Gratuity Law in Pakistan (2022)

What is gratuity, and what laws are governing gratuity in Pakistan?

Gratuity is one of three prevalent retirement benefits in private sector employment. The other two are "Pensions (approved Pensions Fund) and Provident Fund". It is a "lump-sum" amount of money payable to a worker on leaving service (through retirement, death or termination of service) based on salary (highest or the final salary) and period of service (over and above six months).

Gratuity is actually a benefit for services rendered in the past. It is a reward for good, efficient and faithful service for a substantial period of time. Before 1972, gratuity was paid by an employer either on a voluntary basis or in consequence of an award by a labour court. However, the Labour Laws Amendments Ordinance, 1972 made payment of gratuity a legal obligation. Amendments were subsequently made in the Standing Order 12 of Industrial and Commercial Establishments (Standing Orders) Ordinance 1968. Gratuity is now a statutory right for workers who have worked at least twelve months in an organization. The relevant laws governing gratuity in the private sector are:

Standing Orders Legislation

  • 1. The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applicable in IC)
  • 2. Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (adapted by the province of Punjab through Amendment Act of 2012)
  • 3. The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013
  • 4. The Sindh Terms of Employment (Standing Orders) Act, 2015
  • 5. The Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021

Payment of Wages Legislation

  • 1. Payment of Wages Act, 1936 (applicable in ICT)
  • 2. Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment Act of 2014)
  • 3. The Khyber Pakhtunkhwa Payment of Wages Act, 2013
  • 4. The Sindh Payment of Wages Act, 2015
  • 5. The Balochistan Payment of Wages Act, 2021

Factories Legislation

  • 1. The Factories Act, 1934
  • 2. The Factories Act, 1934 (adapted by the province of Punjab through the Amendment Act of 2012)
  • 3. The Khyber Pakhtunkhwa Factories Act, 2013
  • 4. The Sindh Factories Act, 2015
  • 5.Balochistan Factories Act, 2021

Shops and Establishments Legislation

  • 1. The Shops and Establishments Ordinance, 1969
  • 2. The Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab through Amendment Act of 2014)
  • 3. The Khyber Pakhtunkhwa Shops and Establishments Act, 2015
  • 4. The Sindh Shops and CommercialEstablishment Act, 2015
  • 5. The Balochistan Shops and Establishments Act, 2021

Which Organizations are liable to pay gratuity to their workers?

In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in Punjab), every commercial establishment (employing 20 or more workers) and industrial establishment (employing 50 or more workers) are required to pay gratuity to a worker once he/she has met the minimum criteria. The Khyber Pakhtunkhwa Act and theSindh Terms of Employment (Standing Orders) Act, 2015 reduce the minimum number of workers in commercial establishments to 10 workersand in industrial establishments to 20 workers. The Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021 reduces the minimum number of workers for all kinds of establishments to 10 workers. The table below shows all the organizations liable to pay gratuity to their workers.

Commercial Establishments

Minimum Number of Workers

Industrial Establishments

Minimum Number of Workers

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applicable in ICT and Punjab)

Advertising/commission/forwarding Agency, clerical department of a factory, joint-stock company

At least 20 workers must have been employed by the organization for continuous 12 months

Factory

At least 50 workers must have been employed by the organization for continuous 12 months

Insurance company, banking company, bank, broker office, stock exchange

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Railways

Club, hotel, restaurant

Establishment of a contractor

Cinema, theatre

Establishment in connection with the construction industry

The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013

The Sindh Terms of Employment (Standing Orders) Act, 2015

Balochistan Industrial and Commercial Employment (Standing Orders) Act, 2021

Above establishments

At least 10 workers must have been employed by the organization for continuous 12 months

Above establishments

At least 20 workers must have been employed by the organization for continuous 12 months

*In Balochistan, the requirement is that at least 10 workers must have been employed by the organizations for continuous twelve months

private educational institutions,

tramway or motor omnibus service; dock, wharf or jetty; inland steam-vessel;

private health centres, clinical

laboratories

mine, quarry, oil field or gas field;

private security agencies

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plantation;

societies registered under the Societies Registration Act, 1860 (Act

No. XXI of 1860) and the Voluntary Social Welfare Originations (NGOs, NPOs)

workshop or other establishments in which articles are produced,

adapted or manufactured, with a view to their use, transport or sale

Other organizations as declared and notified by the government

What are the qualifying conditions for a worker to earn gratuity?

