Finance Bill 2026: New Tax on Life Insurance and Takaful Payouts

The Finance Bill 2026 has proposed a major amendment to the Income Tax Ordinance, 2001, introducing a new Section 7G that brings life insurance and takaful payouts under a revised tax framework. The move is aimed at discouraging misuse of insurance products for tax avoidance and curbing so-called “sham” policies designed to benefit from tax arbitrage.

Scope of the New Tax on Insurance Payouts

Under the proposed rules, starting from Tax Year 2026, any individual receiving a payout from a life insurance company or family takaful operator will be subject to taxation. This includes:

• Surrender value of policies
• Maturity proceeds
• Other benefits payable under insurance or takaful certificates

However, the tax will not be imposed on the full payout amount. Instead, the taxable portion will be calculated as:

Gross payout amount − Total premiums or contributions paid by the policyholder

This ensures that only the gain or profit component is taxed, not the invested principal.

Proposed Tax Rates Under Division IC

The Finance Bill introduces a time-based taxation structure depending on how long the policy has been held before payout:

Timing of Payout	Tax Rate
Within 1 year of policy issuance	15%
After 1 year but before 7 years	10%

This structure is designed to discourage short-term exploitation of insurance policies for tax benefits.

Key Exemptions Under Section 7G(3)

Certain payouts have been kept outside the scope of taxation under the proposed law. These include:

• Payouts made due to the death of the insured person or participant
• Payouts made due to disability of the insured person or participant
• Payouts made after completion of seven years from the policy issuance date

These exemptions aim to protect genuine long-term savings and risk protection benefits of insurance products.

Withholding and Final Tax Treatment

The bill also introduces a new withholding mechanism under Section 151B, making life insurance companies and takaful operators responsible for deducting tax at the time of payment.

Key points include:

• Tax will be withheld at source by insurers and takaful operators
• The deducted amount will be treated as a final tax liability
• No further tax will be payable on the same payout in the hands of the recipient

Impact of the New Tax Regime

The introduction of Section 7G marks a significant policy shift aimed at tightening oversight of insurance-linked investment products. While genuine policyholders with long-term coverage are largely protected through exemptions, short-term policy structures may face reduced attractiveness under the new tax framework.

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