Gratuity is a one of the retirement benefits for long service. Before May 1972, the payment of gratuity by employer was on voluntary basis, after that it was incorporated in Standing Orders and becomes a statutory obligation of employers. Since then payment of gratuity is a legal benefit of eligible worker.
There are three different retirement benefits defined in Standing Order 12(6) i.e. “Gratuity” or “Provident Fund” or “Approved Pension Fund”. The commercial establishment employed 20 or more workmen OR any industrial establishment employed 49 or more workmen, directly or indirectly, during any days of preceding 12-months, are legally liable to offer at least any one of these retirement benefit.
S.O 12(6) of W.P. Industrial & Commercial (Standing Orders) Ordinance, 1968 defines, “where a workman resigns from service or services are terminated by the employer, for any reason other than misconduct, shall be entitled for gratuity equivalent to thirty (30) days wages, calculated on the basis of the (wages admissible to him in the last month of service if he is a fixed-rated workman or the highest pay drawn by him during the last twelve months if he is a piece-rated workman), for every completed year of service or any part thereof in excess of six months: provided that, where the employer has established a provident fund to which the workman is a contributor and the contribution of the employer to which is not less than the contribution made by the workman, no such gratuity shall be payable for the period during which such provident fund has been in existence. Provided further that if through collective bargaining the employer offers and contributes to an “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001, and where the contribution of the employer is not less than fifty per cent of the limit prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the remaining fifty per cent or less, no gratuity shall be payable for the period during which such contributions has been made.]”
Which Establishment is Liable to Pay Gratuity?
As per Section 1 of the Ordinance, the provision of gratuity becomes applicable to: every commercial establishment employing or employed twenty or more workmen and every industrial establishment employing or employed fifty or more workmen, on any day during the preceding twelve month.
When Gratuity becomes payable?
Gratuity becomes payable at time of separation from services which could be:
- Resignation by the workman,
- Termination of services by employer due any reason other than misconduct (in case of proved misconduct employer is not bound to pay gratuity),
- In case of death and
- Retirement or superannuation of a worker.
Who is entitled for Gratuity?
There are following conditions to check the entitlement of gratuity:
- Provision of statutory gratuity is applicable on the establishment i.e. industrial or commercial, in respect to number of workmen employed, as explained above.
- Employee is a "workman" as defined in Section 2(i) of this Ordinance as someone who is employed to do any skilled or unskilled, manual or clerical work. According to various Courts judgments, it is thenature of dutieshe is performing rather than his designation or wages which determine whether he is a "workman" or not.
- Length of service should be excess to six months or more.
Rate of Gratuity
Earlier the rate of gratuity was 15-days of wages for each completed year of service and later on it was revised as 20-days wages. Right now the present rate of gratuity is 30-days wages for every completed year of service or for any period in excess of six month in the same establishment.
How to calculate the amount of Gratuity payable?
Following is procedure to calculate the payable gratuity of an eligible worker:
- Calculate per day wage rate based on 26-days in a month, by dividing monthly wages by 26-days;
- Rate per day is multiplied by rate of gratuity which is 30 days wages (i.e. per day wage x 30); and
- Finally calculate payable amount of gratuity for the entire service period, the formula is per day wage x 30 (rate of gratuity) x No. of service years
Six-month rule is followed to decide whether to pay gratuity for the last year of service depending upon whether the service is more or less than six months. For service of more than six months, gratuity is payable otherwise not.
The 26-days month is defined in the Explanation of Section 3 of the Minimum Wages for Unskilled Workers Ordinance, 1969 i.e. "month" means a normal working period of twenty-six days calculated at the rate of forty-eight hours of work per week. Similarly the minimum wages for skilled and semi-skilled workers is also based on 26 days in a month. The yearly provincial gazettes specify the same for these categories of workers.
Meaning of Wages for Calculation of Gratuity
All payments or allowances which areregular,permanentandnon-contingentin nature, no matter by what name they are called, are included in wages for the purpose of gratuity. Any payments which areirregular(unpredictable and/or depend on the goodwill of employer) orcontingentin nature (payable upon existence or disappearance of certain conditions (e.g., profit) which could not be predicted in advance) then those payments are not part of wages for the purpose of calculating gratuity.
In the case of fixed-rated worker, gratuity is to be calculated on the basis of wages admissible to worker in the last month of service.
In the case of piece-rated worker, gratuity is to be calculated on the basis of highest pay drawn during the last twelve months, for every completed year of service or any part thereof in excess of six months.
