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Capital Gains Tax on Property

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 .

  1. What is Capital gains tax on property .
  2. How Capital gains Tax on property is calculated with examples.
  3. 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 :capital-gains2

  1. 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.
  2. Capital gains tax is only applicable on the seller . Purchaser do not pay any Capital gains tax.
  3. Capital gains tax on property (CGT) was also levied in the previous year at 10 % .
  4. Capital gains tax is to be deposited at the time of your annual tax returns.
  5. CGT is incurred only on the profits you make . Misc costs such as taxes and commissions are excluded from the taxable profit.
  6. As per the new law , it will be levied at following rates on property investments in Pakistan .
    1. 10% of profit you have made if you sell it in first year of your purchase.
    2. 7.5% of  profit you have made if you sell it in second year of your purchase.
    3. 5% of  profit you have made if you sell it in third year of your purchase.
    4. 0% of  profit you have made if you sell it in fourth year of your purchase.
    5. 5% flat rate on profit for all properties purchased before 1st July 2016 if they are sold within 3 years of there purchase.
    6. For army officers benefit plot and plots for dependents of Shahuda the CGT is 0%.
    7. 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

  1. You are paying the taxes as a responsible citizen and helping to rebuild your country.
  2. 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

  1. You pay much less tax.

Disadvantages

  1. Economy of Pakistan  suffers because you have not paid the taxes due.
  2. 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 = 0

Total CGT Payable = 10% of 0 = 0 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

  1. You pay very minimal tax.

Disadvantages

  1. Economy of Pakistan suffers because you have not paid the taxes due.
  2. 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 .

  1. 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.
  2. 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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Yousuf Qureshi

A piece of land was gifted to me by my father a year ago, which he had purchased some 40 years ago. So the cost to me was zero. Do the same capital gain tax rules apply to me if I sell the land now? How will CGT be calculated in my case? Thanks

Rao Awais

can we claim back capital gain tax ? As an employee? if yes, kindly mention conditions, and elaborate please.

Ali Khan

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.

Habib Ullah

Thank You.

Bashir Ahmad

There is mention of army benefit plots CGT 0%
But what houses allotted to army officer s against their membership

Muhammad Khursheed

I have sold a plot of Bahria town Karachi at 5,775,000 in April 2018 which i bought on amount 3,378,000 in May 2015. The FBR evaluation of plot is 2,125,000 and they have taken a tax under section 236 C is 21,250. I want to know how much CGT i have to pay and how should i file it in IRIS. I am a tax filer and documented this plot with the value of 2,850,000.

Ali Raza

hello sir my question is what will be the gain tax on amount 2500000/= if we are tax filer 1% or 2% ?

Muneeb

If i sale property after 5 years of purchase date … what will be the CGT

Kamran Mehmood

Dear Sir,

I am going to sell an inherited property which was transferred in our name. we have 6 brothers and 2 sisters in Tax Year 2018.
Market value of property is 30 million.

Would you please explain the implication of capital gain tax?

Thanks & regards

Muihammad Bilal

Respected Sir,
Please guide me that how many taxes are admissible on purchasing 10Marla residential Plot.

M. Akhtar

Dear Sir,

I am going to sell an inherited property which was transferred in my name in Tax Year 2017.
Market value of property is 130 million.

Would you please explain the implication of capital gain tax?

Thanks & regards

M. Akhtar

Sahir Khan

I bought a 4-marla residential plot in (rural) Rawalpindi. The price i actually paid for it is around 1.6 million, but the price mentioned on the registry is around 1 lac, as this is the government rate.

I am an income tax return filer. Guide me as when filing this year’s return, what price should i mention in the return? The price i paid (1.6 million) or The price mentioned on Registry (1 lac)?

irfan khaliq

I would like have one clarity if I buy a property for 10 lac & sell in 11 lac, profit is 1 lac & paid 10 thousand as cgt with in one year. So the one lac would also be included or not in taxable income for income tax calculation purpose if my income tax slab is 5 % so the 5 thousand would have to pay as income tax or not.

kamran

Salam,
i have purchase a plot in Gulshan e roomi (Malir Cant, Karachi) for price 1,260,000 on 2010 i have now sale it for 6,200,000. Is there any CGT i have to pay ?? as this purchase before 2016 but not sold within 3 years of purchase as per your coaching on below. Lastly is this still applicable or there is some now law for it
https://imlaak.com/capital-gains-tax-property-calculation/
JazakAllah

naseer

what is capital gain tax on agricultural land at kpk plz

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