Question: Explain capital gain, how it is computed and what is its allowable deduction and exempted capital gain?
Answers: Capital gain: (Sec 37)
According to section 11 of income tax ordinance 2001, capital gain is the 4th source of income of a person and it is chargeable to tax under section 37. “Capital gain means any gain arising from the disposal of capital asset”.
Under income tax ordinance 2001, assets are grouped to capital asset, depreciable asset, intangible asset, commencement expenditures and stock in trade.
Capital asset mean perfectly of any kind held by a person but excluding the following.
- Any depreciable asset
- Any intangible asset on which amortization are allowed
- Any moveable property held for personal use
- Any stock in trade, raw material, consumable stores.
- Term finance certificate , Musharakah certificate
- PTCL Voucher issued by Govt. , Modaraba certificate
- Shares of company , Participation term finance certificate
Computation of capital gain :
Capital gain arising from the sale or disposal of capital asset will be considered income of the
Year in which the asset is disposed off. It will be computed as follows.
Amount received from disposal of asset xxxx
Less: cost of asset (xxx)
Gain or loss on disposal of asset xxxx
Procedure for calculation of capital gain
- Disposal of capital asset within 12 months
- Disposal of capital asset after 12 months
Disposal of capital asset within 12 months
If the capital asset is disposed of within 12 months of its acquisition, the amount of capital gain will be included in the total income:
A – B = C
A = Amount received on disposal of asset
B = Cost of the asset
C = Capital gain
Where the capital asset become the property of a person
- Under gift , bequest or will
- Inheritance or by succession
- Distribution of asset on dissolution of a company
Disposal of capital asset after 12 months:
If the capital asset is disposed of after 12 months of its acquisition then the following formula will be applied.
Capital gain multiply 25% (will be reduced in the amount of capital gain)
Capital gain xxxx
25% of gain (xxxx)
Deduction of capital loss: (sec 38)
In computing the income of a person chargeable to tax the losses on disposal of capital shall be treated as:
- Any loss on the disposal of capital asset during the year shall be deducted from capital gain.
- No loss shall be deducted on sale of capital asset when gain on sale of asset is not chargeable to tax.
- No loss shall be reorganized under the income tax ordinance 2001 , on the disposal of the following capital asset: 1. An Antique 2. Jewelry 3.Posting stamp 4. A rare manuscript folio or book 5. A painting 6. Sculpture or the art work 7.
- The loss from disposal of capital asset shell be computed by applying following formula:
A — B
(A) Cost of asset (B) Amount received on sale of asset
Capital gain on disposal of securities
Security means share of public company , voucher of Pakistan Telecommunication corporation , Corporate Debt securities , Modaraba certificate . Capital gain on sale of all these were exempt up to 30th June 2010 but if a security sold on or after 1 July 2010 , no matter when it was cashed but the gain on sale of security will be taxable , but tax rates are different .
Holding period of security
The holding period of securities means the period between the dates of acquisition to the date of disposal of such security.
The rate of tax to be paid on capital gains on disposal of securities for the tax year 2017 are as follows:
|Sr. No.||Period||Tax year 2017|
|1.||Holding period less than 12 months||15%||18%|
|2.||Holding period 12 months or more but less than 24 months||12.5%||16%|
|3.||Holding period 24 months or more but security was acquired on after 1st July 2012||7.5%||11%|
|4.||Security was acquired before 1st July 2012||Nil||Nil|
|5.||Future commodity contracts by members of Pakistan Mercantile Exchange||5%||5%|
Exempted Capital Gain
Capital gain from the following gain are not included in the total income and exempt from tax.
Schedule Second Clause 114
Any income chargeable under the head “Capital Gains” derived by a person from an industrial undertaking set up in an area declared by the Federal Government to be a “Zone” within the meaning of the Export Processing Zone Authority Ordinance, 1980, is permanently exempt form tax.