Payment of Gratuity in case of Death of Worker
In case of death of a workman, gratuity is payable to the legal dependents of a workman. As mentioned above, death may not necessarily occur on duty but the worker should be in continuous service at that time. The amount of gratuity, in this case, is transferred to "Workmen Compensation Commissioner" who will then allocate this amount to the dependents of a worker. The dependents of a deceased worker include "his widowed mother, his own widow, minor son and unmarried daughter". The Commissioner shall proceed with the allocation of the deposit amount to the dependents of the deceased in accordance with the provisions of Section 8 of the Workmen’s Compensation Act, 1923. If the employer fails to deposit the gratuity amount then the dependents of the deceased may submit an application to Commissioner for the recovery.
Important points to be remembered regarding payment of gratuity:
- Gratuity has no connection with loss or profit or the financial position of an employer; it has to be paid to eligible worker.
- Completed year of service means a period of 12-months service counted from the date of first appointment in the same establishment. It does mean calendar year, financial year or any other period.
- The period of service which is 6-months or less, will not be considered for payment of gratuity.
- Retirement on attaining the age of superannuation is treated as termination of service by employer and voluntary retirement is considered resignation by worker.
Legally employer is bound to offer only one retirement benefit out of three. However, employer at its sole discretion may also offer provident fund or worker unions have to right to negotiate and get more benefits simultaneously.
FAQs
What is the rate of gratuity and how is it calculated? In accordance with the provisions of law, the rate of gratuity is "thirty (30) days wages for every completed year of service or any period in excess of six months". Any employment period exceeding six months will be considered as one year.
Is gratuity taxable for private employees in Pakistan? ›
Approved Fund
Any amount not exceeding Rs. 300,000/= is not liable to Income Tax if the employee receives the gratuity from the approved fund.
What is the difference between provident fund and gratuity in Pakistan? ›
Difference Between Provident Fund And Gratuity
A PF account receives contributions from both the employer and the employee. But, on the contrary, the gratuity does not include any contribution from the employee. Instead, the gratuity is a token monetary amount offered to an employee as an appreciation.
What is the formula for gratuity in Excel? ›
Formula : Gratuity Calculation= [ (Basic Pay + D.A) x 15 days x No.
Is gratuity paid on basic or gross in Pakistan? ›
The Corporation shall make an initial contribution in respect of the past services of the employees to the fund after execution of this Trust Deed in one or more installments. Such contribution shall, however, the gratuity shall be calculated on the basis of the gross pay drawn in the last month of service.
What is Labour law in Pakistan? ›
Labour law arbitrates the relationship between workers, engaging entities, trade unions and the government whereas joint labour law relates to the three-way relationship between worker, owner and the union and individual labour law corresponds workers' rights at work through contract.
What is exempt from salary tax in Pakistan? ›
Employment income exemptions
Medical allowance/expenses: Reimbursem*nt of expenses on medical treatment or hospitalisation or both received by an employee is exempt from tax. Medical allowance of up to 10% of basic salary is exempt if the facility of reimbursem*nt of medical expenses is not available to the employee.
How much salary is taxable in Pakistan? ›
Personal income tax rates
| Taxable income (PKR) | Tax on excess (%) |
|---|
| 800,000 | 1,200,000 | 12.5 |
| 1,200,000 | 2,400,000 | 17.5 |
| 2,400,000 | 3,000,000 | 22.5 |
| 3,000,000 | 4,000,000 | 27.5 |
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The government of Pakistan has finalized tax slabs for salaried individuals for the fiscal year 2022-23 and has set a minimum income tax rate of 2.5% for those earning up to Rs. 100,000 per month and a maximum of 35% for individuals earning a monthly salary over Rs.1 million.
What is provident fund law in Pakistan? ›
The Provident fund is created by the employer in the form of an irrevocable trust reflecting the name of the Company and containing the term Employees' Contributory Provident Fund. At least three to five trustees are appointed for the management of the Trust who are named in the Trust Deed.
Employee's contribution: The amount deducted from the employee's salary at a rate of 2% – 15%.
What is the PF calculation? ›
To calculate your Provident Fund contribution, add both employer and employee contributions. The employer contributes 12% towards the PF balance, whereas the employee contributes 3.67% towards the PF balance. The employer's contribution of 12% towards the PF balance depends on the employee's basic pay.
What is the latest gratuity formula? ›
One can calculate the gratuity amount manually by using the gratuity formula:
- If the employer is covered under the Gratuity Act — Gratuity (G) = n*b*15/26.
- If the employer is not covered under the Gratuity Act — Gratuity (G) = n*b*15/30.
- Where n is the number of years and b is the basic salary and dearness allowance.
calculateGratuity = (gratuity / 100) * subtotal gives you the dollar amount of the tip.
