Chapter 6

Capital Gains
 6-2

Definition of Capital Gains [37(1)]

Profit or gain arising on the disposal of a capital

asset by a person in a tax year shall be chargeable
to tax in that year under the head Capital Gains.
 6-3

Personal Assets as Capital Asset

[2(11) & 37(5)]
• Capital asset means property of any kind held by a
person or his family dependent includes:
• Shares
• Paintings/monument/sketch
• Jewelry
• Antiques
• Postage Stamps
• Coin
• Medal
Types of Capital Assets

• Shares of Private/Unlisited companies.

• Specified personal movable
Assets(jewellery/antiques)
• Immovable property
• Securities
 6-5

Capital Asset - Examples

• Shares of Companies
• Modaraba Certificates
• Participation Term Certificates
• Term Finance Certificates
• Musharika Certificates
• PTC Vouchers issues by Govt. of Pakistan
• Partner’s shares in AOP
 6-6

Capital Asset - Exceptions

These assets will be excluded
• Stock in trade (not being stocks and shares)
• Consumable stores
• Raw materials
• Any property for which a depreciation is allowed under
the head of business income
• Intangible assets on which amortization is allowed u/s
24 and
• Movable property held for personal use or his family
dependant (excluding Paintings, Jewelry, Antiques,
Postage stamps)
 Computation of Capital Gain
[37(2)&(3) & (4)]
• In order o charge an income under this head there should be a
gain on the “disposal” of the “capital assets”, which is computed
as below:

Consideration received on disposal of asset….xxx

Less: cost of the asset…………………………...xxx
Gain/(loss) on disposal of asset………………...xxx
Notes for the calculation of Capital
gain/(loss)
As per section 76(2) of ITO,2001, the incidental
expenditure incurred on the disposal of the asset
forms a part of the cost of the asset. Thus, any
expenses on disposal shall also be deducted in order
to compute the gain or loss. While determining the
cost of the capital asset, the following amounts shall
no be included[38(4)]
i) Any expenditure that is or may be deducted under
any other head of income
ii) Any expenditure that is rendered inadmissible
under section 21 of ITO,2001.
Example:

• Mr. Raza purchased 10,000 shares of ABC limited

(a non-listed company) @ RS. 15/ share. He
incurred Rs. 1000 on acquisition/transfer of shares.
During the year he disposed of all the shares @ Rs.
20/share and paid Rs. 1500 as commission to the
broker.
• Required: Compute the amount of capital gain
of Mr. Raza.
 Solution

Consideration received (10,000*Rs.20) = 200,000

Less: Cost of Shares
Paid of purchase of shares(10,000*Rs 15)= (150,000)
Expenses on purchase = (1000)
Expenses on disposal = (1500)

Gain/(loss) on disposal of shares = 47,500

Tax on Capital Gains (clause 5B of
Part II of Second Schedule)

• Tax @ 10% of the capital gain shall be charged if

the gain is from the sale of shares or assets by a
private limited company to Private Equity and
Venture Capital Fund
 6-12

Capital Gain Taxation After one year

[37(3)]

• Capital gain in respect of capital asset, other than

Securities and Immovable Property, held for a period
more than one year shall be computed in accordance
with the following formula:

• C x ¾
• Where a capital asset which is taxable under NTR is disposed
after one year of its acquisition then the gain for income tax
purposes shall be taken as 3/4th (i.e. 75%) of the actual gain on
disposal. Remaining 1/4th (i.e. 25% ) of the gain shall be treated
as exempt.
Example

• Considering the facts of the earlier example,

assume Mr Raza sold the shares after one year of
the purchase. The amount of capital gain shall be
as below:

Actual Capital Gain (Rs. 200,000- RS. 152, 500) = 47,500

Capital Gain for Tax purposes (47,500 * 75%) = 35,625

This treatment shall not be applicable to the following assets.

 Fair Market Value As a Cost of
Capital Asset [37(4A)]
• The fair market value on the date on which the asset is
transferred or acquired by a person shall be treated as its
“cost” if the capital asset becomes the property of a person
under any of the following cases:
• 1. Gift from a relative
• 2. Will
• 3. Inheritance
• 4. Distribution of asset on dissolution of an AOP or
• 5. Distribution of Asset on liquidation of a company
• 6.Succession
• 7.Devolution.
• ‘Relative’ in relation to an individual means an ancestor, a descendant of any of the
grandparents or an adopted child of an individual or of a spouse of the individual
[85(5)]
 6-15

Capital Gain on Disposal of Securities

[37A]

Securities is a category of capital assets introduced

through Finance Act. 2010. Securities means the following
capital assets:

