Tax on a Life Insurance Surrender or Payout in Pakistan: 15% in Year One, 10% Before Year Four
Early life insurance or family takaful payouts in Pakistan carry final tax on the gain: 15% in year one, 10% before four years, none after. FBR circular read.
Short answer: If you surrender a life insurance or family takaful policy in Pakistan, or take a payout from it, before the policy is four years old, tax is due on your gain. The rate is 15 per cent in the first year and 10 per cent from the second year until four years are complete. After four years, or on death or disability, this tax does not apply.
Many buyers take a policy as a savings plan and cash it in early. The Finance Act 2026 added a tax that catches this. The insurer deducts it before paying you, so you may see a smaller cheque than you expected.
We read FBR's own explanation of the Finance Act 2026, Circular No. 02 of 2026-27, dated 8 September 2026, on the FBR website on 13 October 2026. The rules are in new sections 7G and 151B of the Income Tax Ordinance, 2001.
The tax is charged on the gain, not on the whole payout
Section 7G taxes every individual who receives a payout, benefit, surrender value, maturity amount or similar payment from a life insurance policy or family takaful plan. The taxable amount is the gross payout minus all the premiums or contributions you paid.
That means only your profit is taxed. If you paid Rs 300,000 in premiums and receive Rs 340,000, the taxable amount is Rs 40,000. The circular applies this from tax year 2026 and onwards.
The insurer must deduct the tax at the time of payment under section 151B. The circular calls the tax deducted final tax, which means it settles the tax on that gain.
Two rates apply before the fourth year
The circular lists two rates in a new division of the First Schedule. The rate depends on how long the policy has run when the payout is made. A payout after four years, or on death or disability, is outside the tax.
| When the payout is made | Rate on the gain |
|---|---|
| Within one year of the policy being issued | 15% |
| After one year but before four years are complete | 10% |
| After four years from issue | No tax under section 7G |
| On death or disability of the insured | No tax under section 7G |
The same rule covers family takaful certificates and similar plans. Window takaful and family takaful operators must deduct the tax too.
A worked example with round numbers
These figures are our own example, not an FBR table. Say you pay Rs 100,000 a year for two years, which is Rs 200,000 in premiums, and then surrender the policy for Rs 230,000. Your gain is Rs 30,000. At 10 per cent, the tax is Rs 3,000, and the insurer pays you Rs 227,000.
If you had surrendered within the first year, at 15 per cent, the tax on the same gain would be Rs 4,500. If you had waited until four years were complete, none of this tax would be due.
- Find the total of premiums or contributions you have paid, from your statement.
- Ask the company for the gross surrender or maturity value.
- Subtract the premiums from that value to get the gain.
- Check how many full years have passed since the policy was issued.
- Apply 15 per cent in year one, or 10 per cent from year two until four years are complete.
Check before you surrender, and what else to ask
Before you cash in, ask the company for the surrender value in writing and the tax it will deduct. A policy sold by a bank may carry its own charges on top. If you were pushed into a policy you did not want, our guide to your rights when a bank sells you insurance explains the options.
A new policy can also be cancelled within a free look period, with a refund. The steps are in the guide to cancelling life insurance in the free look period. A cancellation in that window is a refund, so whether section 7G applies to it is a question to put to the insurer in writing.
If a family member has died, the payout falls outside this tax. Use the guide to a life insurance death claim for the papers.
Common questions
Is tax charged on the whole surrender value?
No. It is charged on the gain, which is the payout minus the premiums or contributions you paid, according to FBR's circular.
Does the tax apply after four years?
No. The circular says the tax does not apply once four years have passed since the policy was issued.
Is the tax deducted on death claims?
No. A payout on the death or disability of the insured is outside section 7G.
Can I claim this tax back at return time?
No. The circular says the tax deducted is final tax. Check your return rules with a tax adviser if you also have other income.
Does it apply to family takaful?
Yes. The section names family takaful certificates and plans, and takaful operators must deduct the tax.
Which companies are licensed to sell life insurance?
You can check an insurer or broker with our guide to checking an insurance company or broker with SECP.
How we verified this
What we checked, where we read it, and what we could not confirm.
Last checked on 13 October 2026, Pakistan time. We read FBR's Circular No. 02 of 2026-27 on the Finance Act 2026, item 5. We did not read the Finance Act text itself or any insurer's notice, and we could not confirm how insurers apply the rule to a free look cancellation.
About the author
Senior Writer, Public Services and Technology
Shahid joined us in 2024 as an author. He is a senior contributor to Pakistan's leading technology websites. He writes detailed articles, mostly covering his expertise in the latest tech, mobiles, apps, gadgets, and step-by-step guides. His ideology is to help people understand the latest trends and explain complex methods through very easy-to-understand guides.
