Tax on deemed income:
Tax on deemed income under section 7E is inserted through finance act, 2022 which required that from tax year 2022 every resident person shall pay Tax on on capital assets (whose total fair market value(FMV) exceed 25 million rupees) held by the person on last day of tax year i.e 30 June, 2022.
The Income Tax under section 7E is not applicable in the following cases.
- The resident person owned only one capital asset.
- self-owned business premises for business and name of the person appeared in active taxpayer list(ATL) of the current tax year.
- Self-owned agriculture land used for agriculture purpose but excluding farmhouses
- A Shaheed or dependents of a shaheed belonging to Pakistan Armed Forces, an ex-serviceman or Federal and provincial governments.
- Any property from which is already subject to income tax and the taxes are paid to the FBR.
- The advance tax has been paid under section 236K on the capital assets purchased during the current fiscal year.
- The fair market value(FMV) of the capital assets in aggregate not more than 25 million rupees.
How to calculate Tax on deemed income?
The formula for calculation is 5 % X fair market value(FMV) of capital assets X the rate of tax (20%) Or Fair Market Value(FMV) Of Capital Assets X Effective Rate of Income Tax (1%)
For example, if a person owns a capital asset of 30 million, the Deemed Income will be (30 million x 5% = 1,500,000) and the tax paid on deemed income is 300,000. The effective rate of income tax is 1% (30 million x 1%= 1,500,000).
Case 1: A Person owns Single property with a fair market value of Rs. 28 million
In this Scenario the person owns only one capital asset which is exempted from tax. Although the fair market value of 25 million rupees but the said property is exempted from tax on deemed income therefore no tax is payable.
Case 2: A Person Commercial property used for business with a fair market value of Rs. 30 million and his name appeared in ATL
In this Scenario the person owns a capital asset of of Rs. 30 million , as the said property is self –owned and used for business purpose therefore exempted from tax on deemed income.
Case 3: A Person owns a property with a fair market value of Rs. 28 million and taxes has already been paid on property income
In this Scenario no tax on deemed income is payable as the income tax is already been paid on property income earned from this capital asset. Therefore, this person not required to pay any tax on deemed income.
Case 4: A person owns two properties, one has a fair market value of 28 million Rupees and the other has a fair market value of 30 million Rupees
In this Scenario the aggregate value of total capital assets is 58 million, however as per rule one capital assets is exempted, therefore one property of which has valued as 30 million Rupees can have excluded from deemed income and other property can be taxed. The tax can be calculated as follows.
Deemed Income: 2,800,000 x 5% = 1,400,000
Tax payable = 1,400,000 x 20%= 280,000
Or 1% x 2,800,000 = 280,000
Declaration for deemed income :
According to FBR notification, regardless of whether the total value of capital assets does not exceed 25 million rupees, every taxpayer is required to file Declaration for deemed income along with income tax returns form, the declaration form is annexed to the tax return form later in November 2022. As a result, taxpayers who filed their tax returns prior to October 2022 must file a Declaration for deemed income separately.