Capital gains

Haider Ali
01-177192-015
LLB 9-A

CAPITAL GAINS and BASIS of CHARGEABILITY (Section 37)

 Any profit on disposal of capital asset by a person in a tax year excluding gains
exempted from tax is taxable under the head of income from “Capital Gains”.
The gains which are exempted from levy of income tax are the followings:
 Capital gains on Transfer of a stock exchange membership rights
 Capital Gains on sale of shares of undertaking in export processing zone (EPZ).
Tax is charged on accrual basis on capital gains. It means that tax is charged in the tax year in
which disposal has taken place. For example, if the disposal has taken place in 2023 and the
consideration to it is to be received in 2024, tax payer will include that gain from disposal in
the tax year 2023 while the is still to be received tax year 2024.
In order to get the transparent glance of the above-mentioned paragraph understanding of
these two terms mentioned below is very crucial
 CAPITAL ASSETS
 DISPOSAL

CAPITAL ASSETS
It refers to all kinds of property owned by a person whether associated to business or not
excluding the following
 Business inventory, raw material and consumable supplies kept for business purposes.
 Properties eligible for depreciation under section 22 and 24 of ITO 2001.
 Any movable property held by an individual or his family excluding antique, art,
books, coins, drawings, folio, first day cover, jewelry, medallion postage stamps and
rare manuscripts.

Common examples of capitals assets include the following

 Shares (ordinary and bonus)
 Modaraba Certificates
 Participation Term Certificates
 Term Finance Certificates
  Vouchers of PTC
 Goodwill, patents and copyrights (Where amortization is not charged)

DISPOSAL OF ASSETS
The legislature deliberately used the term disposal instead of sale to encompass the broader
meaning in 2(18) read with section 75.

(DISPOSAL CONNOTATIONS )
Section 75:
The term disposal means not only parting of ownership but also when the assets existence is
no more. It includes the following when asset is
 Sold, exchanged, transferred or distributed
 Cancelled, redeemed, relinquished, destroyed, lost, expired or surrendered.
An asset received by inheritance or will shall be considered as disposal by deceased at the
time of transfer.
When of business asset are started to be used for personal purposes ,it is treated as disposal
by the owner at the time of application. When asset is no longer used in business, it is treated
as if it has been disposed of. A disposal also includes transfer of portion of asset.

COMPUTATIONS OF CAPITAL GAINS

Formula:
Capital Gains = A -B
Here
A is the consideration received on disposal of asset
B is the cost of the asset

COST OF ASSETS
If an asset is bought or acquired then that buying or acquiring cost is the cost of the asset and
if the capital asset is transferred(other connotations of disposal) then the FMV of that asset
on the date of transferring would considered as the cost of the asset. And if tax avoidance
scheme is used then the actual cost of that asset would the cost of the asset.
While computing the cost of capital asset, the following expenses aren’t included
 When expenditure is deductible under any other head of income.
 Any expenditure which’s deduction is not allowed under Section 21 ITO
Holding period of Plot Taxable gain
Less than 1 year 100%
More than one year and 75%
less than eight years
Exceed Eight years 0%

Holding period on immovable Taxable gain

property
Less than 1 year 100%
More than 1year and less than 2 75%
years
More than 2 year and less than 3 50%
years
More than 3 years and less than 4 25%
years
Exceeds 4 years 0%

Holding period of immovable constructed Taxable Gain

property
Less than 1 year 100%
More than 1 year and less than 4 years 75%
Exceeds 4 years 0%