ISLAMABAD: The federal government has implemented stricter tax measures on Pakistan’s life insurance and family takaful sector under the Finance Act, 2026, a move designed to curb tax avoidance and protect government revenue by taxing gains from early policy withdrawals.
The new provisions, introduced through Sections 7G and 151B of the Income Tax Ordinance, 2001, took effect from the 2026 tax year and apply to specified payments made by life insurance companies, family takaful operators and window takaful operators.
Under the newly inserted Section 7G, individuals who receive surrender values, maturity proceeds or similar benefits before completing a four-year 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.
Officials said the tax deducted will constitute the recipient’s final tax liability, eliminating any further income tax obligation on the amount covered by the deduction.
The Finance Act retains exemptions for certain payments. 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.
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.
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.
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.