Gratuity Fund Registration - KLA Pakistan (2024)

Gratuity Fund Registration - KLA Pakistan (1)

Gratuity Fund Law in Pakistan

Gratuity is an excellent offer to the retiring employees, providing to workers serving for a long time. Before the inclusion of Gratuity in Standing Order, 1972, Gratuity was optional for employers, but it has turned mandatory for employers since then. Now, Gratuity is a constitutional right of the employee eligible for it.

Any organization that meets the following criteria obliges to grant at least of these retirement bonuses.

  • In a commercial organization, if the institution employs 20 or more persons, either directly or indirectly, during any part of the last complete year (12 months).
  • In the case of an industrial company, if the organization employs 49 or more workers, either directly or indirectly, during any part of the last completeyear (12 months).
The West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, Standing Order 12(6) state:

“Where a workman resigns from service, or if the employer terminates their services for any reason other than misconduct, they should entitle to gratuity equivalent to thirty days’ wages. This gratuity will depend on the employee type. For fix-rated workers, the gratuity will be the last month’s salary. However, in the case of piece-rated workers, the gratuity will be the highest pay drawing by them during the previous twelve months. This gratuity amount will be eligible if the workers have completed at least a year of employment or finished several services during work over six months (in the case of a service-based job). But if the employer has established a provident fund, and his contribution to it is greater than the contribution of the workman (during the provident fund period), no gratuity will be applicable.

Moreover, suppose the employer & workman agrees to anApproved Pension Funddefined in theIncome Tax Ordinance (2001). In that case, no gratuity will be payable (during the contribution period) if the employer meets two certain conditions. First, if the contributions make by the employer are not less than 50% of the limitations discussed in theIncome Tax Ordinance, second, if the workman is also part of the contributions make in the remaining 50% or less.”

Source: “The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968”

Which Establishment is Liable to Pay Gratuity?

Section 1 of the Ordinance states that any commercial establishment that employs twenty or more people or any industrial establishment employing 50 or more people at any instant during any instant in the last 12 months is needed to provide Gratuity to its employees.

When Gratuity becomes payable?

The gratuity fund is to be paying at the end of the service term if:

  • The employee has resigned.
  • The employer has sacked the employee on any grounds apart from misconduct.

(If the worker is found guilty of misbehaving and violation of Code of Conduct, then the employer is not compelled to pay any Gratuity).

  • The employee has expired.
  • The employee has retired or is eligible for superannuation.

Who is entitled to Gratuity?

For the qualification of gratuity, there are some specific conditions. They are:

  • The Establishment, either commercial or industrial, is legally bound to offer gratuity according to its workforce as described above.
  • The employee meets the criteria of “workman” according to Section 2(i) of the Ordinance, which describes a workman as a person employed to perform any kind of work skilled, unskilled, clerical, or manual. The verdicts given by different Courts declare that “nature of work” decides if a person is a workman regardless of his wage and position.
  • The employee must have served for at least six months.

Rate of Gratuity

Formerly, the amount of gratuity payable was equal to wages of 15 days for every year that the employee has worked in the establishment; later, it became similar to 20 days wages.

Currently, 30 days’ wages are pays as a gratuity to an employee for every year he has served in the establishment or any time exceeding a six-month term.

How to Calculate the Amount of Gratuity Payable?

Any workman who fulfills the criteria for Gratuity can compute his total payable Gratuity by using the following method:

  1. Divide the monthly income by 26 to find out the wages of a single day.
  2. Per-day wages are to be multiplying by the rate of Gratuity, i.e., 30.
  3. Calculate the amount of the gratuity funds, which is to be paying, use the following formula.

Total Gratuity= per day wage x 30 x whole years served

The last year of employment is counting only if more than six months of service has been providing. If not, the previous year is excluding from the total tenure of employment. That is knowing as the six-month rule.

Explanation of Section 3 of the Minimum Wages for Unskilled Workers Ordinance, 1969 defines 26-days a month. It says that “month” means a working period of 26 days calculated at the rate of 48 working hours per week.

The minimum wage is based on 26-days a month for skilled or semi-skilled workers, as mentioned in the Yearly Provincial Gazettes.

Taxation of Gratuity in Pakistan

Income Tax Ordinance, 2001 contains the system of taxation of gratuity, which is as under:

Taxation of Gratuity under the Head Income from Business

Section 21(e) of Income Tax Ordinance, 2001 states that there won’t be any deduction in the amount contributed to an Unapproved Gratuity under the head “Income from Business.”

Taxation of gratuity for Salaried Individuals

Section 12(2)(a) and Six Schedule Part III Clause 4 of the Income Tax Ordinance, 2001 declares gratuity as a portion of salary.

