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Budget 2021 Tax Amendments: Impact on Real Estate Sector in Pakistan

real estate tax policies in budget 2021

The government of Pakistan announced the annual federal budget for fiscal year 2021-22 on 11th June, 2021. According to the government officials, this budget is aimed at the betterment and stability of real estate sector. New reforms are proposed to improve the standards and economic growth of this sector.

Budget 2021 announced relief for the real estate and construction sector. Special funds are allocated, and taxes are reduced to boost this sector as it acts as a backbone of Pakistan’s economy. The government’s spokesperson mentioned this relief as an effort to improve real estate businesses so they can flourish, enhance the economic growth and create job opportunities.

However, where numerous steps are taken by the government for improving real estate and construction sectors, the capital gains tax ratio is increased significantly. Capital Gains Tax is the amount you have to pay on your gain/profit if your property is sold before 4 years.

Keeping a close eye on the tax policies is very crucial in the real estate business.  These policies give you a clear insight into the future budget plans of the government. Moreover, you can make a more intelligent investment after getting sufficient knowledge.

Here is the new Capital Gains Tax ratio in Budget 2021

  • You have to pay 3.5% tax instead of 2.5% on earning less than 5 million profits by selling a property in less than 4 years.
  • If the profit margin of your property is more than 5 million and less than 10 million, you’ll have to pay 7.5% tax if the property is sold before 4 years of purchase. Notice that this ratio was 5% in the past.
  • If the profit lies between 10 million to 15 million, you have to pay 10% instead of 7.5% CGT (Capital Gains Tax) if you sell your property before 4 years time limit.
  • Finally, if the profit gain is above 15 million, 15% CGT will be applicable.

These are the tax policies in the fiscal budget 2021-2022 that are likely to impact the real estate sector. These policies will mainly affect the people selling their properties before 4 years of purchasing.

Effect of New Tax Policies on Real Estate

As far as the real estate sector is concerned, these changes of CGT will affect this sector to some extent but won’t generate alarming outcomes. These taxes are more likely to increase in the coming years. Above-mentioned CGT increase will not affect you if you are not planning to sell your property within 4 years of purchasing.

New Rental Income Tax Ratio in Budget 2021

According to the amendments in budget 2021, all the rental income will be taxed annually. Rental income tax is reduced in the current budget, and the new tax policy is as follows:

  • No tax will be applicable on your rental income on the first 0.3 million (3 lac).
  • If your rental income falls between 0.3 million (3 lac) to 0.6 million (6 lac), a total of 5% tax will be implemented.
  • In case of rental income between 0.6 million (6 lac) to 2 million, the same policy will be followed on first 0.3 millions (no tax), then 5% tax on income from 0.3 million (3 lac) to 0.6 million (6 lac). Moreover, a 10% tax will be implemented on the income of more than 0.6 million.
  • For payments above 2 million, the same process will be implemented till 2 million, and an additional 25% will be applicable after 2 million.

Relief for the Real Estate and Construction Sectors

The government has also announced relief for the real estate sector. Special funds have been allocated for construction and real estate sectors so that they can generate more income, create job opportunities and boost the economic growth of the country.

Tax Relief Announced in Fiscal Budget

Following are some amendments to relieve real estate and construction sectors which promise positive impact:

  • The FED (Federal Excise Duty) is reduced from 2 Rs per kg to 1.75 Rs per kg on cement purchases.
  • Tax rates have been reduced for capital gains.
  • No CGT is applicable if a property is sold after 4 years of purchasing. The minimum time frame from tax exemption is reduced from 8 years to 4 years, which is a big step.
  • CGT on property sales is set to reduce by 25% with each passing year.
  • The source of income spent on development and construction is not required to be declared to the government (applicable for people involved in the development and construction sector). A fixed amount of tax is implemented on developers.
  • People with low income can avail themselves of a 90% reduction in taxes on purchasing a house.
  • A subsidy of 30 billion Rs is provided to Naya Pakistan Housing Authority to provide houses to the people at low prices.

How Budget 2021 will be beneficial for the real estate sector?

  • FBR-approved construction projects will benefit from this budget because it allows the first buyers to purchase property without the declaration of the income source till 31st March 2023 through the amnesty scheme.
  • New infrastructural projects launched under PSDP (Public Sector Development Program) will support new or old societies struggling to develop.
  • Tax rate is lowered for rental income and it is likely to be reduced further in future.

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