A worker is entitled to gratuity if the following four conditions are satisfied.

1. Industrial and Commercial Establishments (Standing Orders) Ordinance 1968 (or any of its variants) is applicable to that establishment (whether commercial or industrial) i.e. it must have the minimum number of workers as mentioned above

2.A person has to be aworkmanas defined in Standing Orders Ordinance 1968. A workman is "any person employed in any industrial or commercial establishment to do any skilled or unskilled, manual or clerical work for hire or reward".

3.He/she must be a permanent workman. Badli (replacement worker) or a contract worker are also entitled to gratuity if the length of service is more than one year. A temporary worker (whose maximum length of employment is nine months) or a probationer (three months) is not eligible for gratuity under the law.

4.The minimum qualifying employment period is twelve months or above. However, if a worker has worked over six months in a specific year, he will be entitled to a gratuity of one year. Thus, in essence, gratuity is payable for more than six months of employment when the length of employment exceeds one year.

What are the qualifying events for payment of gratuity to a worker?

An employee is entitled to gratuity when:

  1. He resigns from his service (voluntary retirement or voluntary redundancy in exchange for financial benefits like golden handshake schemes)
  2. His organization terminates his services due to reasons other than misconduct
  3. He dies while in service of his employer (it is not necessary that the employee should be on duty at the time of death)
  4. He reaches the superannuation age and retires

However, if an employee's services were terminated on account of misconduct (like harassment, theft etc.), a gratuity would no longer be admissible to him.

In the case of the 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 the "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".

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. Originally, gratuity was set at 15 days' wages for every completed year of service. In 1973, the rate was revised to 20 days' wages. In 1994, it was further revised to 30 days' wagesfor every completed year of service or any period in excess of six months. After the 18th Constitutional Amendment of 2010, provinces have enacted necessary legislation providing for gratuity on termination of employment. Punjab and the Islamabad Capital Territory provide 30 days' wages for each year of service. Khyber Pakhtunkhwa and Sindh provide one-month wages for each year of service. Balochistan requires two-months wages as gratuity for each year of service.

The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month of his service" or "the highest drawn pay by a piece-rate worker during the preceding twelve months". Wages for gratuity calculation are the "gross wages" including all permanent and regular allowances (like house rent allowance, cost of living allowance and conveyance allowance), however, these don't include any such contingent or unpredictable payments like temporary relief to workers (e.g. flood relief) or bonus provided by the employer. Other than wage rate, the second determining factor in gratuity calculation is the time period a worker has served with an establishment/organization. Any length of service higher than six months over the number of years of service is considered as one year for the purpose of gratuity calculation. Whereas any length of service less than six months is not included in the course of calculating gratuity.

Consider the following illustration:

Date of joining/first appointment in an establishment

01September 1990

Date of voluntary retirement/resignation

30April 2022

The gross salary paid in 2022

Rs. 50,000

Temporary relief (flood relief)

10,000

Bonus (at the end of the year indicating a profitable situation for the firm)

20,000

The total length of service

31 years and 8 months

Admissible period for the calculation of gratuity

32 years

To calculate gratuity, the Last drawn monthly gross pay

Rs. 50,000

Pay per day

50,000/26(working days)=1923

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One year gratuity (pay per day*30)

1923*30=57,692

Gratuity for the whole period served i.e. 32 years

32*57,692=Rs. 1,846,153

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Note: If the employment period in the above example was 31 years and 4 months, the gratuity would be payable only for 31 years.

Wages for workers are determined on a 26-day month basis as defined in theMinimum Wages for Unskilled Workers Ordinance, 1969. Minimum wage notifications, issued by the provincial governments, also determine wages for unskilled, semi-skilled and skilled workers on a 26-day basis.

