Deemed Income, Section 7E Explained Easy

The concept of deemed income on the capital assets held by a resident taxpayer was introduced by the insertion of section 7E in the Income Tax Ordinance 2001 which is effective from the tax year 2022 onwards.

A new section 7E has been inserted in the Income Tax Ordinance 2001 by the Finance Act 2022 describing the concept of deemed income.  According to this section, a resident person who has immovable capital assets having a fair market value of more than twenty-five million rupees will be considered to be deriving income from these assets. The deemed income on the capital assets will be taxed at the rate of 5% (specified in Division VIII-C of Part-I of the First Schedule) on the fair market value of the assets held on the last day of the tax year 2022 i.e. 30th of June 2022 excluding the following types of assets:-

(a) one capital asset owned by the resident person is not covered under the scope of this section;

(b) A capital asset that is owned and used by the taxpayer for the business activity and the person is an active taxpayer included in the list of ATL at any time during the tax year.

(c) Agricultural land that is owned and used by the person for agriculture. This does not include a farmhouse. A farmhouse for this section means a house (single unit) having a minimum covered area of 5000 square feet that is constructed on a total land of 2000 square yards or more.

(d)  A capital asset that is allotted to a Shaheed or dependents of a shaheed who belonged to the Armed Forces.

(e) Capital asset allotted to a person or his dependents who died or gets wounded during service of the Armed Forces or Federal or Provincial Government.

(f)  Capital assets owned by a person who is or was in service of Armed Forces, or Federal or Provincial Government and is original allottee certified by the allotment authority.

(g) Capital assets of immovable property from which income was derived and was tax payable thereon under the Ordinance

(f) Capital asset acquired by a taxpayer on which tax is paid under section 236K of the Ordinance is not covered under the scope of this section.

(h) Capital assets owned by a provincial government or a local government, local authority, a development authority,  builders, and developers who are registered with the Directorate General of Designated Non-Financial Businesses and Professions.

Capital Assets

 For the purpose of this section, the term capital asset means immovable property. It does not include any movable property, stock in trade, consumable stores, or raw material that is kept for being used in the business activity.  Any Shares, securities, and stocks are also not included in this section’s meaning of capital assets. The capital assets also do not include assets on which depreciation or amortization is allowed under sections 22 and 24 of the Ordinance respectively.

Federal Government may include or exclude any person, property, or asset under the scope of this section.

Interim Relief

Supreme Court has granted interim relief on deemed income tax imposed through section 7E by an order on 22nd March 2023. For details, click on the following link:-

Interim Relief on Deemed Income Tax By Supreme Court