How is the capital gain on a property sale calculated, and which costs can I deduct?

What does the law say?

The gain on selling a property is a subtraction. Section 37(2) of the Income Tax Ordinance, 2001 sets the formula A - B, where A is the consideration received on disposal and B is the cost of the asset. Section 37(1A) then taxes that gain at the rates in Division VIII of Part I of the First Schedule.

Each side of the formula has its own rules.

A, the consideration received. Section 77(1) says it is the total amount received for the asset “or the fair market value thereof, whichever is the higher”, including the value of anything received in kind. For property, section 68(6) adds a floor: component A of the section 37(2) formula “shall not be less than” the fair market value determined under section 68(4) (a value notified by the Board in the official Gazette for an area) or section 68(5) (where no such notification covers the area, the value fixed by the District Officer (Revenue) or other authority for stamp duty). Explanation (2) to section 68(6) says that where that value differs from an auction price, the higher of the two applies.

B, the cost. Section 76(2) says the cost of a purchased asset is the sum of:

Item	Section 76(2) wording, summarised
Purchase price	total consideration given, including the fair market value of anything given in kind
Incidental costs	incidental expenditure incurred in acquiring and disposing of the asset
Improvements	expenditure incurred to alter or improve the asset

Items (b) and (c) are left out if they have already been fully allowed as a deduction. If you built the property yourself, section 76(4) makes the cost the total cost of construction plus the same incidental and improvement items. Section 37(4) also keeps out of B any expenditure that is or may be deducted under another provision of the same chapter.

How does it work in practice?

Notice that selling costs go into B, not A. The formula takes the full sale figure as A and adds the costs of disposing of the property to the cost side. The result is the same as netting them off the price.

One condition can remove the purchase price from cost altogether. Section 75A(1) says no person shall buy immovable property with a fair market value above five million rupees other than by crossed cheque, crossed demand draft, crossed pay order, another crossed banking instrument or digital means. Under section 75A(3)(b), if the purchase was not made that way, the amount “shall not be treated as cost” under section 76 when working out the gain on a later sale.

Worked example (illustrative figures)

Sana bought a flat in Karachi in August 2024 for Rs. 12,000,000, paid through a bank transfer, and paid Rs. 300,000 in incidental costs at purchase. She spent Rs. 800,000 remodelling the kitchen and bathrooms. In September 2026 she sells for Rs. 16,000,000 and pays Rs. 160,000 in selling costs. The notified value for the flat is Rs. 14,500,000. She is on the Active Taxpayers’ List.

1. A. She received Rs. 16,000,000, which is higher than the Rs. 14,500,000 notified value, so A = Rs. 16,000,000.
2. B. Rs. 12,000,000 + Rs. 300,000 + Rs. 160,000 + Rs. 800,000 = Rs. 13,260,000.
3. Gain. Rs. 16,000,000 - Rs. 13,260,000 = Rs. 2,740,000.
4. Rate. The flat was acquired after 1 July 2024 and she is on the Active Taxpayers’ List on the date of disposal, so Division VIII column (6) gives 15%.
5. Tax. 15% of Rs. 2,740,000 = Rs. 411,000, for tax year 2027.

Now change one fact: the deed shows Rs. 13,500,000 instead. Section 68(6) lifts A to the Rs. 14,500,000 notified value. The gain becomes Rs. 14,500,000 - Rs. 13,260,000 = Rs. 1,240,000, and tax at 15% is Rs. 186,000. The lower deed price does not lower A below the notified value.

What if I sell only part of the property?

Section 76(7) deals with this. Where part of an asset is disposed of, the cost is apportioned between the part kept and the part sold “in accordance with their respective fair market values determined at the time the person acquired the asset”. So if you split a plot and sell half, B for the half you sell is its share of the original cost, measured by values at the date you bought, not by area alone.

What if the property was bought before July 2024?

The formula is the same. Only the rate changes: Division VIII taxes property acquired on or before 30 June 2024 by holding period and type, and several of those rates are 0. See the linked page on older property.

Common mistakes

• Using the deed price when the notified value is higher. Section 68(6) sets the notified or stamp duty value as a floor for A.
• Leaving out selling costs. Section 76(2)(b) covers expenditure incurred in disposing of the asset as well as acquiring it.
• Counting cash purchases. Where the fair market value was above five million rupees and the price was paid in cash, section 75A(3)(b) says that amount is not treated as cost.
• Adding everyday repairs. Section 76(2)(c) speaks of expenditure to “alter or improve” the asset. The text does not mention routine maintenance.

What to check in the official text

Read section 37(2) and (4), section 68(4) to (6) with its explanations, section 76(2) and (4), section 77(1) and section 75A. The valuation figures themselves come from Board notifications and provincial stamp duty tables, which are not part of this corpus, so check the value that applied on your sale date with the relevant authority. Rates are in Division VIII of Part I of the First Schedule.