Is benevolent fund or group insurance money received by the family after a death taxable?

What does the law say?

Three provisions of the Income Tax Ordinance, 2001 cover most money a family receives after a death.

Benevolent grant: clause (24). Part I of the Second Schedule exempts:

“Any benevolent grant paid from the Benevolent Fund to the employees or members of their families in accordance with the provisions of the Central Employee Benevolent Fund and Group Insurance Act, 1969.”

The clause has no rupee cap. It is tied to the Benevolent Fund under that Act.

Gratuity and commutation paid to heirs: clause (13). This clause exempts gratuity or commutation of pension received “by an employee on his retirement or, in the event of his death, by his heirs”, up to these limits:

Sub-clause	Whose gratuity or commutation	Exempt amount
(i)	Employee of the Government, a Local Government, or a statutory body or corporation established by law	The amount receivable under the rules and conditions of service
(ii)	Paid from a gratuity fund approved by the Commissioner under Part III of the Sixth Schedule	The amount receivable from the fund
(iii)	Other employees, under a scheme for all employees approved by the Board	Up to Rs. 300,000
(iv)	Anyone to whom (i) to (iii) do not apply	50% of the amount receivable or Rs. 75,000, whichever is less

A proviso printed after sub-clause (iv) says the exemption does not apply to a payment not received in Pakistan, to a payment from a company to a director who is not a regular employee, to a payment to an employee who is not a resident individual, or to gratuity received by an employee who has already received gratuity from the same or another employer.

Life insurance payouts: sections 7G and 151B. Section 7G, inserted by the Finance Act, 2026, taxes an individual who receives a payout from a life insurance business, for tax year 2026 and onwards, at the rates in Division IC of Part III of the First Schedule. Section 7G(3) switches this off where the payout is made “on account of death of the insured or participant”, on account of disability, or after four years from the policy’s issue. Section 151B, which requires the insurer to deduct the tax, has the same three exclusions.

How does it work in practice?

The benevolent grant is simply left out of income if it comes from the Benevolent Fund under the 1969 Act. The clause covers grants to “employees or members of their families”, so it is not limited to payments after a death.

The group insurance sum is the gap. The 1969 Act has “Group Insurance” in its title, but clause (24) exempts only “any benevolent grant”. Our copy of the Ordinance has no Second Schedule clause that names a group insurance payout to heirs. What the text does say is that where the payout is made by a life insurance business on account of death, section 7G does not tax it and section 151B does not require deduction. Whether such a sum is income of the heirs under any other provision is not addressed in the sections read for this page.

Gratuity paid to heirs follows the clause (13) limits above. For a government employee who dies in service, sub-clause (i) exempts what the service rules provide. For a private employer without an approved fund or scheme, only the smaller of half the amount or Rs. 75,000 is exempt. The Ordinance does not spell out how the remainder is taxed in the hands of heirs.

Worked example (illustrative figures)

Scenario 1: government employee dies in service. Tariq, a federal government clerk in Islamabad, dies in service. His widow receives a benevolent grant from the Benevolent Fund under the 1969 Act, gratuity under his service rules, and a group insurance sum.

• Benevolent grant: exempt under clause (24).
• Gratuity: exempt under clause (13)(i), to the amount receivable under his service rules.
• Group insurance: no clause names it. If paid by a life insurance business on account of his death, section 7G does not apply.

Scenario 2: private life policy. Farah in Lahore held a life policy on her husband’s life. Premiums paid totalled Rs. 500,000.

1. He dies eighteen months after the policy was issued, and the insurer pays Rs. 2,000,000. The payout is on account of death, so section 7G(3)(a) applies and no section 7G tax is charged. Section 151B(3)(a) means the insurer deducts nothing.
2. Compare: the policy had been surrendered at the same point, with no death, for Rs. 560,000. The taxable amount under section 7G(2) is the payout less premiums: Rs. 560,000 - Rs. 500,000 = Rs. 60,000. Division IC charges 10% where the payout is made after one year but before four years from issue: 10% of Rs. 60,000 = Rs. 6,000, a final tax under section 7G(4).

Scenario 3: private-sector gratuity to heirs. Kamran worked for a private trading firm in Sialkot with no approved gratuity fund or Board-approved scheme. After his death, his heirs receive Rs. 400,000 of gratuity. Under clause (13)(iv), 50% of Rs. 400,000 is Rs. 200,000, and the lesser of Rs. 200,000 and Rs. 75,000 is Rs. 75,000 exempt. The remaining Rs. 325,000 is not covered by the clause.

What if the insured becomes disabled rather than dying?

Section 7G(3)(b) and section 151B(3)(b) exclude a payout made on account of disability of the insured or participant in the same way as a death payout.

Common mistakes

• Assuming clause (24) covers every benevolent fund. It is tied to the Benevolent Fund under the 1969 Act. Clause (57)(3)(iii) of Part I exempts the income of a Board-approved benevolent fund or group insurance scheme itself, which is a different thing from a payment to a family.
• Assuming all insurance payouts are now taxed. Section 7G excludes payouts on death, on disability, and after four years.
• Applying the government gratuity rule to a private employer. Clause (13)(i) is limited to government, local government and statutory bodies.

What to check in the official text

Read clauses (13) and (24) of Part I of the Second Schedule, sections 7G and 151B, and Division IC of Part III of the First Schedule. The Central Employee Benevolent Fund and Group Insurance Act, 1969 itself is outside this corpus, so check with the paying office which payment is a benevolent grant and which is a group insurance sum.