CAF-2 · Chapter 9
Capital Gains MCQs with Answers
15 multiple-choice questions on Capital Gains for CAF-2 Taxation Principles and Compliance. Try each one before revealing the answer and explanation.
Practise this chapter interactivelyQuestion 1
Under Section 37(5), which of the following assets is specifically INCLUDED in the definition of a "capital asset"?
- A) A) Stock-in-trade held for the purpose of business.
- B) B) A personal motor vehicle used by the taxpayer's family.
- C) C) A painting or work of art kept for personal use.
- D) D) A depreciable asset used in the taxpayer's business.
Show answer & explanation
Answer: C) C) A painting or work of art kept for personal use.
Capital asset excludes movable property held for personal use, EXCEPT for specific items like a painting, sculpture, drawing, jewelry, rare manuscript, postage stamp, coin, medallion, or antique. Thus, a painting remains a capital asset even if held for personal use.
Question 2
Which of the following scenarios does NOT constitute a "disposal" of an asset under Section 75 of the Income Tax Ordinance, 2001?
- A) A) The transmission of an asset by succession or under a will.
- B) B) The application of a business asset to personal use.
- C) C) The cancellation, redemption, or destruction of an asset.
- D) D) Pledging an asset as collateral to secure a bank loan.
Show answer & explanation
Answer: D) D) Pledging an asset as collateral to secure a bank loan.
Pledging an asset as collateral does not mean the owner has parted with the ownership. Disposal involves selling, exchanging, transferring, transmitting by succession, or applying a business asset to personal use.
Question 3
Mr. Zaid sold an antique coin collection at a loss of Rs. 80,000 and his wife's jewelry at a gain of Rs. 150,000 during the tax year. What is the net capital gain chargeable to tax?
- A) A) Rs. 70,000
- B) B) Rs. 150,000
- C) C) Rs. 230,000
- D) D) Nil
Show answer & explanation
Answer: B) B) Rs. 150,000
According to Section 38(5), no loss is recognized on the disposal of specific capital assets such as a painting, jewelry, coin, medallion, or antique. Therefore, the loss of Rs. 80,000 on the coin collection cannot be deducted, and the full gain of Rs. 150,000 on the jewelry is taxable.
Question 4
If a taxpayer sustains a general capital loss (under Section 59) during a tax year that cannot be fully set off, what is the maximum period it can be carried forward?
- A) A) It cannot be carried forward.
- B) B) Up to 3 immediately succeeding tax years.
- C) C) Up to 6 immediately succeeding tax years.
- D) D) Indefinitely.
Show answer & explanation
Answer: C) C) Up to 6 immediately succeeding tax years.
The amount of capital loss which cannot be set-off shall be carried forward up to six (6) tax years immediately succeeding the tax year for which the loss was first computed. (Note: For losses on *securities* under Sec 37A, the carry-forward period is 3 years).
Question 5
For an active taxpayer, what is the capital gains tax rate on the disposal of an immovable property acquired on or after 1 July 2024?
- A) A) 0% if held for more than 6 years.
- B) B) 10% regardless of the holding period.
- C) C) 15% regardless of the holding period.
- D) D) Taxed at normal progressive slab rates.
Show answer & explanation
Answer: C) C) 15% regardless of the holding period.
For properties acquired on or after 1 July 2024, a flat rate of 15% applies for persons appearing on the Active Taxpayers' List, completely regardless of the holding period.
Question 6
A resident active taxpayer purchased 10,000 shares of a listed company. He later disposed of these shares through a private arrangement (off-market), and the transaction was NOT settled through the National Clearing Company of Pakistan Limited (NCCPL). How will the capital gain on these shares be taxed?
- A) A) It will be taxed as a separate block of income at 15%.
- B) B) It will be taxed under the Normal Tax Regime (NTR) at applicable progressive slab rates.
- C) C) It will be completely exempt from tax.
- D) D) It will be taxed at a flat rate of 12.5%.