Gratuity is calculated on the basis of gross wages including all those allowances and fringe benefits which are permanent, regular and non-contingent in nature. The irregular and non-contingent payments (bonus, profit, payment for annual leave etc.) are not part of wages for the purpose of calculating gratuity. In the case of fixed-rated workers, gratuity is calculated on the basis of wages payable to a worker in the last month of service. In the case of piece-rated workers, gratuity is calculated on the highest pay drawn during the last 12 months.

What is the difference between gratuity, provident fund, and pension fund?

As mentioned before, gratuity and provident fund are two different retirement benefits under the Standing Orders Ordinance 1968. Workers don't have legal right to both of these benefits. It is rests with an employer's discretion to decide as to whether he wants to set up provident fund or provide gratuity at the end of employment or grant both of these benefits voluntarily. The law can't force an employer to provide either of these benefits or both the benefits simultaneously.

Gratuity is usually awarded in addition to other benefits payable to an employee. However gratuity is not payable during the period an employer has set up a provident fund in his establishment with at least 50% of the contribution by the employer and the remaining by employee. The sum of both of these contributions would be payable to a workman even if he resigns or is dismissed from service for any reason including misconduct (remember gratuity is not admissible in case of misconduct). However, the law does not stop an employer to provide both gratuity and provident fund to its employees. What is provided in the law is the minimum legal protection i.e. floor and not the ceiling. Both the Khyber Pakhtunkhwa and Sindh Standing Orders Acts further provide that the amount paid to the worker under provident fund must not be less than the amount of gratuity admissible to such worker.

It must be emphasized here though that after a 2007 amendment, there is also a provisions for an Approved Pension Fund. If, agreed through collective bargaining, an employer offers and contributes to an “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001 (XLIX of 2001), and where the contribution of the employer is at least 50% of the limit prescribed in the aforesaid Ordinance, and to which the workman is also a contributor for the remaining 50% or less, no gratuity is payable for the period during which such contributions has been made. The Pension Fund option is not provided under the Khyber Pakhtunkhwa and Sindh Standing Orders Acts.

It is interesting to note however that in the case of misconduct, an employer is not required to pay gratuity however if a Provident Fund is maintained, the workman is entitled to receive the amount standing to his credit in the provident fund, including the contributions of the employer to such fund, even if he resigns or is dismissed from service.

If an employer refuses to pay gratuity or is paying less than the due amount, what should a worker (or his dependents) do?

The first step to get gratuity is to apply to the employer for payment of the due amount. If there are delays on the employer side or employer is paying less than the due amount, the aggrieved party (worker or his dependents, in case of his death) can file a claim to the Commissioner appointed under section 15 of the Payment of Wages Act 1936. The complaint to the Workmen Compensation Commissioner's office can be filed within three years of the incidence of the act. A Workmen Compensation Commissioner is the officer of directorate of labor welfare and every district has a designated Commissioner for labor related matters.

How is gratuity paid to the worker's dependents in the case of worker's death?

In the event of a worker's death, gratuity is payable to the legal dependents of a worker. The amount of gratuity, as calculated above, is transferred to theWorkmen Compensation Commissioner, appointed under theWorkmen Compensation Act 1923. The Commissioner then allocates the amount to the worker's dependents who are defined as thewidow, minor son (under 18 years), and unmarried daughter, or a widowed mother. The amount of gratuity is allocated among the dependents in accordance with the provisions of section 8 of theWorkmen’s Compensation Act, 1923 (or its provincial variants).

Some points to remember

1. Gratuity is payable on completion of 12 months of service after first day of employment. It is not related to calendar year (January to December) or fiscal or financial year (July to June) or any other arbitrary period.

2. Gratuity is payable for more more than six months of employment. If the period of employment is less than 6 months, no gratuity is payable.

3. As stated above, employer is required to provide only one benefit: Gratuity or Provident Fund or Pension Fund. However, under a collective agreement/memorandum of understanding, the employer may provide multiple benefits or the rate of gratuity may be raised from 30 days' wages to 40-45 days' wages.

