10. What is Capital Gains Tax?

Just like your salary, the return earned from investing in Stocks is also subject to taxation by the Government of Pakistan. An investor has to pay taxes on both Dividends and Capital Gains in Pakistan. Before looking at the tax structure, lets understand some terminology:

  • Holding Period: In the Investment world, Holding Period reflects the amount of time you intend to keep your money invested in a security. For example, Ali purchased a house in December 2017 for Rs. 1 Million. He sold this house for Rs. 2 Million in June 2018. His Holding Period for the investment (house) was 6 months. Holding Period can be stated in days, months or years depending on the circumstances. The Government of Pakistan specifies Holding Period for investment in stocks in ‘months.’
  • Acquisition Date: For the purpose of calculation of taxes, its important to record the acquisition date of stocks. Applicable tax rates can vary with the date of acquisition of stocks in Pakistan.
  • Disposal Date: Disposal Date is the date of sale of stock. Record of Disposal Date is important to calculate the Holding Period of an investor.
  • Filer/Non-Filer: Filer refers to a tax payer whose name appears on the list of “Active Taxpayers” issued by the Federal Board of Revenue, Pakistan. If you don’t file taxes, you will be termed as a Non-Filer and may have to pay higher taxes (a penalty) on return earned on your investment in stocks.  

10.1. Tax Structure for the Year 2018

Holding Period

Acquisition Date

 

Before July 1st, 2016

After July 1st, 2016

 

Filer

Non-Filer

Filer

Non-Filer

Less than 12 months

15%

18%

15%

20%

12 months or more but less 24 months

12.5%

16%

15%

20%

24 months or more but the security was acquired on or after July 1st, 2013

7.5%

11%

15%

20%

Security was acquired before July 1st, 2013

0%

0%

0%

0%

 

Based on the information presented in the chart above, following deductions can be made:

  • Government gives you a break on long-term capital gains. In this case, the tax rate is 0% if the Holding Period is over 4 years i.e. stock was purchased before July 1st, 2013.  
  • The tax rates for Filers are lower than tax rates for Non-Filers.
  • Ali who purchased stock on July 1st, 2016 and held on to it for over 2 years will pay lower taxes (tax rate of 7.5%) compared to Ahmad who purchased the stock on the same date but sold it in 6 months (tax rate of 15%).

The earlier you acquired the security and the higher the Holding Period, the lower the applicable tax rate.

10.2. Tax on Dividends

Of course, it’s not just Capital Gains! Investors also have to pay taxes on Dividends, if any. As of 2018, tax-filers have to pay 15% tax on Dividends while non-filers will have to pay 20% tax on Dividends.