Is there any capital gains exemption if I sell my only house or buy another one with the money?

What does the law say?

Section 37(1A) of the Income Tax Ordinance, 2001 charges the gain on disposal of immovable property in Pakistan at the rates in Division VIII of Part I of the First Schedule. It does not distinguish between a family home, a second house, a plot or a rental flat. Division VIII sets rates by holding period and type for property acquired on or before 30 June 2024, and a flat 15% for persons on the Active Taxpayers’ List for property acquired on or after 1 July 2024. Neither part of the table mentions the owner’s residence or what the seller does with the money.

The provision that comes closest to rollover relief is section 79, the non-recognition rules. Section 79(1) lists six situations in which no gain or loss arises on disposal of an asset. Only one involves reinvestment:

(d) by reason of the compulsory acquisition of the asset under any law where the consideration received for the disposal is reinvested by the recipient in an asset of a like kind within one year of the disposal;

A voluntary sale to a buyer is not a compulsory acquisition, so buying a new home with the proceeds does not bring a normal sale inside clause (d).

How does it work in practice?

Ordinary sale. The gain is worked out under section 37(2) as consideration received minus cost, and the Division VIII rate applies. Buying another house afterwards does not change that figure.

Compulsory acquisition. If a government body acquires your property under a law, for example for a road, and you reinvest the compensation in an asset of a like kind within one year, no gain arises. Section 79(4) then sets the cost of the replacement as the cost of the old asset plus any amount by which the price of the replacement exceeds the compensation received. In effect, the untaxed gain is carried into the new property. The Ordinance does not define “like kind”, so whether, for example, a plot replaces a house is not settled by the text.

Older holdings. For property acquired on or before 30 June 2024, time itself can bring the rate to 0: after four years for constructed property, two years for flats and six years for open plots. That applies to everyone, not only homeowners.

Worked example (illustrative figures)

Farhan bought a house in Rawalpindi in September 2024 for Rs. 20,000,000. He sells it in November 2026 for Rs. 25,000,000 and buys a larger house for Rs. 30,000,000. Ignore incidental costs, assume the sale price is not below the notified value, and assume he is on the Active Taxpayers’ List.

1. Gain. Rs. 25,000,000 - Rs. 20,000,000 = Rs. 5,000,000.
2. Rate. Acquired after 1 July 2024, filer on the date of disposal: 15%.
3. Tax. 15% of Rs. 5,000,000 = Rs. 750,000. The Rs. 30,000,000 purchase does not reduce it.

Now suppose instead the Rawalpindi house was compulsorily acquired under a law for Rs. 25,000,000 in compensation, and Farhan bought the Rs. 30,000,000 house within one year.

1. Gain recognised. None, under section 79(1)(d).
2. Cost of the new house. Rs. 20,000,000 (old cost) + (Rs. 30,000,000 - Rs. 25,000,000) = Rs. 25,000,000, under section 79(4).

When he later sells the new house, the gain is measured from Rs. 25,000,000, not Rs. 30,000,000.

What if I have lived in the house for fifteen years?

Clause (104A) of Part IV of the Second Schedule says section 4C does not apply to capital gain from the disposal of one residential immovable property if it has been in the person’s personal use for the last fifteen years, has been declared in the person’s wealth statement for the last fifteen years, and appears as the person’s residence in their tax record. It applies once in fifteen years. Section 4C is super tax on high earning persons, so this clause keeps that gain out of super tax. It does not exempt the gain from capital gains tax under section 37(1A).

What if the house was allotted to me as a government or armed forces employee?

Clause (9A) of Part III of the Second Schedule reduces, rather than removes, the capital gains tax on the first sale by an original allottee who is an ex-serviceman, serving member of the Armed Forces, or a serving or former Federal or Provincial Government employee, certified by the allotment authority. The reduction is fifty percent, or seventy-five percent for gains arising after three years from acquisition.

Common mistakes

• Expecting a principal residence exemption. Neither section 37 nor Division VIII contains one.
• Treating any reinvestment as rollover. Section 79(1)(d) is limited to compulsory acquisition under a law, with reinvestment in a like asset within one year.
• Reading clause (104A) as a capital gains exemption. It refers only to section 4C super tax.

What to check in the official text

Read section 37(1A), all of section 79(1) and (4), and Division VIII of Part I of the First Schedule. For the fifteen-year residence condition, read clause (104A) of Part IV of the Second Schedule, and for original allottees clause (9A) of Part III. Provincial property taxes and stamp duty are outside this corpus and are not covered here.