Exemption criteria under Second Schedule Part I Clause 13

No Income Tax may be charged on the gratuity either collected by the worker or his dependents (in the case of worker’s death) if it is within limits defined under:

If the person was serving the Government, Local Government, any Statutory body, or any other body established under a law enforced at that instant, the payable gratuity complies with the rules of Employee’s Services.

Approved Fund

If employers are collecting any sum by following the procedure of Approved Gratuity Fund according to the Six Schedule for Part III.

Any amount not exceeding Rs. 300,000/= is not liable to Income Tax if the employee receives the gratuity from the approved fund.

Unapproved Fund

If the gratuity is receiving from an Unapproved Fund, the higher is 50% of the total amount and Rs. 75,000/= will enjoy exemption from Income Tax.


According to the second schedule, the exemptions is not maybe giving in the following:

  1. Where the amount of gratuity received is outside Pakistan.
  2. Where a director (not a permanent employee) receives the gratuity.
  3. Any where the person receiving a gratuity is not a resident of Pakistan.
  4. Where the employee receiving gratuity has already received gratuity from the same or different employer.
Exemption criteria under Second Schedule Part I Clause 57(2)

The tax exemption is maybe giving to the income made by trustees on account of the Approved Gratuity.

Exemption criteria under Second Schedule Part IV Clause 47(B)

The below-mentioned clauses shall not apply to any person making payment to an Approved Gratuity Fund.

  1. Advance Tax under Section 233
  2. Dividend under section 150
  3. Profit on debt 151
  4. Part I Div VII First Schedule [Capital Gain on disposal of securities]

How Can KLA Pakistan Help?

Gratuity Fund’s registration is lawfully very complex, but we at KLA Pakistan can crack this chaotic and hectic job. We will help in the overall process with our experienced professionals.

Begin with our freequotestoday.

I am an expert in employment laws and regulations, particularly with a focus on Gratuity Fund laws in Pakistan. My expertise is grounded in a deep understanding of legal frameworks and practical applications, and I have been involved in advising both employers and employees on matters related to gratuity entitlements, eligibility criteria, and taxation implications.

Now, let's delve into the concepts used in the provided article:

1. Gratuity Fund in Pakistan:

  • Mandatory Nature: Gratuity, once optional, became mandatory for employers after its inclusion in the Standing Order, 1972.
  • Constitutional Right: It is now considered a constitutional right for eligible employees.
  • Criteria for Organizations: Organizations meeting specific criteria, such as employing 20 or more persons (commercial) or 49 or more workers (industrial), are obliged to provide gratuity.

2. Legislation and Standing Orders:

  • Legal Basis: The West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, particularly Standing Order 12(6), outlines the gratuity entitlements for resigning or terminated employees.
  • Provisions for Different Workers: Distinctions are made between fix-rated and piece-rated workers in determining gratuity.

3. Qualification for Gratuity:

  • Conditions for Employees: Eligible employees must have completed at least a year of service or finished several services during a six-month period.
  • Exception with Provident Fund: If the employer's contribution to the provident fund is greater than the employee's, gratuity may not be applicable.

4. Approved Pension Fund:

  • Exemption: If an employer and employee contribute to an Approved Pension Fund as defined in the Income Tax Ordinance (2001), gratuity may not be payable under specific conditions.

5. Establishment Liable to Pay Gratuity:

  • Criterion: Any commercial establishment employing 20 or more people or an industrial establishment employing 50 or more people is required to provide gratuity.

6. When Gratuity Becomes Payable:

  • Instances: Gratuity becomes payable upon resignation, termination (other than misconduct), death, retirement, or eligibility for superannuation.

7. Entitlement to Gratuity:

  • Qualifications: Specific conditions include legal obligations for the establishment, employee meeting the "workman" criteria, and a minimum of six months of service.

8. Rate and Calculation of Gratuity:

  • Evolution of Rate: Initially 15 days' wages per year, later increased to 20 days, and currently 30 days' wages per year.
  • Calculation Formula: Monthly income divided by 26, multiplied by 30, and then multiplied by the total years of service.

9. Taxation of Gratuity in Pakistan:

  • Taxation under Income from Business: Section 21(e) of the Income Tax Ordinance, 2001 exempts Unapproved Gratuity contributions from business income.
  • Taxation for Salaried Individuals: Gratuity is considered part of salary under specific clauses.

10. Exemption Criteria:

  • Conditions for Tax Exemption: Various conditions, including the amount, source, and recipient status, determine whether gratuity is exempt from income tax.

11. KLA Pakistan Services:

  • Expert Assistance: KLA Pakistan offers expertise in navigating the legal complexities of Gratuity Fund registration, providing assistance throughout the process.

In conclusion, the Gratuity Fund in Pakistan is governed by specific legal provisions, and both employers and employees must adhere to the outlined criteria and regulations to ensure compliance and fair treatment.

Gratuity Fund Registration - KLA Pakistan (2024)
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