All Income Accrued After Selling Real Estate Will Now be Taxed at Standard Rates

Previously, the Capital Gains Tax (CGT) on immovable properties had been calculated separately; with the rate of the said tax dependent on how long the property was held – up to a period of three years.

As per Tuesday’s budgetary announcement, the income accrued through capital gains would now be brought under the government’s normal income tax regime, and taxed at normal rates.

The State Minister for Revenue mentioned further in the budget speech that the capital gains would be revised down on ‘the basis of net present value (NPV).’ However, this provision has not been introduced in the actual bill.

Nevertheless, if introduced, what it would mean is that the gains would not be calculated in absolute terms, rather they would be based on the difference between current NPV and the sale price, instead of the purchase price and sale price.

It should be noted that the net present value of the property continues rising on the basis of inflation rates each year.

The example below will further clarify this:

A person buys a 5-marla plot at a price of PKR 2,000,000 at the beginning of 2017. For the purpose of this example, let’s assume that the rate of inflation remains stable at 7% each subsequent year. Then, the NPV of the property in 2018 will be PKR 2,140,000; in 2019, it will be PKR 2,289,800; and, in 2020, it will be PKR 2,450,086.

Then, if the person sells the property after three years at a price of PKR 2,500,000, here’s how they will be calculating their actual gains:

Price paid at the time of purchase PKR 2,000,000
Price received at the time of sale PKR 2,500,000
NPV at the time of Sale (Three years later) PKR 2,450,086
Actual Gains 49,914

Therefore, the actual gains for the person’s income will be calculated at PKR 49,914 and they will be taxed on this value.

In the bill on the other hand, the calculation of capital gains have been provided in the following manner:

In case of plots

  • If the plot is sold within the first year of purchase, 100% of the gains will be taxed.
  • If the plot is sold after the first year but before ten years of purchase, 75% of the gains will be taxed.
  • If the property is sold after 10 years of purchase, no gains tax will be levied.

In case of constructed property

  • If the property is sold within the first year of purchase, 100% of the gains will be taxed.
  • If sold after one year but before the elapse of the fifth year, 75% of the gains will be taxed.
  • Gains will not be taxed if the property is sold after five years of ownership.

INVOLVEMENT OF BANKS IN PURCHASES OF PROPERTY – NOW A MANDATORY PROCEEDING