Section 7G: Complete Guide to Tax on Life Insurance & Takaful Payouts (2026-27)

If you hold a life insurance policy or a family takaful certificate in Pakistan, the Finance Act 2026 has introduced crucial changes to how your payouts are taxed. Through the newly inserted Section 7G in the Income Tax Ordinance, 2001, the Federal Board of Revenue (FBR) has imposed a tiered tax on specific insurance and takaful payments.

Below is an easy-to-understand breakdown of Section 7G, how the taxable amount is calculated, the applicable tax rates, and key exemptions.

Key Takeaways

• What is it? A new tax on the profit/gain earned from life insurance and family takaful payouts.
• When does it apply? From Tax Year 2026 onwards.
• Is the whole payout taxed? No, only the capital gain (Gross Payout minus Total Premiums Paid) is taxable.
• Are there exemptions? Yes. Death benefits, disability payouts, and policies held for more than 4 years are 100% exempt.

1. Scope of the Tax: Who Does Section 7G Apply To?

Effective from Tax Year 2026, Section 7G applies to every individual who receives a payout from a life insurance business or takaful operator.

Under the law, a “payout” includes any:

• Maturity proceeds
• Surrender value
• General benefits
• Similar payments arising from a life insurance policy, family takaful certificate, or equivalent plan.

2. How is the Taxable Amount Calculated?

A common misconception is that the tax applies to the entire payout. This is incorrect. Section 7G only taxes the gain or profit you made on the policy. The taxable amount is calculated using a simple formula:

Taxable Amount = (Gross Payout Received) – (Total Premiums/Contributions Paid by the Policyholder)

Essentially, you are only taxed on the excess amount generated by the insurance company’s investments, protecting your original principal amount.

3. Section 7G Tax Rates (First Schedule, Part III, Division IC)

The tax rate is determined by how long you held the policy before receiving the payout. The law discourages early surrenders by applying higher rates to short-term withdrawals.

4. Exemptions: When is Section 7G Not Applicable?

The FBR has provided clear protections for vulnerable individuals and long-term investors. No tax is deducted under Section 7G if the payout is made under the following conditions:

• Death of the Insured: Payments made to beneficiaries due to the death of the policyholder or takaful participant.
• Disability: Payments triggered by the disability of the insured individual.
• Long-Term Holding: Any policy, certificate, or plan held for more than four years from its date of issuance.

5. Withholding Mechanism & Final Tax Status (Section 151B)

To ensure compliance, the government also introduced Section 151B.

• Withholding at Source: Life insurance companies and takaful operators are legally obligated to deduct the Section 7G tax at the time of making the payment to the policyholder.
• Non-Residents Included: According to amendments in the Tenth Schedule, this withholding tax also applies to non-resident individuals.
• Final Tax Treatment: The tax deducted under Section 151B is treated as the final tax on the income arising from the insurance payout. You will not owe further income tax on these specific proceeds when filing your annual return.

Frequently Asked Questions (FAQs) for Search Intent

Q: Do I have to pay tax on my life insurance death benefit under Section 7G?

No. Death benefits are strictly exempt from the Section 7G tax, regardless of how long the policy was held before the insured’s passing.

Q: I am surrendering my policy after 5 years. Will I be taxed?

No. If the payout is made after four years from the date the policy was issued, it is entirely exempt from this tax.

Q: How is the tax collected? Do I need to pay it manually?

No. Under Section 151B, your insurance company or takaful operator will automatically calculate and deduct the applicable tax from your profit before transferring the final payout to your account.