7E Capital Gain – Deemed Income on Immovable Property

 

Introduction: 

 

Tax under section 7 E and Division VIII C Part I of 1st Schedule @ 20% shall be imposed on the 5% Fair Market Value of the CAPITAL ASSET. It is considered as Deemed Income on immovable property. This income is deemed to have been earned on that CAPITAL ASSET by a resident person on the last day of the TAX YEAR.

Effectively, a resident person is liable for tax @ 1% of the Fair Market Value of the CAPITAL ASSET.

Fair Market Value – Section 68

The fair market value is the value notified by the Federal Board of Revenue (FBR) if it is not notified by the Federal Board of Revenue (FBR) the value is fixed by the district officer (revenue) or provincial or any other authorized authority for the purpose of stamp duty.

Capital Asset

Capital asset for the purpose of section 7E means property of any kind held by a person, whether or not connected with a business, but does not include Any;

1. Stock in trade, consumable stores, or raw materials held for the purpose of business;
2. Shares, stocks, or securities;
3. Depreciable asset or intangible property; or
4. Movable asset not mentioned in (i) (ii) or (iii) above.

Therefore, any immovable property is subject to tax under section 7E .

Below are a few exceptions;

1. Only 1 capital asset owned by the resident;
2. Business premises are self-owned by the active taxpayer person.
3. Self-owned agriculture land where agriculture activity is carried out by the person with exception of a farmhouse and annexed land.
4. Capital assets allotted to;
5. Original allottees of current or past employees of armed forces or federal and provincial governments.
6. War wounded person while in the service of Pakistan armed forces or federal or provincial government, person and dependents of the person who dies while in service of Pakistan armed forces or federal or provincial government.
7. Shaheed or dependents of shaheed belonging to Pakistan Armed Forces.
8. Any property form which income is taxable and tax is paid thereon, (please refer to Income from Property);
9. The first year of acquisition of capital asset for which tax under section 236k has been paid;
10. The fair market value of capital asset excluding the above points is less than 25 million;
11. Capital assets owned by the federal or provincial government;
12. Persons such as local authority, development authority, builders, and developers for land development and construction who are registered with the Directorate General of designed non-financial businesses and professions own capital assets.

 

Examples:

 1.  A person filer person owns a commercial property that is used for business purposes with a fair market value of Rupees 35 million.

In this case, as explained in exception point “2” above, immovable property of the business premises which is self-owned by the active taxpayer person is exempt under section 7E.

2.  A person owner of a single property with a fair market value of Rupees 50 million.

In this case, as explained in exception point “1” above, owning one capital asset is exempt under section 7E.

3.  A person owns 2 properties, the fair market value of 1st property is 30 million and 2nd property is rupees 22 million.

In this case, as explained in exception point “1” and “10” above, 1st property of rupees 30 million is exempted. 2nd property having a fair market value is less than 25 million is also exempt.

4.  A person owns 2 properties, the fair market value of 1st property is 35 million and 2nd property is rupees 30 million.

In this case, as explained in exception point “1” above, 1st property of rupees 35 million is exempted. 2nd property having a fair market value is more than 25 million shall be taxed under section 7E as follows:

30,000,000 x 5% = 1,500,000 x 20% = 300,000 or

30,000,000 x 1% = 300,000

5.  A person owns 2 properties, the fair market value of the 1st property is 40 million and the 2nd property is rupees 30 million. The 2nd property is chargeable to tax as INCOME FROM PROPERTY.

In this case, as explained in exception points “1” and “8” above, 1st property of rupees 40 million is exempted. 2nd property is chargeable to tax under INCOME FROM PROPERTY is exempt on deemed income.

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