4. Unlike Bonus or workers' participation in profits, gratuity has no connection with the financial position of the employer. It must be paid to an eligible worker at the end of service, whether by superannuation or resignation or death or termination (for any reason other than misconduct).

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FAQs

Gratuity Law in Pakistan? ›

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.

Who is eligible for gratuity in Pakistan? ›

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 months.

What is the new law about gratuity? ›

The retirement gratuity will be equal to 1/4th of the employee's emoluments for each completed 6 monthly period of qualifying service, subject to a maximum of 16½ times the emoluments. The amount of retirement gratuity or death gratuity payable under the rule will not exceed Rs. 20 lakh.

What is the new rule of gratuity 2021? ›

New gratuity rules 2021

This is because according to the new law, the allowances of an employee cannot exceed 50 per cent of the total salary. To comply with this rule, employers will have to increase the basic salary of their employees by 50 per cent.

What is gratuity formula? ›

Gratuity Amount = (15 * Last drawn salary amount * period of service) / 30. For Example: For example, if you have at a company for 10 years and 8 months and your salary is Rs. 50,000, the calculation of the gratuity amount is done as follows: Gratuity Amount: (15 * 50,000 * 11) / 30 = Rs.

What is gratuity formula in Pakistan? ›

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.

Can a company refuse to pay gratuity? ›

An employer cannot deny gratuity to the employee on the ground of limitation. No doubt, there is a specified period of 30 days for an employee to file a notice to the employer but a claim for gratuity will never be invalid solely because it was not presented within the specified time.

What is the new rule of gratuity 2022? ›

If an employee has served for more than 1 year but less than 5 years, he is entitled to full gratuity pay based on 21 days' salary for each year of work. If an employee has served more than 5 years, he is entitled to full gratuity of 30 days' salary for each year of work following the first five years.

What is the minimum period for gratuity? ›

As per the Act, an employee should render five years of continuous service with the existing employer to become eligible for gratuity. However, Section 2A of the same Act, defines the term 'continuous service' under which many of those who have not worked continuously for five years also become eligible for gratuity.

What is the minimum eligibility for gratuity? ›

The section says that for every year of completed service (more than six months), the employee can receive gratuity. As an employee, if you work in an organisation for more than six months, you are entitled to get the gratuity.

Is 4 years eligible for gratuity? ›

Thus, in accordance with the Act, an employee is eligible for gratuity only if he/she has completed 5 years of service with an organization. These 5 years must be continuous and there should not be any gap in the services of the employee with that company.

Is gratuity mandatory for private companies? ›

The Company have to pay ? In 1972 the Government passed the Payment of Gratuity Act and made it mandatory for all the employers with more than 10 employees to pay gratuity.

What is gratuity limit? ›

According to the Gratuity Act 1972, an employee becomes eligible for the loyalty benefit only if he has completed five years of regular service. The maximum amount of gratuity that can be paid to an employee is Rs 20 lakh.

What percentage of salary is gratuity? ›

Ans: An employee can receive a maximum of 57.69% of the monthly salary as gratuity. To know the exact amount of gratuity, you can use the Gratuity calculator.

How much is gratuity of basic salary? ›

Gratuity Calculations in case of Death of Employee
Qualifying ServiceGratuity
< 1 Year2 times of basic pay
1 year or more but less than 5 years6 times of basic pay
5 years or more but less than 11 years12 times of basic pay
11 years or more but less than 20 years20 times of basic pay
1 more row

What is gratuity in salary structure? ›

The gratuity amount is paid in gratitude for the services rendered by the individual during the period of employment. According to the Payment of Gratuity Act, 1972, gratuity is calculated as 4.81% of the basic pay. Most firms with a workforce of 10 or more employees come under the Act.

Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment Act of 2014) 3.. In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in Punjab), every commercial establishment (employing 20 or more workers) and industrial establishment (employing 50 or more workers) are required to pay gratuity to a worker once he/she has met the minimum criteria.. The Khyber Pakhtunkhwa Act and the Sindh Terms of Employment (Standing Orders) Act, 2015 reduce the minimum number of workers in commercial establishments to 10 workers and in industrial establishments to 20 workers.. However, if a worker has worked over six months in a specific year, he will be entitled to a gratuity of one year.. The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month of his service" or "the highest drawn pay by a piece-rate worker during the preceding twelve months".. Whereas any length of service less than six months is not included in the course of calculating gratuity.. Wages for workers are determined on a 26-day month basis as defined in the Minimum Wages for Unskilled Workers Ordinance, 1969.. In the case of fixed-rated workers, gratuity is calculated on the basis of wages payable to a worker in the last month of service.. Both the Khyber Pakhtunkhwa and Sindh Standing Orders Acts further provide that the amount paid to the worker under provident fund must not be less than the amount of gratuity admissible to such worker.. In the event of a worker's death, gratuity is payable to the legal dependents of a worker.

Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment Act of 2014) 3.. The Sindh Payment of Wages Act, 2015 5.. The Balochistan Payment of Wages Act, 2021. The Factories Act, 1934 (adapted by the province of Punjab through the Amendment Act of 2012) 3.. In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in Punjab), every commercial establishment (employing 20 or more workers) and industrial establishment (employing 50 or more workers) are required to pay gratuity to a worker once he/she has met the minimum criteria.. A temporary worker (whose maximum length of employment is nine months) or a probationer (three months) is not eligible for gratuity under the law.. However, if a worker has worked over six months in a specific year, he will be entitled to a gratuity of one year.. The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month of his service" or "the highest drawn pay by a piece-rate worker during the preceding twelve months".. Whereas any length of service less than six months is not included in the course of calculating gratuity.. Note: If the employment period in the above example was 31 years and 4 months, the gratuity would be payable only for 31 years.. In the case of fixed-rated workers, gratuity is calculated on the basis of wages payable to a worker in the last month of service.. As mentioned before, gratuity and provident fund are two different retirement benefits under the Standing Orders Ordinance 1968.. Both the Khyber Pakhtunkhwa and Sindh Standing Orders Acts further provide that the amount paid to the worker under provident fund must not be less than the amount of gratuity admissible to such worker.. In the event of a worker's death, gratuity is payable to the legal dependents of a worker.. Gratuity is payable on completion of 12 months of service after first day of employment.

The amount of gratuity an employee is entitled to be calculated based on the employee’s length of service and salary.. Under the Gratuity Act, an employee is entitled to receive a gratuity of one month’s salary for each year of service.. However, if the employee has been in continuous service for more than five years, the gratuity amount is increased to two months’ salary for each year of service.. The Gratuity Act provides for exceptions to the rule that an employee must be in continuous service for at least five years to receive a gratuity.. The Gratuity Act also provides for the payment of gratuities to employees who are terminally ill.. For employees who have completed five years or more of continuous service, the gratuity is equal to two months’ salary for each year of service.. However, if an employee has been in continuous service for less than five years, the gratuity is equal to one month’s salary for each year of service.. The Gratuity Act of 1972 is a Pakistani law that requires employers to pay gratuities, or bonus payments, to employees who have completed at least five years of service.

Since then payment of gratuity is a legal benefit of the eligible worker.. 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.. 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 months.. Gratuity becomes payable at the time of separation from services which could be: (i) by resignation by the workman, (ii) termination of services by the employer due to any reason other than misconduct (in case of proved misconduct employer is not bound to pay gratuity), (iii) in case of death and (iv) retirement or superannuation of a worker.. 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 months in the same establishment.. of service years. For service of more than six months, gratuity is payable otherwise not.. Any payments which are irregular (unpredictable and/or depend on the goodwill of employer) or contingent in 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 a fixed-rated worker, gratuity is to be calculated on the basis of wages admissible to the worker in the last month of service.. In case of death of a workman, gratuity is payable to the legal dependents of a workman.

