Pakistan introduces final tax on early life insurance, takaful withdrawals

The federal government has introduced stricter tax measures for Pakistan's life insurance and family takaful sector under the Finance Act, 2026, empowering the Federal Board of Revenue (FBR) to impose a final tax on gains from early withdrawals of eligible policies in an effort to curb tax avoidance and protect government revenue.

The new provisions, introduced through Sections 7G and 151B of the Income Tax Ordinance, 2001, apply from tax year 2026 and cover specified payments made by life insurance companies, family takaful operators and window takaful operators.

Tax on early withdrawals

Under the newly inserted Section 7G, individuals who receive surrender values, maturity proceeds or similar benefits before completing the prescribed holding period will be subject to tax on the gain earned from the policy.

The taxable gain will be calculated by deducting the total premiums or contributions paid by the policyholder from the gross amount received. The tax deducted will constitute the recipient's final tax liability, eliminating any further income tax obligation on the amount covered by the deduction.

Exemptions retained

The Finance Act exempts certain payments from the tax. No tax will be deducted from benefits paid upon the death of the insured person or takaful participant, in cases of permanent disability, or where the policy or takaful certificate has been held for at least four years.

The government said the exemptions are intended to preserve the tax advantages of genuine long-term insurance and takaful products while discouraging the use of short-term investment structures primarily for tax planning.

Mandatory withholding

Section 151B requires life insurance companies, family takaful operators and window takaful operators to withhold tax when making eligible payments to individuals.

The withholding tax will apply to the net gain, calculated as the difference between the total amount received and the aggregate premiums or contributions paid by the policyholder. As provided under Section 7G, the amount withheld will be treated as the recipient's final tax liability.

Tax rates

Under the Finance Act, the withholding tax rate is set at 15% for payouts made within one year of the issuance of a life insurance policy or takaful certificate and 10% for payouts made after one year but before the completion of four years.

No tax will apply to payments made after four years or to payments that qualify for the exemptions related to death or permanent disability.

Strengthening tax compliance

The government said the amendments are intended to discourage the misuse of life insurance and family takaful products for tax planning while preserving incentives for long-term financial protection.

Officials said the introduction of mandatory withholding and final tax treatment is expected to strengthen tax compliance, reduce revenue leakage and improve transparency in Pakistan's life insurance and family takaful sector.