New law imposes final tax on early life insurance and family takaful payouts to curb tax avoidance
ISLAMABAD: The federal government has introduced stricter tax measures for Pakistan’s insurance sector through the Finance Act, 2026, empowering the Federal Board of Revenue (FBR) to levy final tax on early withdrawals from life insurance and family takaful products in a move aimed at discouraging tax avoidance and protecting government revenues.
The new provisions, introduced through Sections 7G and 151B of the Income Tax Ordinance, 2001, will take effect from the 2026 tax year and apply to specified payouts made by life insurance companies, family takaful operators and window takaful operators.
Final tax on early policy withdrawals
Under newly inserted Section 7G, individuals receiving surrender values, maturity proceeds or similar benefits from life insurance policies, family takaful certificates or comparable financial arrangements before the prescribed holding period will be subject to tax.
The taxable amount will be calculated by deducting the total premiums or contributions paid by the policyholder from the gross amount received. The tax deducted will be treated as a final tax liability, meaning recipients will not be required to pay any additional income tax on the amount covered by the deduction.
Exemptions remain available
The Finance Act provides important exemptions to ensure genuine insurance claims are not affected.
No tax will be deducted where payments are made:
• upon the death of the insured person or takaful participant;
• due to the permanent disability of the insured or participant; or
• after completion of four years from the date the life insurance policy, family takaful certificate or plan was issued.
These exemptions are intended to preserve the tax benefits of long-term protection products while discouraging short-term investment structures designed primarily for tax planning.
Mandatory withholding by insurers
The newly introduced Section 151B requires every life insurance company, family takaful operator and window takaful operator to deduct tax at the time of making eligible payments to individuals.
The withholding tax will apply to the net gain, calculated by subtracting the aggregate premiums or contributions paid from the total amount received by the policyholder.
As provided under Section 7G, the tax deducted under Section 151B will constitute the recipient’s final tax liability on the payment.
Tax rates
The Finance Act prescribes the following withholding tax rates:
• 15% where the payout is made within one year from the issuance of the policy or takaful certificate.
• 10% where the payout is made after one year but before completion of four years.
No tax will apply where the payment is made after four years or qualifies under the exemptions relating to death or disability.
Strengthening tax compliance
The government says the amendments are designed to discourage the use of short-term life insurance and family takaful products as tax planning vehicles while preserving incentives for genuine long-term financial protection.
By introducing mandatory withholding and treating the deducted amount as final tax, the Finance Act, 2026 aims to strengthen tax compliance, minimise revenue leakage and improve transparency within Pakistan’s life insurance and family takaful industry.
The new provisions came into force under the Finance Act, 2026 and will apply from the 2026 tax year onwards.