The Industrial and Commercial Establishments (Standing Orders) Ordinance, 1968 (applicable in ICT, Sindh & Balochistan) Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (adapted by the province of Punjab through Amendment Act of 2012) The Khyber Pakhtunkhwa Industrial And Commercial Employment (Standing Orders) Act, 2013 Payment of Wages Act, 1936 (applicable in ICT, Sindh & Balochistan) Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment Act of 2014) The Khyber Pakhtunkhwa Payment of Wages Act, 2013 Factories Act, 1934 Factories Act, 1934 (adapted by the province of Punjab through Amendment Act of 2012) The Khyber Pakhtunkhwa Factories Act, 2013 Shops and Establishments Ordinance, 1969 Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab through Amendment Act of 2014) Khyber Pakhtunkhwa Shops and Establishments Act, 2015. In accordance with section 1(4) of the Standing Orders Ordinance, 1968 (and its variant in Punjab), every commercial establishment (employing 20 or more workers) and industrial establishment (employing 50 or more workers) are required to pay gratuity to a worker once he/she has met the minimum criteria.. The Khyber Pakhtunkhwa Act reduces the minimum number of workers in commercial establishments to 10 workers while in industrial establishments to 20 workers.. A workman is "any person employed in any industrial or commercial establishment to do any skilled or unskilled, manual or clerical work for hire or reward".. However, if a worker has worked over six months in a specific year, he will be entitled to gratuity of one year.. The basis for calculation of wages is "wages admissible to a fixed-rate worker in the last month of his service" or "the highest drawn pay by a piece-rate worker during the preceding twelve months".. Whereas any length of service less than six months is not included in the course of calculating gratuity.. As mentioned before, gratuity and provident fund are two different retirement benefits under the Standing Orders Ordinance 1968.. However gratuity is not payable during the period an employer has set up a provident fund in his establishment with at least 50% of the contribution by the employer and the remaining by employee.. However, the law does not stop an employer to provide both gratuity and provident fund to its employees.. The Khyber Pakhtunkhwa Act further provides that the amount paid to the worker under provident fund must not be less than the amount of gratuity admissible to such worker.. It is interesting to note however that in the case of misconduct, an employer is not required to pay gratuity however if a Provident Fund is maintained, the workman is entitled to receive the amount standing to his credit in the provident fund, including the contributions of the employer to such fund, even if he resigns or is dismissed from service.

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.. 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.. 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.. 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.. 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.. 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.. Any payments which are irregular (unpredictable and/or depend on the goodwill of employer) or contingent in 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.

Since then payment of gratuity is a legal benefit of eligible worker.. The establishment employing or employed certain number of workers is legal liable to offer at least any one of the retirement benefit.. 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.. 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.. 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.. of service years. For service of more than six months, gratuity is payable otherwise not.. Any payments which are irregular (unpredictable and/or depend on the goodwill of employer) orcontingent in 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 case of death of a workman, gratuity is payable to the legal dependents of a workman.. If the employer fails to deposit the gratuity amount then the dependents of the deceased may submit an application to Commissioner for the recovery.. It does mean calendar year, financial year or any other period.

Before the inclusion of Gratuity in Standing Order, 1972, Gratuity was optional for employers, but it has turned mandatory for employers since then.. 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 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).. 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.. 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.. 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.. Where the employee receiving gratuity has already received gratuity from the same or different employer.

In accordance with section 1(4) of the Standing Orders Ordinance,. 1968 (and its variant in Punjab), every commercial establishment. (employing 20 or more workers) and industrial establishment (employing. 50 or more workers) are required to pay gratuity to a worker once he/she. has met the minimum criteria.. The Khyber Pakhtunkhwa Act and the Sindh. Terms of Employment (Standing Orders) Act, 2015 reduce the minimum. number of workers in commercial establishments to 10 workers and in. industrial establishments to 20 workers.. Wages for gratuity calculation are the "gross wages" including all. permanent and regular allowances (like house rent allowance, cost of. living allowance and conveyance allowance), however, these don't include. any such contingent or unpredictable payments like temporary relief to. workers (e.g. flood relief) or bonus provided by the employer.. Both the Khyber. Pakhtunkhwa and Sindh Standing Orders Acts further provide that the. amount paid to the worker under provident fund must not be less than the. amount of gratuity admissible to such worker.. It is interesting to note however that in the case of misconduct, an. employer is not required to pay gratuity however if a Provident Fund is. maintained, the workman is entitled to receive the amount standing to. his credit in the provident fund, including the contributions of the. employer to such fund, even if he resigns or is dismissed from service.

