Section 37A sets out the tax treatment of securities, including capital gain calculations, eligible losses, holding periods and covered financial instruments.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained the rules governing capital gains arising from the disposal of securities for Tax Year 2027 under Section 37A of the Income Tax Ordinance, 2001.
The provisions are contained in the Income Tax Ordinance, 2001, updated up to June 30, 2026, and specify the securities subject to capital gains tax, the method for calculating gains and the treatment of losses.
Securities subject to capital gains tax
Under Section 37A(1), capital gains arising from the disposal of securities on or after July 1, 2010 are chargeable to tax at the rates specified in Division VII of Part I of the First Schedule, unless the gain is exempt under the Income Tax Ordinance, 2001.
The section does not apply to a banking company or an insurance company.
Certain share disposals are also excluded from Section 37A. These include:
• Shares of a listed company disposed of otherwise than through a registered stock exchange and not settled through the National Clearing Company of Pakistan Limited (NCCPL).
• Shares disposed of through an initial public offering (IPO) during the listing process, except where details of the disposal are furnished to NCCPL for the computation of capital gains and tax.
For such transactions, the provisions of Section 37 apply.
How capital gain is calculated
Under Section 37A(1A), the capital gain on the disposal of a security is calculated using the following formula:
Capital gain = A – B
Here:
• A represents the consideration received by the person on disposal of the security.
• B represents the cost of acquisition of the security.
The resulting gain is subject to the applicable capital gains tax rate under Division VII of Part I of the First Schedule.
Holding period of securities
For the purposes of Section 37A, the holding period is calculated from the date of acquisition to the date of disposal.
The provision applies to securities acquired before, on or after June 30, 2010, provided that the disposal takes place after June 30, 2010.
What qualifies as a security?
Section 37A defines a “security” to include a range of financial instruments, including:
• Shares of a public company
• Vouchers of Pakistan Telecommunication Corporation
• Modaraba certificates
• Instruments of redeemable capital
• Debt securities
• Units of exchange-traded funds (ETFs)
• Derivative products
Shares of a public company qualify as securities where the company is a public company at the time the shares are disposed of.
Debt securities covered by Section 37A
For the purposes of Section 37A, debt securities include both corporate and government debt instruments.
Corporate debt securities include Term Finance Certificates (TFCs), Sukuk certificates, registered bonds, commercial papers, Participation Term Certificates (PTCs) and other debt instruments issued by Pakistani or foreign companies or corporations registered in Pakistan.
Government debt securities include Treasury Bills (T-bills), Federal Investment Bonds (FIBs), Pakistan Investment Bonds (PIBs), foreign currency bonds, government papers, municipal bonds, infrastructure bonds and other debt instruments issued by federal or provincial governments, local authorities and statutory bodies.
Derivative products covered
The FBR has clarified that derivative products include future commodity contracts entered into by members of the Pakistan Mercantile Exchange, regardless of whether the contracts are settled through physical delivery.
This brings such qualifying derivative transactions within the scope of the securities provisions under Section 37A.
Capital gains treated as separate income
Under Section 37A(4), income from capital gains covered by the section is treated as a separate block of income.
This means such gains are dealt with separately in accordance with the provisions and rates applicable under Section 37A.
Treatment of capital losses
Section 37A(5) generally provides that where a person incurs a loss from the disposal of securities during a tax year, the loss can only be set off against gains from other securities chargeable under Section 37A.
The provision further states that losses from the disposal of securities sustained from Tax Year 2019 onwards, to the extent that they have not been set off against eligible gains, may be carried forward to the following tax year.
Such carried-forward losses can only be adjusted against gains from securities chargeable under Section 37A.
The losses cannot be carried forward for more than three immediately succeeding tax years.
FBR may prescribe rules
Under Section 37A(6), the FBR may prescribe rules to carry out the purposes of the section.
The provision gives the tax authority the power to establish the necessary rules for implementing the securities capital gains regime.
Capital gains tax rules for Tax Year 2027
For Tax Year 2027, capital gains from securities covered by Section 37A are generally calculated by deducting the acquisition cost from the consideration received on disposal.
The resulting gain is subject to the applicable rates under Division VII of Part I of the First Schedule, while eligible losses are subject to the specific set-off and carry-forward restrictions provided under Section 37A.