Finance Act, 2026 imposes withholding tax on certain life insurance and family takaful payments while exempting death, disability and long-term policy proceeds.
ISLAMABAD: The Federal Board of Revenue (FBR) has introduced a Final Tax Regime (FTR) for certain life insurance and family takaful payments received by individuals under the Finance Act, 2026, while exempting several categories of payouts from the new tax framework.
Under the amended law, the FTR will apply to individuals receiving any payout, benefit, surrender value, maturity proceeds or similar payment from a life insurance business, including amounts paid under an insurance policy, family takaful certificate, plan or any comparable arrangement.
The Finance Act, 2026, however, excludes a number of payments from the final tax regime. These include payouts made upon the death of the insured or participant, payments made on account of the disability of the insured or participant, and proceeds received under an insurance policy, certificate or plan that has remained in force for more than four years.
The exemption period was reduced to four years in the enacted Finance Act, 2026, compared with the seven-year holding period originally proposed in the Finance Bill, 2026.
The amended provisions also require every life insurance company, family takaful operator and window takaful operator to deduct withholding tax at the time of making taxable payouts.
The tax will be calculated on the gross amount of the payout after deducting the aggregate premiums or contributions paid by the policyholder or participant.
Under the new tax structure, a 15 per cent withholding tax will apply where the payout or benefit is received within one year of the commencement of the policy or plan.
Where the payout is made after one year but within four years, the applicable withholding tax rate will be 10 per cent.
Tax experts said the introduction of the Final Tax Regime provides greater certainty regarding the taxation of life insurance and family takaful proceeds by establishing clear rules for both taxpayers and insurers.
They added that exempting policies that remain in force for more than four years encourages long-term financial planning and savings, while the reduction of the exemption period from seven years, as proposed in the Finance Bill, to four years in the enacted Finance Act offers greater flexibility for policyholders without undermining the objective of promoting long-term investment.