What is Capital Gain?

Capital Gain known as the increase in overall value of capital assets. In other words, its a profit gained on selling a capital assets. Real Estate Property, Stocks, Bonds, and other collectibles are basically comes under the category of  capital assets. It offers a higher value when there is a difference between high selling price and low purchase price. Meanwhile, Capital Loss occurs when purchasing price is higher than selling price.

Capital gains also linked to the several other profits linked with “investment income” in the form of cash flow or passive income. It includes financial assets such as stocks, funds or bonds because of their direct relation with price value. Meanwhile, it must be noted that capital gains is realized only after sale of assets.

Short-term & Long-term Capital Gain

Short-term capital gains and long-term capital gains is dependent upon the holding time period of capital assets or specifically property before its selling.

Short term capital gains are acquired when you sell your capital asset you owned for less than a year or so. Meanwhile, long term capital gains are the one comes from selling capital asset you had for more than a year.

Read More : Calculate Return On Investment

How to Calculate the Capital Gain

In order to calculate capital gain in a Real Estate precinct, you need to find adjusted cost basis first. Adjusted cost basis has 3 components:

• Original purchase price
• Closing cost
• Cost of repairing or maintenance

Furthermore, sale basis known as actual amount you received in return for property.  Following formula is used for calculating capital gain

Capital Gain=Sale Basis–(Adjusted Cost Basis + Actual cost of the property)

This is the most easiest way to find capital gain for your property.

Capital Gain Tax (CGT)

Capital Gain tax is amount paid to the Federal Government of Pakistan on the profit made as capital gain. Its not incurred to the whole selling price but just profit. So, ultimately you are bound to deposited this amount at the time of your annual tax returns. Following are the main points you must consider as an investor about Capital Gain tax system in Pakistan:

• 1^st year of purchase | 10% of your profit
• 2^nd year of purchase | 7.5% of your profit
• 3^rd year of purchase | 5% of your profit
• 4^th year of purchase | 0% of your profit
• Property purchased before 1^st July 2016 and sold within 3 years, 5% of profit will go as a tax
• In addition, 0% CGT will be paid to martyred dependent and army officers benefit plots