• Shares of public companies

• Vouchers of PTCL

• Modaraba certificates

• Redeemable capital instruments

• Any other security not based on interest

Security Taxation [capital gain arising from 6-16

disposal of securities shall be treated as a separate

block of income and charged to tax at he following
rates]
Acquired Acquired
Period before after
01.07.2016 01.07.2016

1 Holding period less than 12 Months 15% 15%

2 Holding period between 12-24 Months 12.5% 15%

3 Holding period more than 24 Months 7.5% 15%

4 Future Commodity Contracts 5% 5%

 Capital Gain on Sale of Immovable
Property
• As per ITO,2001 an immovable property is now treated as capital asset of that
person. Hence, the capital gain on disposal of that immovable property is taxable
as a separate block of income. The tax rates are given below:
Holding Period Tax rates for Immovable Tax rates for Immovable
property acquired on or property acquired before
after July1,2016 July1,2016

Holding period upto 1 year 10%

More than or equal to one 7.5%
year but less than two
years
More than or equal to two 5%
years but less than three
years
Holding period is upto 3 - 5%
years
More than three years 0% 0%
 6-18

Immovable Property – Taxable Gain

Holding Period Taxable Gain

1 Up to 1 Year C

2 Between 1-8 Years C x 3/4

3 More than 8 Years 0

 6-19

Immovable Property – Tax Rates

Capital Gain Tax Rate

1 Up to Rs. 5,000,000 5%

2 Rs. 5,000,001 – 10,000,000 10%

2 Rs. 10,000,001 – 15,000,000 15%

3 More than Rs. 15,000,000 20%

 6-20

Important Provisions

• Capital gain on sale of shares of listed companies was

exempt from tax up to June 2010.

• Consideration received on disposal is equal to fair

market value or amount received against disposal,
whichever is higher.

• Cost of capital asset in case of gifts or inheritance is

equivalent to the cost of acquisition to the person who
transferred it.
 6-21

Exemptions - Securities

• Shares of a Public Company set up in any Special

Industrial Zone

• Shares of an Industrial undertaking set up in Export

Processing Zone
 EXAMPLE 2
Mr. Mobeen owns different assets the detail of these assets
with mode and value of acquisition and nature of
transactions is as under:
• During the year, Mr Arshad, brother of Mr. Mobeen gifted
5,000 shares of ABC (Pvt) Ltd to Mr. Mobeen. Mr Arshad
purchased these shares at Rs. 100/ share. However the
break-up value of these shares on the gift date was RS.135/
share. Mr. Mobeen sold these shares for a sum of
Rs.625,000 an on Jun 15, 2007.
• Mr. Mobeen has also 10,000 shares of XYZ LTD, a listed
company, which were transferred to him in inheritance from
father. The face value of these shares is Rs.10/ share and
his father was original allottee of these shares. Mr. Mobeen
sold 2,000 shares out of them at Rs. 30,000 on 30th Jan
2007. The break up value of these shares as per balance
sheet of the company was Rs.15/ share; however, the price
ruling in the market on the date of sale was Rs.20/share.
continued---
 EXAMPLE 2 continued
• Mr. Mobeen has also paid a sum of Rs. 10,000 for purchase
of a ten marla plot in DHA. Fortunately, Mr. Mobeen
succeeded in balloting and he was provided the opportunity
to pay the instalments for the allotyment of plot. Mr. Mobeen
paid first instalment of Rs. 50,000 on 15th Jan 2004.
Howevr, Mr. Mobeen felt that he would not be bale to pay
the further instalment; therefore he sold that plot entitlement
to Mr. Gufran for sum of Rs. 200,000 on 27th June 2007.
• Mr. Mobeen also has a habit of collection of postage stamps.
His collection includes 2,000 stamps of different countries
and occasions. He collectedc these stamps in many years.
The cost of these stamps aggregates to Rs.275,000.
However, due to paucity of space in the home, he is not
being able to continue this habit therefore he sold these
stamps for Rs.500,000 in a stamp exhiobition.
COMPUTE THE TAXABLE INCOME OF Mr. MOBEEN
FOR TAX YEAR
 SOLUTION EXAMPLE 2
MR MOBEEN
COMPUTATION OF TAXABLE INCOME
TAX YEAR 2006
Particulars Gross Deductions/ Taxable
Amount Exemptions Income
Rs. Rs. Rs.
Shares ABC (Pvt) Ltd 625,000 500,000 125,000
Shares XYZ Ltd 40,000 20,000 ---
20,000
Rights in DHA plot 200,000 60,000
35,000 105,000
Postage Stamps 500,000 275,000
56,250 168,750
Total Capital Gain 398,750