Since then payment of gratuity is a legal benefit of. eligible worker.. 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.. 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.. Gratuity becomes payable at time of separation from services. which could be: (i) by resignation by the workman, (ii) termination of services. by employer due any reason other than misconduct (in case of proved misconduct. employer is not bound to pay gratuity), (iii) in case of death and (iv). retirement or superannuation of a worker.. 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.. 3.Finally calculate. payable amount of gratuity for the entire service period, the formula is per. day wage x 30 (rate of gratuity) x No.. For service of more than six months, gratuity is payable. otherwise not.. Any. payments which are irregular (unpredictable. and/or depend on the goodwill of employer) or contingent in. 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.. 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.

Calculation of gratuity is based on the last drawn salary and years of service –. Gratuity is calculated based on an individual’s last drawn salary and years of service.. a. Gratuity calculation for employees covered under the act. For instance, if Mr. B works for an organisation for 12 years and 8 months, his completed years of service will be taken as 13 years as per the gratuity rules.. b. Gratuity calculation for employees not covered under the act. For instance, if Mr. C has been employed at an organisation for 15 years and 8 months, his number of years employed will be considered as 15 years.. Then, his gratuity will be –. As per the gratuity rules, employers can forfeit to pay a gratuity of the employee who has been terminated for the following reasons –. A gratuity of up to Rs.20 Lakh paid by organisations covered under the Payment of Gratuity Act, 1972, other than central and state government departments, defence, and local governing bodies, is exempt from tax as per the gratuity rules 2021 .. The Rs.20 Lakh threshold for tax exemption is for cumulative gratuity received –. Upon an employee’s demise, the gratuity that is paid to his widow or legal heir will be exempt from tax.

In accordance with section 1(4) of the Standing Orders Ordinance,. 1968 (and its variant in Punjab), every commercial establishment. (employing 20 or more workers) and industrial establishment (employing. 50 or more workers) are required to pay gratuity to a worker once he/she. has met the minimum criteria.. The Khyber Pakhtunkhwa Act and the Sindh. Terms of Employment (Standing Orders) Act, 2015 reduce the minimum. number of workers in commercial establishments to 10 workers and in. industrial establishments to 20 workers.. Industrial and Commercial Establishments (Standing Orders). Ordinance 1968 (or any of its variants) is applicable to that. establishment (whether commercial or industrial) i.e. it must have the. minimum number of workers as mentioned above. The basis for calculation of wages is "wages admissible to a. fixed-rate worker in the last month of his service" or "the highest. drawn pay by a piece-rate worker during the preceding twelve months".. Wages for gratuity calculation are the "gross wages" including all. permanent and regular allowances (like house rent allowance, cost of. living allowance and conveyance allowance), however, these don't include. any such contingent or unpredictable payments like temporary relief to. workers (e.g. flood relief) or bonus provided by the employer.. Note: If the employment period in above example was 25 years and 4 months, gratuity would be payable only for 25 years.. In the case of fixed-rated. workers, gratuity is calculated on the basis of wages payable to a. workers in the last month of service.. It is rests with an. employer's discretion to decide as to whether he wants to set up. provident fund or provide gratuity at the end of employment or grant. both of these benefits voluntarily.. However gratuity is not payable during the period an. employer has set up a provident fund in his establishment with at least. 50% of the contribution by the employer and the remaining by employee.. Both the Khyber. Pakhtunkhwa and Sindh Standing Orders Acts further provide that the. amount paid to the worker under provident fund must not be less than the. amount of gratuity admissible to such worker.. If, agreed through. collective bargaining, an employer offers and contributes to an. “Approved Pension Fund” as defined in the Income Tax Ordinance, 2001. (XLIX of 2001), and where the contribution of the employer is at least. 50% of the limit prescribed in the aforesaid Ordinance, and to which the. workman is also a contributor for the remaining 50% or less, no. gratuity is payable for the period during which such contributions has. been made.. It is interesting to note however that in the case of misconduct, an. employer is not required to pay gratuity however if a Provident Fund is. maintained, the workman is entitled to receive the amount standing to. his credit in the provident fund, including the contributions of the. employer to such fund, even if he resigns or is dismissed from service.. If there are delays on the employer side or. employer is paying less than the due amount, the aggrieved party (worker. or his dependents, in case of his death) can file a claim to the. Commissioner appointed under section 15 of the Payment of Wages Act. 1936.. However, under a collective. agreement/memorandum of understanding, the employer may provide. multiple benefits or the rate of gratuity may be raised from 30 days'. wages to 40-45 days' wages.

