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Define Capital Gain, Computations and Deductions

 Question: Explain capital gain, how it is computed and what is its allowable deduction and exempted capital gain?

Define Capital Gain, Computations and Deductions

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”.
Capital assets:
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.
Examples:
  • 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
Where
A = Amount received on disposal of asset
B = Cost of the asset
C = Capital gain
Explanation:
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:
  1. Any loss on the disposal of capital asset during the year shall be deducted from capital gain.
  2. No loss shall be deducted on sale of capital asset when gain on sale of asset is not chargeable to tax.
  3. 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.
  1. 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:
               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.PeriodTax year 2017
FilerNon-Filer
1.     Holding period less than 12 months15%18%
2.     Holding period 12 months or more but less than 24 months12.5%16%
3.     Holding period 24 months or more but security was acquired on after 1st July 20127.5%11%
4.     Security was acquired before 1st July 2012NilNil
5.     Future commodity contracts by members of Pakistan Mercantile Exchange5%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.

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