Introduction
With the expansion of Pakistan’s financial markets, investment in debt instruments such as Pakistan Investment Bonds (PIBs), Treasury Bills, and corporate bonds has become an integral part of diversified portfolios. To ensure transparent taxation of profits arising from these securities, the legislature introduced Section 151A into the Income Tax Ordinance, 2001.
This provision mandates withholding of tax at source on capital gains realized from the disposal of certain debt securities. It applies primarily to banks and custodians maintaining Investor Portfolio Securities (IPS) accounts on behalf of investors.
Exact Text of Section 151A Gain Arising on Disposal of Certain Debt Securities
“151A. Gain arising on disposal of certain debt securities.— (1) Every custodian of debt securities including a banking company responsible to maintain Investor Portfolio Securities (IPS) Account on behalf of holder of a debt security shall at the time of disposal of debt securities including government securities deduct tax at the rate specified in Division IIIAA of Part III of the First Schedule on the gross amount of capital gain arising to such holder and deposit the same in government treasury:
Provided that this section shall not apply on disposal of debt securities made through registered stock exchange and which are settled through NCCPL.
(2) The capital gain arising to the holder on disposal of debt security mentioned in sub-section (1) shall be computed in accordance with the formula provided in sub-section (1A) of section 37A of the Ordinance.”
Division IIIAA — Rate of Tax:
“The rate of tax to be deducted under section 151A shall be 15% of the gross amount of the capital gain.”
1. Scope and Applicability
Section 151A applies to every custodian or banking company that maintains an IPS Account for its clients. It covers both government and corporate debt instruments, and the tax deduction obligation arises at the time of disposal.
2. Rate of Tax Deduction
A flat rate of 15% applies to the gross capital gain. This deduction is required to be deposited into the Government Treasury by the custodian at the time of sale.
3. Capital Gain Computation
Capital gain is computed using the Section 37A(1A) formula:
Capital Gain=Sale Price−Cost of Acquisition Gain
This ensures that only the actual gain realized upon disposal is taxed.
4. Exemption for Stock Exchange Transactions
The proviso to sub-section (1) exempts transactions executed through a registered stock exchange and settled via NCCPL from the purview of Section 151A.
This encourages transparent trading through regulated markets.
5. Responsibility of Custodians and Banks
Banks and custodians must:
Compute gains on disposal;
Deduct 15% tax;
Deposit it promptly to the treasury; and
Issue withholding certificates to investors.
6. Treatment for Investors
For investors, the deducted tax is generally adjustable against total liability. They must declare such gains under Capital Gains in their annual income tax returns.
7. Example of Computation
An investor sells Treasury Bills purchased for PKR 5,000,000 at PKR 5,300,000, realizing a gain of PKR 300,000. = 45,000
Hence, the custodian will deduct PKR 45,000 and deposit it to the FBR.
8. Policy Rationale
Section 151A was introduced to:
Strengthen tax collection at source;
Prevent non-reporting of gains;
Ensure fiscal equity between debt and equity markets; and
Enhance documentation within the capital market.
9. Record-Keeping and Compliance
Custodians must retain transaction logs, gain computations, tax deposits, and certificates for each client for audit and FBR verification.
10. Relation with Section 37A
Section 151A works in conjunction with Section 37A, which deals with the taxation of capital gains on securities. The latter provides the computational basis, while Section 151A imposes withholding obligation on custodians.
Section 151A introduces an efficient withholding framework for debt-market transactions. By taxing capital gains at 15%, it ensures fairness, transparency, and ease of compliance for both investors and financial institutions.
At Tanweer Habib & Co., we assist clients in computation, withholding, declaration, and reconciliation of such gains under FBR guidelines.
FAQs on Section 151A Gain on Disposal of Debt Securities
1. What is Section 151A of the Income Tax Ordinance, 2001?
It imposes a 15% tax deduction on capital gains arising from the sale or disposal of certain debt securities in Pakistan.
2. Who is responsible for deducting the tax?
Every custodian or banking company maintaining an Investor Portfolio Securities (IPS) Account is required to deduct the tax.
3. What is the tax rate on such gains?
The tax rate is 15% of the gross amount of capital gain.
4. Does this section apply to all debt securities?
Yes, it covers both government and corporate debt instruments unless exempted.
5. Are transactions on the stock exchange covered?
No. Transactions executed through a registered stock exchange and settled via NCCPL are exempt from this withholding.
6. What is meant by “gross amount of capital gain”?
It refers to the difference between the sale price and cost of acquisition of the security.
7. Who is considered a custodian?
A banking company or financial institution maintaining an IPS account on behalf of investors.
8. When is the tax deducted?
At the time of disposal (sale or transfer) of the debt security.
9. What happens if no gain is made?
If there is no gain or a capital loss, no tax is deducted.
10. How is the gain calculated?
In accordance with Section 37A(1A) — Sale Price minus Cost of Acquisition.
11. Is the 15% tax final or adjustable?
It may be treated as adjustable unless specifically declared as final tax by the FBR.
12. Do foreign investors also fall under Section 151A?
Yes, if they maintain IPS accounts in Pakistan and earn gains from local debt securities.
13. What documents are issued to investors?
A tax deduction certificate confirming the gain amount and tax withheld.
14. Can investors claim this tax in their returns?
Yes, they can claim credit or adjustment in their annual income tax returns.
15. Are government securities included?
Yes — Treasury Bills, Pakistan Investment Bonds (PIBs), and Sukuks are all covered.
16. What is the role of NCCPL?
NCCPL acts as a clearing and settlement system for stock exchange trades; transactions settled through NCCPL are exempt from Section 151A.
17. Does this tax apply on interest or coupon payments?
No, Section 151A applies only to capital gains on disposal, not to interest income (which is covered under Section 151).
18. What is the objective of this section?
To enhance tax transparency and automate collection on gains from debt-market instruments.
19. What records must custodians maintain?
Transaction logs, gain computations, tax deduction details, and payment proofs to FBR.
20. How can Tanweer Habib & Co. assist?
We provide expert services in withholding tax compliance, investment taxation, and capital gain reconciliation under Section 151A.