How to calculate gratuity amount using gratuity formula in 2020?. Gratuity Formula – Last drawn salary X years of service X 15/26.. 20 Lakhs Gratuity Eligibility – 5 Years of Services Rules – Gratuity is Mandatory Gratuity Calculations. Under the Payment of Gratuity Act, the employee can demand and receive gratuity as a part of his or her terms of employment.. As per the latest notification, The maximum amount limit of gratuity has recently increased by the Parliament under the Payment of Gratuity Act to 20 lakhs from the previous amount of 10 lakhs.. Is gratuity available for all employees?. Is it mandatory the employee has to work every day in a year ?. Gratuity formula, for calculation of gratuity,depends on the period of employment, last drawn salary, and number of completed years of service.. His last received salary is 26000 Rs per month(basic plus DA).. In the case of death of an employee, even if the employee works for less than the five years, he will be eligible to get gratuity for the number of years of completed service.. For companies covered under the Payment of Gratuity Act, the least of the following is exempt from tax –. Last salary (basic + DA)* number of years of employment* 15/26; Rs.. For employees not covered under the Payment of Gratuity Act, the least of the following is exempt from tax –. What If an employee leaves the company after 4 years and 8 months, will he be eligible for a gratuity?

In terms of structure, while gratuity is a lump sum amount, provident fund on the other hand is an investment fund into which both the employee and the employer make contributions which are then invested on behalf of the employee.. For the provident fund to qualify as a substitute for gratuity the employers must match the employees contribution in the fund.. While the federal law does not explicitly state any specific level of contribution into the provident fund, in Sindh and KPK, the law requires that the provident fund should at least provide a total benefit equal to what the employee would have made if the employer had offered a gratuity instead.. However, in the case of other employees, since they are not entitled to receive gratuity or provident fund to begin with, provident fund trust deeds can contain certain clauses which allow employers to recover their contribution to the employees provident fund and the interest earned on it in case the employee is dismissed or leaves before the expiration of their contract for reasons other than unavoidable circumstances or illnesses.. Rather both the employee and the employer can make contributions to a VPS fund managed by asset management companies which makes VPS a much more cost effective option for employers.. For example, since a VPS is managed and operated by an asset management company and not the employer themselves, the employers are hence unable to recover their contributions or any amount from the employees VPS account in case the employee is dismissed from the job.

The end of service gratuity, a statutory right of employees and a defined retirement benefit, is being gamed by some employers in Pakistan.. Because gratuity is a multiple of one’s salary and years of service, it is paid to the workers annually and not as a lump sum at the natural end of the employment.. It becomes payable for reasons such as reaching the retirement age, death, or resignation of the employee.. The annual payment also protects workers from the risk that the company operating a non-funded scheme may not be able to make the lump sum payment due to bankruptcy.. A non-funded scheme requires actuarial valuation and recognition of liability on the balance sheet and a funded scheme requires its own audited annual financial statements.

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