more than 75% income is salary income therefore all the income (including
capital gain) will be taxed at the rates applicable on salaried person. NTR means
Normal Tax Regime

• Income from property = 600,000

• Less: expenses = (120,000) assumed no expense other than repair allowance 10
• Net taxable property income = 480,000
COST OF CAPITAL ASSET
• (4) For the purposes of determining component B of the formula in sub-
section (2), no amount shall be included in the cost of a capital asset for
any expenditure incurred by a person –
• (a) that is or may be deducted under another provision of this Chapter; or
• (b) that is referred to in section 21.
• (4A) Where the capital asset becomes the property of the person —-
• (a) under a gift, bequest or will;

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• (b) by succession, inheritance or devolution;
• (c) a distribution of assets on dissolution of an association of persons; or
• (d) on distribution of assets on liquidation of a company,
• the fair market value of the asset, on the date of its transfer or acquisition
by the person shall be treated to be the cost of the asset.]
• “Provided that, if the capital asset acquired through gift is disposed of
within two years of acquisition and the Commissioner is satisfied that such
gift arrangement is a part of tax avoidance scheme, then the provisions of 11
sub-section (3) of section 79 shall apply for the purpose of determining the
cost of asset in the hands of recipient of the gift.
COST OF CAPITAL ASSET
• For example
• Asset purchased in TY 2015 for Rs.500,000
• Current fair market value = Rs.2,000,000
• Gain = 1,500,000

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• Gift to son
• For son the cost of asset becomes FMV which is Rs.2,000,000
• So when the son sell it out for Rs.2,000,000 there is no gain.

• If CIR is satisfied that it is part of tax avoidance scheme, the CIR

will say the cost of asset is Rs.500,000.

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CAPITAL GAINS-PUBLIC CO. SHARES
• [37A. Capital gain on disposal of securities.— (1) The capital gain
arising on or after the first day of July 2010, from disposal of
securities held for a period of less than a year [, other than a gain
that is exempt from tax under this Ordinance], shall be chargeable to
tax at the rates specified in Division VII of Part I of the First Schedule:
• Provided [ ] that this section shall not apply to a banking company
and an insurance company.

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• (2) The holding period of a security, for the purposes of this section,
shall be reckoned from the date of acquisition (whether before, on
or after the thirtieth day of June, 2010) to the date of disposal of
such security falling after the thirtieth day of June, 2010.
• (3) For the purposes of this section “security” means share of a
public company, voucher of Pakistan Telecommunication
Corporation, Modaraba Certificate, an instrument of redeemable
capital [,debt Securities], unit of exchange traded fund and
derivative products. 13
CAPITAL GAINS-PUBLIC CO. SHARES
• [37A. Capital gain on disposal of securities.— (3A) For the purpose of this
section, “debt securities” means -
• (a) Corporate Debt Securities such as Term Finance Certificates (TFCs), Sukuk
Certificates (Sharia Compliant Bonds), Registered Bonds, Commercial Papers,
Participation Term Certificates (PTCs) and all kinds of debt instruments issued
by any Pakistani or foreign company or corporation registered in Pakistan; and
• (b) Government Debt Securities such as Treasury Bills (T-bills), Federal
Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), Foreign Currency

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Bonds, Government Papers, Municipal Bonds, Infrastructure Bonds and all
kinds of debt instruments issued by Federal Government, Provincial
Governments, Local Authorities and other statutory bodies.] (future
commodity contracts by members of Pakistan Mercantile Exchange are also
derivative products.)
• (4) Gain under this section shall be treated as a separate block of income.
• (5) Notwithstanding anything contained in this Ordinance, where a person
sustains a loss on disposal of securities in a tax year, the loss shall be set off
only against the gain of the person from any other securities chargeable to tax
under this section and no loss shall be carried forward to the subsequent tax 14
year.]
CAPITAL GAINS-PUBLIC CO. SHARES
• For example
• Mr. A owns 500 shares of OGDCL, a public company listed on
stock exchange and remained listed till the end of year.
• Mr. A owns 500 shares of ABC (Pvt) Ltd, a company wholly
owned by Government of Pakistan.
• Mr. A owns 500 shares of XYZ (Pvt) Ltd, a company wholly

