Taxation of Insurance Premiums in Pakistan

Insurance plays a vital role in financial planning, risk mitigation, and long-term wealth protection. In Pakistan, the insurance industry is growing steadily across sectors such as life insurance, health insurance, motor insurance, and property insurance. From a taxation standpoint, both the payment of insurance premiums and the receipt of insurance benefits carry specific implications under the Income Tax Ordinance, 2001 and related laws. This article provides a comprehensive overview of how different types of insurance premiums are taxed in Pakistan, including applicable tax credits, exemptions, and compliance requirements for individuals and businesses.

Regulatory and Legal Framework
The taxation of insurance in Pakistan is primarily governed by the following:

• Income Tax Ordinance, 2001

• Income Tax Rules, 2002

• Sales Tax Act, 1990

• Insurance Ordinance, 2000

• Annual Finance Acts and FBR SROs

In addition, the Securities and Exchange Commission of Pakistan (SECP) regulates insurance companies and ensures industry compliance with financial and tax laws.

Types of Insurance Premiums in Pakistan
Tax implications vary based on the type of insurance and the payer (individual, company, or partnership). The most common insurance types include:

• Life Insurance

• Health Insurance

• Motor Insurance

• Property and Fire Insurance

• Travel Insurance

• Business Risk and Asset Insurance

• Marine and Cargo Insurance

Tax Treatment for Individuals Paying Insurance Premiums

1. Life Insurance Premiums
Under Section 62 of the Income Tax Ordinance, individuals can claim tax credit for life insurance premiums paid during the tax year.

Eligibility Criteria:

• The policy must be issued by a registered insurance company

• The policyholder must be a resident taxpayer

• Payment must be made through banking channels

• Credit is available only if the return is filed on time

Amount of Tax Credit:

• Credit is limited to 20% of taxable income

• The maximum eligible contribution is capped at Rs. 2,000,000

Calculation Example:

• Taxable income = Rs. 1,800,000

• Life insurance premium paid = Rs. 150,000

• Tax credit = (150,000 ÷ 1,800,000) × tax payable

This credit is applied directly against tax payable, not as a deduction from income.

2. Health Insurance Premiums
Health insurance premiums do not enjoy a direct tax credit under Section 62. However, salaried individuals can sometimes claim it as a reimbursable expense if:

• The employer provides the coverage as part of a salary package

• The benefit is shown as a taxable perquisite

In such cases, the premium is added to the employee’s salary and taxed accordingly.

3. Motor and General Insurance Premiums
For individuals, premiums paid for motor or property insurance are not deductible or eligible for any tax credit unless they are:

• Part of a business vehicle or asset

• Paid by a registered business for tax purposes

Private individuals do not get relief on car or home insurance premiums under current laws.

Tax Treatment for Employers and Businesses

1. Group Life and Health Insurance Premiums
Premiums paid by companies on behalf of employees are:

• Allowed as a deductible business expense under Section 20

• Treated as a taxable perquisite in the hands of the employee if the benefit is not provided to all staff or is discriminatory

Companies must maintain:

• Employee-wise records

• Proof of policy and premium payment

• Tax deductions from salary if the benefit is taxable

2. Asset and Liability Insurance
Premiums for business-related assets (factories, offices, machinery, vehicles) are:

• Fully deductible as business expenses under Section 20

• Allowed only if related to income-generating activity and supported by documentation

3. Fire, Marine, and Cargo Insurance
Importers and exporters often pay premiums for marine and cargo insurance. These premiums are:

• Deductible as part of the cost of goods sold (COGS)

• Must be documented in customs declarations and invoices

Sales Tax on Insurance Premiums
Under the Sales Tax Act, 1990, insurance services are generally exempt from sales tax. However, the provincial sales tax laws (Sindh, Punjab, KP, and Balochistan) apply sales tax on services, including insurance brokerage and consultancy services.

Key Points:

• Insurance premiums are mostly exempt from sales tax

• Insurance agents and brokers may charge 15-16% sales tax on their commission-based services

• Companies must ensure proper withholding and reporting of these services in sales tax returns

Withholding Tax on Insurance Commission Payments
When insurance companies pay commissions to agents, they are required to deduct withholding tax under Section 233 of the Income Tax Ordinance.

Rates of Withholding Tax:

• 15% for non-filers

• 10% for filers

This applies only to commission payments and not to premium amounts.

Insurance Benefits and Claims – Taxability
1. Life Insurance Payouts:

• Exempt under Clause 56, Part I, Second Schedule, if received on maturity or death

• If the policy was employer-paid and added as a salary benefit, it may be partially taxable

2. Health Insurance Claims:

• Not taxable if received as reimbursement for actual expenses

• If received as a lump sum without expense proof, may be taxable

3. Property and Vehicle Insurance Settlements:

• If a company claims depreciation on the insured asset, any recovery in excess of the written-down value is taxable

• Individuals receiving reimbursements for losses are generally not taxed

4. Business Interruption or Keyman Insurance:

• Proceeds from Keyman insurance are taxable as business income

• Business interruption insurance proceeds are taxable if they compensate for lost revenue or profits

Tax Implications of Premium Refunds or Surrender
If a policy is surrendered early:

• Any cash value received may be taxable if it exceeds the premium paid

• Premium refunds are adjusted against business expenses if they were previously deducted

Filing and Documentation Requirements
Taxpayers must maintain proper documentation to support claims of premium payments or insurance proceeds, including:

• Insurance policy contract

• Premium payment receipts

• Tax challans (for deductions or withholding)

• Claim settlement reports

• Bank transaction proofs

All entries must be reflected correctly in:

• Income Tax Return

• Wealth Statement (if applicable)

• Business Financials (for companies)

Common Mistakes to Avoid

• Claiming deductions for non-eligible personal premiums

• Not reporting employer-paid premiums in salary income

• Omitting insurance benefits in tax returns

• Failing to adjust refunded or reversed premiums

• Claiming health insurance under Section 62 (not allowed)

Policy Reforms and Recommendations
To promote insurance uptake and transparency in taxation:

• Introduce tax credit for health insurance similar to life insurance

• Reduce compliance burden on SMEs by standardizing insurance deduction rules

• Encourage micro-insurance with tax incentives for low-income households

• Digitize and integrate insurance premium data with FBR’s IRIS portal

• Promote ESG and climate risk insurance with additional tax credits

FAQs on Insurance Premium Taxation

Q. Is life insurance premium tax-deductible in Pakistan?
A. Not deductible, but eligible for tax credit under Section 62, up to 20% of taxable income.

Q. Are health insurance premiums tax-deductible?
A. Not for individuals. However, businesses may deduct them if paid for employees.

Q. Is insurance claim money taxable?
A. Life insurance claims are exempt. Business-related insurance proceeds may be taxable depending on the type and use.

Q. Is there GST on insurance premiums?
A. No federal GST. However, sales tax on insurance services may apply at the provincial level.

Q. Do insurance brokers pay withholding tax?
A. Yes. Insurance companies must deduct WHT at 10–15% from commission payments.

Q. Can companies deduct premiums paid for employee insurance?
A. Yes, under Section 20 as a business expense.

Conclusion
Insurance premiums in Pakistan are governed by a detailed tax structure that provides incentives for long-term life coverage while ensuring fair taxation of benefits and claims. While individuals enjoy tax credits for life insurance, health and general insurance benefits are limited to business deductions. Companies must handle insurance-related tax compliance with diligence, ensuring all payments, benefits, and refunds are properly documented and reported. With increased awareness, reform, and digital integration, insurance taxation can support both financial protection and tax transparency in Pakistan.