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Pakistan's national savings declined from 20.8 per cent in FY03 to 14.3 per cent in FY 09. Household savings are low because of unattractive investment avenues. Certain fiscal policies have directed people toward low risk and fixed income financial instruments such as bank deposits and National Savings Schemes (NSS).

Due to lack of interest in saving, insurance has not emerged as a thriving field in the country despite being in operations since the country's inception. Although income tax regime has introduced tax incentives for institutions such as mutual funds and retirement benefit schemes as well as incentives targeted at individuals, no such incentive has been proposed for investment in life insurance/Takaful. That is also one of the reasons that Pakistan has one of the lowest life insurance penetration rates in the world, a mere 0.27 per cent of GDP as compared with India (4 per cent), Bangladesh (0.42 per cent), South Korea (7.27 per cent), Singapore (6 per cent), Malaysia (3.6 per cent), and Thailand (1.99 per cent).

The following is a country-wise summary of tax incentives with respect to life insurance/family takaful industry.

- In India, Individuals with taxable income of under IRs500,000 (approximately PKR650,000) are allowed a tax rebate of a proportion of the life insurance premium paid such rebate being: 30 per cent if the person's taxable income is below IRs100,000 and taxable income constitutes 90 per cent of total income; 20 per cent if the person's taxable income is below IRs150,000 and the above does not apply; 15 per cent if the person's taxable income is between IRs150,000 and IRs500,000.

- In Malaysia, life insurance premiums or takaful contributions are allowed to a maximum total tax relief of RM6,000 (approximately PKR105,000). A further tax relief of RM3,000 (approximately PKR50,000) is given for insurance premiums with respect to medical and educational purposes.

- In Korea, life insurance premiums are tax deductible up to 1 million Korean won (approximately US$1,060)

There is a need of similar tax incentive in Pakistan to increase penetration of life insurance in the country, keeping in view incentives given to other saving schemes in the country.


Unit holders of the mutual funds, other than a company, are entitled to a tax credit under section 62 of the Income Tax Ordinance 2001 on purchase of new units. The amount on which tax credit is allowed is the lower of (a) amount invested in purchase of new units, (b) 10 percent of the taxable income of the unit holder, or (c ) PKR300,000, and is calculated by applying the average rate of tax of the unit holder for the tax year. If the units are disposed within twelve months, the amount of tax payable for the tax year in which the units are disposed is increased by the amount of credit allowed.

There are two specific incentives targeted at individuals:

a) As per Section 62 of the Income Tax Ordinance 2001, an individual investor can claim tax credit up to Rs60,000 (in case of a salaried person) or Rs75,000 (in case of self employed) in a tax year on investment up to Rs300,000 or 10 per cent of individual's taxable income (whichever is the lower), subject to that an investment is held for a period of one year.

b) There is a Tax Credit allowed for investment by individuals in pension funds approved under the Voluntary Pension System Rules 2005 (VPS Rules) issued by the Securities and Exchange Commission of Pakistan (SECP) (S63 of the Income Tax Ordinance 2001). The credit is calculated by applying the average tax rate on taxable income to the contribution/premium paid, being an upper limit on the latter of the lower of 20 per cent of the taxable income (higher proportions for older persons under transitional arrangements) or Rs500,000.


Life Insurance/Family Takaful is of vital importance for economic growth of the country and the only industry which garners long terms savings. Investments of insurance/Takaful companies are largely in government bonds/Sukuk and equity of long-term nature. This generates long term funds for infrastructure developments and contributes towards the development and modernisation of capital markets.

Unlike mutual funds which are unable to offer the retail market reach the life insurance/family Takaful offices are spread in metropolitan cities as well as in rural areas covering both the privileged and the underprivileged societies at large. Moreover, there are an approximately 110,000 insurance agents providing increased market penetration as compared to those promoting mutual funds industry which is negligible.

It is seen that the tax incentives allowed to mutual funds and VPS has contributed scantly in boosting savings and economic growth. The regulatory authorities need to revisit policies governing the life insurance/takaful industry so that it becomes competitive and attractive for the public as better means of investment.


1. Support to the government in the provision of high quality pensions, healthcare and social security (financial protection) to the masses.

2. Incentive for savings and investment in life insurance/takaful for the masses.

3. Long-term source of finance for investment in the economy, thereby contributing to infrastructure development and sustainable growth

4. Promote self-sustainability in the masses

Although the incentive can be designed in many forms it is proposed that the format used for the VPS (a Tax Credit) is retained for the sake of consistency.

While introducing the incentive, it will be necessary to discourage life insurance/Takaful companies introducing what are essentially pure savings products in the guise of life insurance/Takaful policies. This is best done by ensuring that the level of life insurance/Takaful cover (as opposed to savings) is of a minimum level. It is therefore proposed that the incentive be introduced for premiums/contributions paid into "qualifying life insurance/Takaful policies", with the definition of a qualifying policy that the amount payable on death (not limited to accidental death) must be at least equal to the greater of: 10 times the premiums/contributions paid in the first year; or the total premiums/contributions payable under the policy over its term.

It is also necessary to define limits up to which the incentive is provided. It is suggested that this should be the same as that of the VPS (currently Rs500,000).

The writer is CFO and CS Pak-Qatar Family & General Takaful. He may be reached at:
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Publication:Pakistan & Gulf Economist
Geographic Code:9PAKI
Date:Jun 27, 2010
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