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owned by UK Govt.
• All above are public companies and any gain arising on the sale
of shares of these companies will be subject to separate
taxation under Final Tax Regime.
• For example: OGDC shares sold for 500,000 and were originally
bought at cost of 450,000.
• Gain = 50,000.
• For tax year 2022 and onwards, tax rate is 12.5% of gain. 15
• Rules for capital gains to discussed later.
Immovable Property
• Gain on sale of plot to be 100% exempt after 8 years and 25%
exempt after one year while gain on sale of constructed property
100% exempt after 4 years and 25% exempt after one year. Form of
property i.e. open or constructed is to be determined at the time of
sale (FBR circular clarified).
• Payment mandatory through banking channel for immovable
property and other assets exceeding FMV Rs.5m & 1m respectively
• First sale of allotted plots by Civil servants & armed forces exempt
up to 50% while for Shaheed’s heirs, full exempt on first sale.
Immovable Property
• Sale of plot within one year = gain fully taxable
• Sale of plot from 1 – 8 years = 25% gain exempt
• Sale of plot after 8 years = 100% gain exempt

• Sale of constructed property within one year = gain fully taxable

• Sale of constructed property from 1 – 4 years = 25% gain exempt
• Sale of constructed property after 4 years = 100% gain exempt

• Example:
• Plot purchased on July 01, 2019
• Construction started on April 01, 2022 and completed on September
30, 2022.
• Property sold on August 30, 2023.
• SO 4 years completed on June 30, 2023.
 Capital Gain Immovable
S Holding period Taxable gain
.

1 Where holding period does not Full amount of

. exceed one year gain is taxable
2 Where holding period is more 75% gain is
. than one year and up to 2 years taxable
3 Where holding period is more 50% gain is
. than 2 year and up to 3 years taxable
4 Where holding period is more 25% gain is
. than 3 year and up to 4 years taxable
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5 Where holding period is more No gain is taxable
. than 4 years
 Tax rates
S Amount of gain New tax rates Previous tax
. rates
1 Where capital gain is up to Rs. 3.5% of taxable 2.5% of
. 5 million gain taxable gain
2 Where capital gain is more 7.5% of taxable 5% of taxable
. than Rs.5 m but up to Rs.10 gain gain
million

3 Where capital gain is more 10% of taxable 7.5% of

. than Rs.10 m but up to Rs.15 gain taxable gain
million

4 Where capital gain more than 15% of taxable 10% of 19

. Rs.15 million gain taxable gain
Immovable property Gain
Taxation
• Mr. A purchased land for Rs. 8,000,000 on July 15, 2021 and sold
the same on March 20, 2022 for Rs. 8,500,000.
• Gain = 500,000 Holding period less than one year. Fully taxable.
• Tax liability = 500,000 * 3.5% = 17,500.
• Mr. A purchased land for Rs. 8,000,000 on July 15, 2010 and sold
the same on March 20, 2022 for Rs. 8,500,000. Gain fully exempt.
• Mr. A purchased land for Rs. 8,000,000 on July 15, 2018 and sold
the same on March 20, 2022 for Rs. 8,500,000. Gain 75% exempt.
• Total gain = 500,000 but exempt gain = 375,000.
• Tax liability = 125,000 * 3.5% = 4,375
Gift Taxation
• Gift is taxable except grand parents, parents, spouse, real brother,
real sister, son or daughter gift to relative.
• Gift to be made through normal banking channel.
• Gift income to be included in the normal income of the recipient
taxpayer unless exempt as above.
• Taxable as income from other sources.
• Relative is defined as

•“relative” in relation to an individual, means —

•(a) an ancestor, a descendant of any of the grandparents, or an adopted child, of the
individual, or of a spouse of the individual; or
•(b) a spouse of the individual or of any person specified in clause.
DEDUCTION OF LOSSES
• 38. Deduction of losses in computing the amount
chargeable under the head “Capital Gains”.— (1)
Subject to this Ordinance, in computing the
amount of a person chargeable to tax under the

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head “Capital Gains” for a tax year, a deduction
shall be allowed for any loss on the disposal of a
capital asset by the person in the year.
• (2) No loss shall be deducted under this section
on the disposal of a capital asset where a gain on
the disposal of such asset would not be chargeable
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to tax.