Is gratuity taxable in India? ›
Gratuity is a benefit given by the employer to employees. A recently approved amendment by the Centre has increased the maximum limit of gratuity. Now it is tax exempt up to Rs 20 lakh from the previous ceiling of Rs 10 lakh, which comes Section 10(10) of the Income Tax Act. The CBDT Notification no.
Is gratuity based on tax? ›
Optional Charges
An optional payment designated as a tip, gratuity, or service charge is not subject to tax.
What is the formula for calculating gratuity in Punjab? ›
Calculation of gratuity amount: W x Y x 15 ÷ 26 [W = Last Wage drawn i.e. basic + DA; Y = number of completed years of continuous service (six months or less to be ignored and more than six months to be counted as full year)]. Maximum Limit : Rs. 3.5 lacs.
Is gratuity a income? ›
All gratuity must be reported by the employee to the employer. It must then be reported as wage income to the IRS by both the employer and the employee. Service charges are reported as regular (non-tip) wages.
What is the minimum salary in Pakistan as per Labour law? ›
Pakistan's Minimum Wage is the lowest amount a worker can be legally paid for his work. Most countries have a nation-wide minimum wage that all workers must be paid. Pakistan's minimum wage is 15,000 Pakistani rupees per month ($150).
What are the employer rights in Pakistan? ›
There are laws that prohibit the employer from discriminating against applicants or employees based on certain characteristics. Employers must provide a safe working environment. In some cases, they must provide health insurance options. Employers must collect and submit payroll taxes on behalf of the employee.
The province of Punjab revised the minimum wage from PKR25,000 (US$88) to PKR32,000 (US$113) for unskilled work after the provincial minimum wage board, comprising of government representatives, employers, and trade unions, met in Islamabad on 20 March.
Is 2 lakh per month good in Pakistan? ›
Earning 2 lakh Pakistani Rupees per month can be considered a good salary in Pakistan. It allows for a comfortable lifestyle and provides the opportunity to save and invest.
What is the 30% income tax in Pakistan? ›
Currently, the 30% tax rate is collected from those who earn Rs4. 1 million a month – the ultra-rich class. For people earning over Rs1 million a month, the IMF has proposed 35% income tax but it will hardly affect 6,000 individuals. The total tax from these people is estimated at around Rs45 billion, said the sources.
Is foreign income taxable in Pakistan? ›
Any foreign-source salary received by a resident individual is exempt from tax in Pakistan if the individual has paid foreign income tax in respect of that salary.
What is minimum tax in Pakistan? ›
Simplified tax regime for retailers and specified service providers
| Gross amount of monthly bills | Tax (PKR) |
|---|
| Where amount does not exceed PKR 30,000 | 3,000 |
| Where amount exceeds PKR 30,000 but does not exceed PKR 50,000 | 5,000 |
| Where amount exceeds PKR 50,000 but does not exceed PKR 100,000 | 10,000 |
1 more rowJan 17, 2023
At retirement withdrawals up to fifty percent (50%) of the accumulated amount in your Individual Pension Account as cash (any amount beyond this limit will be taxed at a rate equal to your average rate of tax of the last three consecutive years, as specified in the Income Tax Ordinance, 2001).
Are bonuses taxable in Pakistan? ›
Clauses (2) and (24) of section 20 have also been amended The effect of amendments in these clauses is that from 1st July 2001, bonus shares would be taxable in the hands of shareholders and tax would be collectable under the amended section 50 (6A) @ 10% by the companies from shareholders other than companies. 2.
What is the percentage of provident fund in Pakistan? ›
Employee's contribution: The amount deducted from the employee's salary at a rate of 2% – 15%. Employer's contribution: Besides the usual salary payment made to the employer, an employer will also pay 2% - 15% of employee's salary into the fund.
What is the pension law in Pakistan? ›
The minimum length of service required for pension is ten years while for the gratuity the required length of service is five years or more but less than 10 years. a. Classes of Pension: i. Superannuation Pension: Granted on completion of age of superannuation which presently is 60 years under the law.
What is the example of gratuity calculation formula in UAE? ›
Calculation based on 30 days for those exceeding five years of service: c. 333.33 x 30 = Dh10,000. So 30 days' salary is Dh10,000 in gratuity entitlement for each year of service – so long as the total figure does not exceed two years' total salary figure.
If the service tenure is less than two years then no gratuity shall be paid. If the service tenure is between two and five years, then one-third of the gratuity shall be paid. If the service tenure is between five and ten years, two-thirds of the gratuity shall be paid.
