ISLAMABAD: Pakistan has tightened tax rules for the life insurance and family takaful sector under the Finance Act 2026, introducing a final tax on early withdrawals in a bid to curb tax avoidance and strengthen revenue collection.
The new provisions, introduced through Sections 7G and 151B of the Income Tax Ordinance, 2001, will take effect from tax year 2026 and apply to payments made by life insurance companies, family takaful operators and window takaful operators.
Under Section 7G, individuals who withdraw surrender values, maturity proceeds or similar benefits before completing the required holding period will be taxed on the gain earned from the policy.
The taxable gain will be calculated by subtracting total premiums or contributions paid from the amount received. The deducted amount will be treated as a final tax, with no further income tax liability on the same income.
The law provides exemptions for payments made on the death of the insured, cases of permanent disability, and policies or certificates held for at least four years.
Officials said the exemptions are intended to protect genuine long-term savings while discouraging short-term tax-driven withdrawals.
Under Section 151B, life insurance companies and takaful operators will be required to deduct withholding tax at the time of eligible payouts.
The tax will be applied to net gains, calculated as the difference between total proceeds and premiums paid by policyholders.
The withholding tax rate has been set at 15% for withdrawals made within one year of policy issuance and 10% for withdrawals after one year but before four years. No tax will apply to payouts made after four years or those falling under exempt categories.
The government said the measures aim to improve tax compliance, reduce revenue leakage and enhance transparency in the insurance and takaful sector, while ensuring the system is not misused for short-term financial gains.
