Tax on Capital Gain Simplified

Profit or gains which arise from the transfer of capital assets from one person to another is a capital gain. There is no any other acts in Nepal in relation to the Capital Gains. It has been covered in the Income Tax Act itself. Generally, people are confused with the Land Revenue Tax (Malpot Registration Tax) and the capital gain tax in relation to sales of land and building.

In Nepal, the Land Revenue Taxes is to be paid as per the acts governed by the provincial governments. The Malpot Registration Tax can differ from once provinces to another. Whereas, tax on capital gain is governed by the Federal government and has been included in the Income Tax Act, 2058.

Applicability’s

The capital gain tax is levied in any of the sales of Non-Business Chargeable Asset except in the following circumstances:

I. In case of Land & Buildings (Ghar & Jagga)

·        Having ownership of more than 10 years continuously and

·        Having resided for 10 more years continuously or intermittently and

·        Area of Land is upto 1 Ropani.

Examples:

1. When an owner of the land & building has gone to abroad for more than 10 years, then the tax will be levied on the gain on sale.

2. If an individual has a land of 5 Ropani’s, tax is levied on 4 ropani and exempt for 1 ropani on the total sales as per understanding above.

II. Land, land & Building of a natural person disposed at less than Rs.10 Lakhs.

For Example: the purchase value of land/building is Rs.3 Lakhs and it has been sold on Rs.9 L, then gain of Rs.6 Lakhs is exempt from the capital gain tax.

III. Transfer of ownership of Land/Land & Building within three generation, except as a result of sales/purchase.

Example: While doing Ansha Banda between father and son- it is exempt. But if there is sale or purchase between them, it would be taxable.[i.e. transfer by the way of Rajinama pass in the Land Revenue Office]

Tax Rates

I. On Disposals of Land

Land & Buildings except above are subject to advance tax as follows:

1.     If owned for less than 5 years by a natural person: 5% of gain.

2.     If owned for more than or equal to 5 years by a natural person: 2.5% of gain.

3.     For Entity: 1.5% on disposal value. Example cost of purchase is Rs.1cr and sales price is also 1cr, then 1.5% of 1cr would be the tax amount though not being gain on sales.

II. On Disposals of Listed Securities: NEPSE

1.     For Resident Natural Person: 5% on gain.

2.     For Resident Entity Dealing Securities: No TDS. Later, it will show in the income and taxed normally.

3.     For Resident Entity Not Dealing Securities: 10% on Gain.

4.     Others: 25% on gain.

Practically, brokers are made responsible for collecting the advance tax.

III. On Disposals of Unlisted Securities

1.     For Resident Natural Person: 10% on gain.

2.     For Resident Entity Dealing with Securities: 15% on gain.

3.     For Resident Entity Not Dealing with Securities: 25% on gain

4.     Others: 25% on gain

Here, the company whose shares is being sold is held responsible for deducting the taxes.And the office of company registrar shall obtain the proof of deposit of advance tax before recording the shareholder’s register.

Collection of advance tax is not required in any of the following conditions on disposal of securities:

a.     Where the disposed securities were owned by Mutual Fund.

b.     Where the entity is resident entity involved in transaction of securities after registration pursuant to prevailing law.

IV. Disposal of Depreciable Assets

            Any kinds of gain on depreciable assets is not taxed as per the income tax act, neither any losses on disposal of depreciable assets can be set off from the income according to the income tax act. Disposal of depreciable assets is to be deducted from the respective pool of assets. It is taxed only when the whole block of assets is disposed.

The disposal of depreciable assets has been shown under this topic only for understanding more clearly.

How to calculate Gain on Disposal of Business Assets?

Gain on Disposal=Incomings – Outgoings.

Incoming includes: Incomings at the time of purchase of assets, at the time of holding of assets and at the time of disposal of assets.

Outgoing includes: Outgoings at the time of purchase of assets, holding of assets and disposal of assets.

In case of listed securities, weighted average method shall be used for determining the outgoings.

Income Tax Return Filing of Gain on Disposals

Where the income of a natural person only include the gains occurred from the disposal of Non Business Chargeable Assets (NBCA), it is not mandatory to file the income tax return though being the income more than Rs.40 Lakhs. NBCA means land, building, securities or interest as per general understanding. But if an individual also has the other sources of income (e.g. salary, business income) including the gains from disposal of NBCA, it is mandatory to file the income tax returns.

The income tax return is to be filed by the individual after showing the income from investment to such gains. Since, tax on gains on such disposal (i.e. disposal of land) is not final withholding, it has to be included in the return of an individual.

In case of entities, the net gains is to be included in the income tax return and taxed normally using corporate tax rates as prescribed.