Capital Gains Tax On Property |Implementation & Calculations
Capital Gains Tax On Property |Implementation & Calculations
One of the major issue investors are facing are not taxes on real estate but the confusion around it. In this article we will try to understand how capital gains tax on property (CGT) is calculated. This will clear a lot of misunderstandings and rumors spread in the market. For the sake of ease we will be dividing this article in three sections .
- What is Capital gains tax on property .
- How Capital gains Tax on property is calculated with examples.
- How to avoid Capital gains tax on property investment.
Section 1 : What is Capital gains tax on property
Capital gain tax on property is the tax payable to the Federal Government Of Pakistan on the profits you make . Some of the things you need to understand about this tax are :
- This is not payable on the complete price of the commodity you have sold but only on the profits you have made. Capital gains tax on property (CGT) is paid on the difference between your buying price and your selling price.
- Capital gains tax is only applicable on the seller . Purchaser do not pay any Capital gains tax.
- Capital gains tax on property (CGT) was also levied in the previous year at 10 % .
- Capital gains tax is to be deposited at the time of your annual tax returns.
- CGT is incurred only on the profits you make . Misc costs such as taxes and commissions are excluded from the taxable profit.
- As per the new law , it will be levied at following rates on property investments in Pakistan .
- 10% of profit you have made if you sell it in first year of your purchase.
- 7.5% of profit you have made if you sell it in second year of your purchase.
- 5% of profit you have made if you sell it in third year of your purchase.
- 0% of profit you have made if you sell it in fourth year of your purchase.
- 5% flat rate on profit for all properties purchased before 1st July 2016 if they are sold within 3 years of there purchase.
- For army officers benefit plot and plots for dependents of Shahuda the CGT is 0%.
- CGT on Government welfare plots will be levied at 50% of the normal percentage. 5% in first year , 3.7% in the 2nd year and 2.5% in the 3rd year.
Section 2 : How Capital gains Tax on property is calculated with examples.
Capital gains tax can be calculated using 2 methods .
Method No 1 : Using actual values
You declare the actual price of purchase and sale and deposit the Capital gains tax on property on actual profits you have made.
Example :
Capital Gain Tax On Actual Values
wdt_ID Sold In Purchase Price Sale Price Total Profit Total CGT 1 1st Year 20 Million 25 Million 5 Million 0.5 Million (10%) 2 2nd Year 20 Million 25 Million 5 Million 0.375 Million (7.5%) 3 3rd Year 20 Million 25 Million 5 Million 0.25 Million (5%)
Note: The 3rd year “sold in” row is applicable to all sellers who have purchased the plot before 1st July 2016.
Advantages
- You are paying the taxes as a responsible citizen and helping to rebuild your country.
- All your money is white and declared.
Method No 2 : Using old DC rates and new FBR value
Let us suppose that you have purchased a plot in DHA Phase 8 and declared its old DC value . Now if you sell it , you can declare that you have sold it as per the FBR value. You will pay CGT at 5% flat rate if you sell it within 3 years. However for this calculation you must have purchased the plot before 1st July 2016.
Formula
Regardless of actual price you have purchased for or sold for the CGT will be as under.
Dc rate at the time of purchase  – FBR value at the time of sale = Total Profit (5% CGT on profit )
DC Rate of 1 Kanal Plot in DHA Phase 8 Lahore in 2015-16 = 3300000
FBR Value of 1 Kanal Plot in DHA Phase 8 Lahore  in 2016-17 = 6300000
Net profit = 3000000
Total CGT Payable = 5% of 3000000 = 150000 PKR
Advantages
- You pay much less tax.
Disadvantages
- Economy of Pakistan  suffers because you have not paid the taxes due.
- You only have 6300000 as white money. The remaining money you have is considered Black and you can be charged legally by FBR.
Method No 3 : Using new FBR value
In case you have purchased a plot in DHA Phase 8 after 1st July 2016 and declared its new FBR value . Now if you sell it , you can declare that you have sold it as per the latest FBR value applicable in that year. You will pay CGT at 10% , 7.5% and 5% respectively for selling it in 1st , 2nd and 3rd years. The catch here is that there is no change in FBR Value in the same financial year . If you sell it in the same financial year technically you do not have to pay any Capital gains tax.
Formula
Regardless of actual price you have purchased for or sold for the CGT will be as under.
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 )
FBR Value of 1 Kanal Plot in DHA Phase 8 Lahore in 2015-16 = 6300000
Net profit =Â 0
Total CGT Payable = 10% of 0Â = 0Â PKR
However if you sell it another financial year and the FBR value has changed than you will pay CGT as follows.
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 )
Advantages
- You pay very minimal tax.
Disadvantages
- Economy of Pakistan suffers because you have not paid the taxes due.
- You only have 6300000 as white money. The remaining money you have is considered Black and you can be charged legally by FBR.
Section 3 : How to avoid Capital gains tax on property investment
There are only two ways you can decrease or avoid Capital gains tax .
- By not showing any profits as explained in method no 2 and method no 3. This will certainly save you from giving huge amount in Capital gains tax. However you are cheating and liable to punishment as per the law of Pakistan. Moreover the extra money you are left with is illegally acquired black money.
- Simply sell your property after 3 years and you do not have to pay any CGT. This way you can declare your entire sale price as white money without paying any CGT.
Hurrah 🙂 i hope we have finally broken the myth of the Capital gains tax . One of the evil genie which is bothering so many real estate investors in Pakistan. Stay tuned because soon we will be breaking myth about the scary withholding tax.
Contributed by
Captain (Retd) Shahnawaz Yaqub Bhatti
CEO & Investment Consultant at Imlaak
Mob & whatsapp : +923331717170
Skype : Shahnawaz.yaqub
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I was allotted a plot in DHA on 20 years installments. I have only paid one third of installments and havnot get the possession yet. How much its worth i need to mention in my tax return.