Show answer & explanation
Answer: B) B) It will be taxed under the Normal Tax Regime (NTR) at applicable progressive slab rates.
A proviso in Section 37A states that the disposal of listed company shares made *otherwise* than through a registered stock exchange and NOT settled through NCCPL falls outside the ambit of Section 37A (Separate Block) and is instead taxed under Section 37 under the Normal Tax Regime (NTR).
Question 7
When a capital gain arises on a "Market-Based Transaction" of a security (settled through NCCPL), how are incidental expenses like brokerage and commission treated for calculating the gain?
- A) A) Actual brokerage and commission expenses paid are deducted from the sale proceeds.
- B) B) No deductions for expenses are allowed under any circumstances.
- C) C) A notional expense equal to 0.5% of the sale proceeds and 0.5% of the security's cost is applied instead of actual charges.
- D) D) A flat fixed deduction of Rs. 10,000 is allowed.
Show answer & explanation
Answer: C) C) A notional expense equal to 0.5% of the sale proceeds and 0.5% of the security's cost is applied instead of actual charges.
In the case of a Market-Based Transaction involving a security, a notional expense equal to 0.5% of the sale proceeds and 0.5% of the security's cost will be applied instead of actual charges like brokerage, commission, and other incidental expenses.
Question 8
Mr. Tariq sold a specific listed security at a significant loss. Two weeks later, he repurchased the exact same security to maintain his portfolio risk profile while artificially realizing the capital loss to reduce his tax liability. What is this transaction called, and is the capital loss admissible?
- A) A) Tax swap sale; the loss is admissible.
- B) B) Cross trade; the loss is inadmissible.
- C) C) Wash sale; the loss is inadmissible.
- D) D) Short selling; the loss is admissible.
Show answer & explanation
Answer: C) C) Wash sale; the loss is inadmissible.
This is defined as a "Wash Sale" (where a capital loss is realized and the same security is purchased within a one-month period by the same investor to maintain the portfolio). Under Rule 13F, capital loss adjustments for Wash Sales are not admissible.
Question 9
Mr. A acquired shares in a private (unlisted) company. Under Section 37(6), what is his obligation regarding withholding tax at the time of paying the seller or registering the shares?
- A) A) He must deduct advance adjustable tax at the rate of 10% of the fair market value of the shares.
- B) B) He must deduct tax at 15% of the actual capital gain earned by the seller.
- C) C) No withholding tax applies to the sale of private company shares.
- D) D) He must deduct tax at 5% of the face value of the shares.
Show answer & explanation
Answer: A) A) He must deduct advance adjustable tax at the rate of 10% of the fair market value of the shares.
The person acquiring a capital asset, being shares of a company (other than listed company shares settled through NCCPL), shall deduct advance adjustable tax at the rate of 10% of the fair market value of the shares at the time of payment or registration, whichever is earlier.
Question 10
Under Section 7E, resident persons are subjected to a tax on the "deemed income" arising from their capital assets (immovable property) situated in Pakistan. How is this deemed income and the corresponding tax computed?
- A) A) Deemed income is 10% of FMV; taxed at 15%.
- B) B) Deemed income is 5% of FMV; taxed at 20% (Effective tax of 1% of FMV).
- C) C) Deemed income is 20% of FMV; taxed at 5%.
- D) D) Deemed income is equal to the annual fair market rent; taxed at standard slab rates.
Show answer & explanation
Answer: B) B) Deemed income is 5% of FMV; taxed at 20% (Effective tax of 1% of FMV).
Deemed income shall be computed as 5% of the Fair Market Value (FBR/DC rate) of capital assets situated in Pakistan. The rate of tax on such deemed income is 20%, which translates into an effective tax of exactly 1% of the property's Fair Market Value.
Question 11
Which of the following immovable properties is NOT excluded from the levy of tax on deemed income under Section 7E?
- A) A) One immovable property owned by the resident person.
- B) B) Self-owned business premises from where the business is carried out by an active taxpayer.
