Karachi, August 2, 2024 – The Federal Board of Revenue (FBR) has clarified the changes to the capital gains tax (CGT) regime on securities as implemented through the Finance Act, 2024. The FBR issued Circular No. 1 of 2024-25 to detail these modifications, providing comprehensive insights into the updated tax structure.
Prior to the enactment of the Finance Act, 2024, the capital gains on the disposal of securities were taxed at varying rates depending on the holding period. Specifically, for securities acquired on or after July 1, 2022, the CGT was set at 15% for a holding period not exceeding one year. This rate decreased progressively, becoming zero for holding periods beyond six years. For securities acquired between July 1, 2013, and June 30, 2022, the tax rate was 12.5%, and for those acquired before July 1, 2013, the rate was zero.
The Finance Act, 2024 has not altered the CGT rates for securities acquired before July 1, 2024. The tax rate remains 12.5% for securities acquired between July 1, 2013, and June 30, 2022, and zero for those acquired before July 1, 2013. For securities acquired from July 1, 2022, to June 30, 2024, the CGT rates based on the holding period are as follows:
• 15% for holding periods less than one year,
• 12.5% for holding periods exceeding one year but not more than two years,
• 10% for holding periods exceeding two years but not more than three years,
• 7.5% for holding periods exceeding three years but not more than four years,
• 5% for holding periods exceeding four years but not more than five years,
• 2.5% for holding periods exceeding five years but not more than six years,
• 0% for holding periods exceeding six years.
Significant changes have been introduced for securities acquired on or after July 1, 2024. The Finance Act, 2024, has standardized the CGT rate at 15%, regardless of the holding period, for individuals and Association of Persons (AOPs) who are listed on the Active Taxpayers List (ATL) at both the acquisition and disposal dates.
For individuals and AOPs not on the ATL at the time of acquisition and disposal, the tax rate will follow Division I, Part I of the First Schedule of the Income Tax Ordinance, 2001, with a minimum rate of 15%. For companies not listed on the ATL at acquisition and disposal, the applicable tax rate is 29%, as specified in Division II, Part I of the First Schedule.
The Finance Act, 2024 also revised the CGT deduction rates for mutual funds, collective investment schemes, and REIT schemes. For individuals and AOPs, the rate on stock funds and other funds has increased from 10% to 15%. For companies, the rate for stock funds has similarly risen from 10% to 15%. Additionally, for stock funds where dividend receipts are less than capital gains, the tax deduction rate has been elevated from 12.5% to 15%.
The FBR’s clarification of the CGT regime aims to streamline tax compliance and ensure a consistent application of tax laws. These updates are part of the broader efforts to enhance revenue collection and provide clarity to taxpayers.
In summary, the Finance Act, 2024 introduces significant updates to the CGT regime on securities, with a focus on progressive taxation and ensuring compliance. Taxpayers are encouraged to familiarize themselves with the new regulations and adjust their financial planning accordingly. The FBR’s detailed circular provides a comprehensive guide to the updated tax rates and is a crucial resource for all stakeholders involved in securities transactions.