FBR outlines new withholding and final-tax rules on certain life insurance and family takaful payments introduced through the Finance Act, 2026.

ISLAMABAD: The Federal Board of Revenue (FBR) has explained the new tax regime on certain life insurance payouts introduced through amendments made by the Finance Act, 2026.

In Circular No. 2 of 2026-26, the FBR outlined key changes to the Income Tax Ordinance, 2001, including the introduction of Section 7G, Section 151B and Division IC of Part III of the First Schedule.

Tax imposed on certain life insurance payouts

Under the newly introduced Section 7G, tax applies from Tax Year 2026 onwards to individuals receiving specified payments from a life insurance business.

The provisions cover payments including:

• Payouts

• Benefits

• Surrender values

• Maturity proceeds

• Similar payments received under a life insurance policy, family takaful certificate, plan or similar arrangement

The taxable amount is calculated on the gross payout after deducting the total premiums or contributions paid by the policyholder or participant.

However, the tax does not apply to payments made as a result of the death or disability of the insured person or participant.

The provision also excludes payments made after the completion of four years from the date of issuance of the relevant policy, certificate or plan.

Tax charged under Section 7G is treated as final tax.

Life insurers required to deduct tax

The FBR has introduced Section 151B, which requires every life insurance company to deduct tax when making a payment covered by the new provisions.

The requirement extends to life insurance companies, family takaful operators and window takaful operators.

The tax deducted at the applicable rate will be treated as final tax, meaning the amount deducted represents the final tax liability on the relevant payment.

Tax rates on life insurance payments

Under Division IC of Part III of the First Schedule, the applicable tax rate depends on the period between the issuance of the policy, certificate or plan and the date of payment.

The rates are:

Timing of payout	Tax rate
Within one year from issuance	15%
After one year but before four years	10%

Accordingly, payments made within the first year attract a 15% tax, while those made after one year but before four years are subject to a 10% tax.

Death, disability and long-term payouts excluded

The new framework provides exclusions for certain payments, particularly those arising because of the death or disability of the insured or participant.

Payments made after the completion of four years from the issuance of the relevant policy, family takaful certificate or plan are also outside the scope of the tax under Section 7G.

The amendments therefore establish a withholding and final-tax regime for specified life insurance and family takaful payments, while preserving exclusions for certain death, disability and long-term policy payouts.