- C) C) A vacant residential plot worth Rs. 40 million, which is the person's second property and not rented out.
- D) D) Self-owned agricultural land where agricultural activity is carried out.
Show answer & explanation
Answer: C) C) A vacant residential plot worth Rs. 40 million, which is the person's second property and not rented out.
The vacant residential plot (which is a second property, not rented out, and exceeds the Rs. 25 million aggregate threshold) does not meet any of the exclusion criteria under Section 7E and will be subject to the deemed income tax.
Question 12
Mr. Junaid sold his personal use car for Rs. 2,000,000, which he had originally purchased for Rs. 1,500,000. He also sold an antique watch for Rs. 150,000, which his mother had gifted him (her original cost was Rs. 50,000). What is his total taxable capital gain?
- A) A) Rs. 500,000
- B) B) Rs. 600,000
- C) C) Rs. 100,000
- D) D) Nil
Show answer & explanation
Answer: C) C) Rs. 100,000
A personal vehicle is specifically excluded from the definition of a capital asset, so the Rs. 500,000 gain on the car is exempt. The antique watch is a capital asset. For assets acquired by gift from a relative, the original cost of the transferor (Rs. 50,000) is taken as the cost. Capital gain = 150,000 - 50,000 = Rs. 100,000.
Question 13
Mr. X purchased an open commercial plot having a fair market value of Rs. 12,000,000. He paid Rs. 6,000,000 through a crossed banking instrument and the remaining Rs. 6,000,000 in physical cash. Under Section 75A, what are the tax implications for computing capital gains upon future disposal?
- A) A) The entire Rs. 12,000,000 will be allowed as the cost of acquisition.
- B) B) The Rs. 6,000,000 paid in cash shall not be treated as cost, and he must pay a penalty of 5% of the FMV/DC rate.
- C) C) The transaction is completely void, and no capital gain or loss will ever be recognized.
- D) D) The cash portion will be taxed as 'Income from Other Sources'.
Show answer & explanation
Answer: B) B) The Rs. 6,000,000 paid in cash shall not be treated as cost, and he must pay a penalty of 5% of the FMV/DC rate.
Under Section 75A, purchasing immovable property having a value greater than Rs. 5 million in cash means the cash amount shall not be treated as cost for computing gain on sale, and the person shall pay a penalty of 5% of the FBR value or DC rate (whichever is higher).
Question 14
Mr. Ali inherited 5,000 shares of a listed company from his father on 1 July 2025. His father was the original allottee of these shares at Rs. 10 per share. The fair market value of these shares at the time of inheritance was Rs. 15 per share. Mr. Ali sold these shares on 30 January 2026 for Rs. 20 per share via NCCPL. What cost will be used to compute Mr. Ali's capital gain?
- A) A) Rs. 10 per share (the original cost to his father).
- B) B) Rs. 15 per share (the FMV at the time of inheritance).
- C) C) Rs. 20 per share.
- D) D) Nil, because inherited assets have zero cost.
Show answer & explanation
Answer: A) A) Rs. 10 per share (the original cost to his father).
For assets acquired by inheritance or gift from relatives, there is no acquisition cost for the person acquiring the asset. Therefore, the original cost of the transferor (the father's cost of Rs. 10 per share) is treated as the cost of the asset for computing the capital gain.
Question 15
A taxpayer sustains a loss on the disposal of listed securities (settled via NCCPL). Under the rules for Section 37A, what is the maximum carry-forward period for this specific loss?
- A) A) It cannot be carried forward at all.
- B) B) Up to 3 immediately succeeding tax years.
- C) C) Up to 6 immediately succeeding tax years.
- D) D) Indefinitely.
Show answer & explanation
Answer: B) B) Up to 3 immediately succeeding tax years.
Loss sustained by a person on the disposal of securities (under Sec 37A) can only be carried forward up to three (3) tax years immediately succeeding the tax year for which the loss was first computed. (General capital losses under Section 59 have a 6-year limit).