ISLAMABAD: Federal Board of Revenue (FBR) has issued formula for computation of capital gain tax on disposal of immovable property as amended through Finance Act, 2020.
The National Assembly recently approved the Finance Act 2020. The Act amended sub-section 3A of Section 37 of the Income Tax Ordinance, 2001.
It said that the amount of any gain arising on disposal of an immovable property shall be computed in accordance with the formula given below:
|Where the holding period of an Immovable property does not exceed one year
|Where the holding period of an immovable property exceeds one year but does not exceed two years
|Where the holding period of an immovable property exceeds two years but does not exceed three years
|Where the holding period of an immovable property exceeds three years but does not exceed four years
|Where the holding period of an immovable property exceeds four years
Analysts at EY Ford Rhodes Chartered Accountants explained the changes stating that the taxation of capital gains arising from disposal of capital assets is governed by Section 37 of the Ordinance.
A separate mechanisms for computation of capital gain on disposal of (i) open plot, and (ii) constructed property was introduced through the Finance Act, 2019.
The capital gain was eligible for reduction of 25 percent based on holding period exceeding one year up to eight years for open plots and one year up to four years for constructed property.
Furthermore, the gain arising after holding period of eight years in case of open plot and four years in case of constructed property was taken as zero.
In order to incentivize economic activity in the real estate sector, the Bill seeks to eliminate the separate mechanism for taxation of capital gains on immovable property by revamping the taxability of such capital gains and proposing as under:
(a) Eliminating classification of immovable property into open plots and constructed property.
(b) Reducing the holding period for 100 percent reduction in gain to four years.
(c) Progressive reduction in the amount of gain based on each year of the holding period.