Finance Bill 2026 introduces new taxes on early life insurance payouts to curb misuse of policies for tax arbitrage.
ISLAMABAD: The Federal Board of Revenue (FBR) has unveiled sweeping measures in the Finance Bill, 2026 to curb the misuse of life insurance products after detecting that tax planners had exploited such schemes to earn billions of rupees through tax arbitrage.
The tax authority said that important amendments have been proposed to the Income Tax Ordinance, 2001 to discourage the use of sham life insurance policies designed primarily to avoid taxation rather than provide genuine insurance coverage.
According to the FBR, a new Section 7G has been inserted into the Income Tax Ordinance, 2001, imposing tax on certain payments made by life insurance businesses to individuals from the tax year 2026 onwards.
Under the proposed provision, tax will be levied on payouts, benefits, surrender values, maturity proceeds or similar payments received by individuals from life insurance policies, family takaful certificates, plans or comparable arrangements.
The taxable amount will be calculated by deducting the aggregate amount of premiums or contributions paid by the policyholder from the gross payout received.
However, the proposed tax will not apply in the following circumstances:
• Payments made on account of the death of the insured person or participant;
• Benefits paid due to disability of the insured person or participant; and
• Payouts made after the completion of seven years from the issuance date of the policy, certificate or plan.
The Finance Bill further provides that the tax deducted under this section will be treated as a final tax liability on the income arising from such payouts.
To ensure effective implementation, the government has also proposed the insertion of Section 151B, requiring life insurance companies, family takaful operators and window takaful operators to deduct withholding tax at the time of making eligible payments to policyholders.
The withholding tax rates proposed under Division IC of Part III of the First Schedule are as follows:
| Holding Period of Policy | Proposed Tax Rate |
| Payout or benefit made within one year from the issuance of the policy, family takaful certificate or plan | 15% |
| Payout or benefit made after one year but before completion of seven years from the issuance of the policy, family takaful certificate or plan | 10% |
| Payout or benefit made after completion of seven years | Exempt from tax |
The FBR believes these measures will discourage the use of life insurance products as tax planning instruments while preserving the genuine social protection purpose of insurance and takaful arrangements.
Tax experts say the move targets short-term investment structures that have been marketed as insurance products primarily to benefit from preferential tax treatment. By imposing taxes on early withdrawals and maturity proceeds, the government aims to close loopholes that have reportedly resulted in significant revenue losses.
In addition to these measures, the Finance Bill, 2026 also proposes amendments to Section 152 of the Income Tax Ordinance, requiring banking companies maintaining Foreign Currency Value Accounts (FCVAs), Foreign Currency Business Value Accounts (FCBVAs), Non-Resident Rupee Value Accounts (NRVAs), and Non-Resident Rupee Business Value Accounts (NRBVAs) to deduct tax on capital gains arising from the disposal of debt instruments and government securities, including Shariah-compliant variants.
The proposed amendments will come into force following parliamentary approval of the Finance Bill, 2026 and enactment of the legislation.
