This detailed examination of gratuity law in Pakistan, as of, latest 2025, provides a thorough understanding for both employees and employers, ensuring compliance with labor rights and financial security measures. The following sections synthesize information to offer a complete picture.
Definition and Importance
Gratuity is defined as a lump-sum payment made by employers to private-sector employees upon leaving service, typically retirement, death, or termination, except in cases of gross misconduct. It serves as a reward for long-term service, ensuring financial security post-employment. This benefit is crucial for safeguarding employees’ interests, emphasizing fair compensation.
Eligibility Criteria for gratuity
Eligibility generally requires five years of continuous service, underscoring loyalty with no breaks or gaps in employment. Exceptions include:
- Death during service, where legal heirs are entitled, regardless of service duration.
- Permanent disability, qualifying for gratuity even before five years.
- Termination due to redundancy, which may also trigger payment.
Exclusions apply to temporary workers (<6 months), probationers (terminated within 3 months), and contractual staff, adding complexity to eligibility assessments.
Calculation Methodology for gratuity in Pakistan
The standard calculation formula is (Last Drawn Salary × Years of Service) / 26, where the last drawn salary includes basic pay and dearness allowance, excluding bonuses or allowances. For example, with a PKR 50,000 salary and 10 years, the gratuity is (50,000 × 10) / 26 ≈ PKR 192,307.69.
The standard gratuity calculation formula is:
Where:
- Last Drawn Salary includes basic pay and dearness allowance
- Excludes bonuses or other allowances
- Years of Service is the total completed years of employment
- The divisor 26 represents half the number of weeks in a year
Example Calculation:
For an employee with:
- Last drawn salary: PKR 50,000
- Years of service: 10
Gratuity = (50,000 × 10) / 26 ≈ PKR 192,307.69
Note: This calculation follows standard gratuity computation practices.
Provincial variations in gratuity rates include:
- ICT and Punjab: 30 days’ wages per year (historically increased from 15 days in 1973 to 30 in 1994).
- KPK and Sindh: 1 month’s wages per year.
- Balochistan: 2 months’ wages per year.
These rates, calculated on a 26-day month basis, reflect regional economic differences, with additional rates for 5+ years (12 weeks’ salary) and 10+ years (24 weeks’ salary).
The legal basis is the Gratuity Act of 1972, mandating payment for 5+ years of service, supported by the Industrial and Commercial (Standing Orders) Ordinance, 1968, applicable to establishments with 20+ workers (commercial) or 49+ (industrial) until provincial laws took effect post-18th Amendment. Provincial laws include:
- ICT and Punjab: 30 days’ wages per year (increased from 15 days in 1973 to 30 in 1994)
- KPK and Sindh: 1 month’s wages per year
- Balochistan: 2 months’ wages per year
These laws ensure labor rights but introduce variations, such as different thresholds for liable organizations (e.g., ≥10 workers in KPK commercial establishments).
Comparison with Other Retirement Benefits
Employers must offer at least one retirement benefit: gratuity, Provident Fund, or Pension Fund:
- Provident Fund requires ≥50% employer contribution; if maintained, gratuity may not be payable, with KPK and Sindh requiring the fund to equal or exceed gratuity.
- Pension Fund, post-2007, is an option but not in Balochistan, KPK, or Sindh Standing Orders.
- Misconduct (e.g., harassment, theft) bars gratuity but not Provident Fund, adding legal clarity.
This choice reflects employer flexibility but can lead to confusion regarding obligations.
Process and Responsibilities
Employees must initiate claims by providing documentation, ensuring accurate service records. Employers calculate gratuity based on last salary and service years, paying within stipulated timeframes, and maintain records for compliance.
Disputes are resolved via the Commissioner under the Payment of Wages Act, 1936 (section 15), with a 3-year claim period (5 years in Balochistan), handled by the Workmen Compensation Commissioner for dependents.
Practical Examples and Regional Considerations
For a worker in Punjab with PKR 50,000 salary and 33 years service, gratuity at 30 days/year is calculated as (50,000/26 × 30 × 33) ≈ PKR 1,903,846. In Balochistan, at 2 months/year, it would be higher, illustrating regional impact.
Gratuity law in Pakistan, as of, year 2025, ensures financial security, with complexities in eligibility, calculation, and provincial variations. Employers must comply, while employees benefit from understanding their rights, making this a critical aspect of labor law compliance and workforce welfare.
