How to Save Taxes on Property Taxes Transactions

When engaging in property transactions in Pakistan, whether buying or selling, it’s essential to understand the various taxes involved. While you pay certain taxes at the sale and purchase, there’s another significant tax to be aware of that comes later: Capital Gains Tax (CGT). This article clarifies this concept and outlines crucial considerations for property transactions.

Transaction Taxes (Sections 236C and 236K)

At the time of buying or selling property, both the seller and buyer are subject to transaction taxes under Sections 236C and 236K of the Income Tax Ordinance. These taxes are collected upfront, acting as a minimum tax.

• Section 236C (Seller): The seller pays tax on the property transaction value. The rate varies based on their filer status:
  • Filer: 3%
  • Late Filer: 6%
  • Non-Filer: 10%
• Section 236K (Buyer): Similarly, the buyer also pays tax on the property transaction value, with the same rate structure based on filer status:
  • Filer: 3%
  • Late Filer: 6%
  • Non-Filer: 12%

These transaction taxes (236C and 236K) are typically calculated on the higher of the Declared Collector (DC) rate or the Federal Board of Revenue (FBR) rate of the property.

Capital Gains Tax (CGT): Tax on Profit

It’s a common misconception to believe that paying 236C and 236K taxes at the time of transaction is the end of your tax obligations. However, CGT is levied on any profit (capital gain) you make from selling a property. Think of it like income tax on the profit from your property deal.

Key Change: Post-July 2024 Flat Rate

Crucially, the rules for Capital Gains Tax changed significantly after July 2024. Previously, Pakistan followed a slab system where the CGT rate decreased the longer you held the property. For properties bought before June 30, 2024, and sold:

• Within 1 year (open plot or constructed property): CGT was 15% of the profit.
• Within 2 years: CGT was 12.5% (and further reduced over time).
• After 6 years: No Capital Gains Tax.

However, for properties purchased on or after July 1, 2024, a new rule applies: a flat 15% Capital Gains Tax is levied on the profit, regardless of how long you hold the property. This means whether you sell after one year or ten years, the CGT rate on your profit remains constant at 15%.

Calculating Capital Gains Tax and Adjusting Transaction Taxes

Let’s illustrate with an example:

• Purchase Date: July 2024
• Purchase Value (DC/FBR Rate): PKR 5 million
• Sale Date: March 2025 (within the same tax year, ending June 30, 2025)
• Sale Value (DC/FBR Rate): PKR 7 million
• Profit (Capital Gain): PKR 2 million (7 million – 5 million)

1. Transaction Taxes Paid: You would have paid 236C and 236K taxes (at filer rates of 3% each) at the time of purchase and sale, based on the DC/FBR values. Let’s assume this totals PKR 360,000 (calculation details provided in the original text example).
2. Capital Gains Tax Calculation: As you made a profit of PKR 2 million, and the CGT rate is now a flat 15%, your CGT liability is: 15% of PKR 2 million = PKR 300,000.
3. Adjustment of Transaction Taxes: The transaction taxes you paid (236C & 236K) are considered “adjustable taxes.” This means they can be offset against your Capital Gains Tax liability. In this example, you paid PKR 360,000 in transaction taxes, and your CGT is PKR 300,000.
4. Refund or Payable: In this scenario, you’ve overpaid your taxes. You would be eligible for a refund of the excess PKR 60,000 (PKR 360,000 – PKR 300,000) from the FBR. Alternatively, this excess tax paid could potentially be adjusted against other income tax liabilities you may have.

Important Considerations for Minimizing Tax and Proper Documentation

• DC/FBR Rate vs. Actual Transaction Value: Often, properties are transacted at values higher than the DC/FBR rates. While taxes at the time of purchase and sale are paid on the DC/FBR rate, your actual profit might be higher if you bought and sold at rates exceeding these official valuations.
• Bank Transactions and Tax Returns: Tax authorities increasingly rely on bank statements to verify income and transactions. If your bank records show significantly higher purchase and sale amounts than declared at DC/FBR rates, the tax department may assess CGT based on the actual profit reflected in your bank statements.
• Documenting Actual Transactions: To avoid potential tax discrepancies and future notices, it’s advisable to conduct property transactions primarily through banking channels (cheques, pay orders, online transfers). While you might pay transaction taxes based on DC/FBR rates, having bank records that align with the actual transaction values can provide a clearer and more defensible picture for tax purposes, especially when calculating Capital Gains.
• Planning for Sales: With the flat 15% CGT rate, the timing of your property sale (holding period) is less critical for CGT minimization than it was under the old slab system. Focus should shift to accurate profit calculation and proper documentation of transaction values through banking channels.

Cash vs. Bank Transactions – The Limit :

Income Tax Ordinance Section 75A: This regulation mandates payments through banking channels for immovable property purchases exceeding Rs. 5 million.

Penalty for Non-Compliance: Paying cash above this limit attracts scrutiny and potential tax disadvantages.

Conclusion

Understanding Capital Gains Tax and its implications is crucial for property buyers and sellers in Pakistan, especially with the post-July 2024 changes. While transaction taxes (236C and 236K) are paid upfront, CGT on profits is a separate liability calculated at the end of the tax year. To ensure tax compliance and potentially minimize future tax burdens, proper planning, accurate record-keeping, and utilizing banking channels for property transactions are highly recommended. Consult with a tax advisor for personalized guidance based on your specific circumstances.