Gratuity is a legal entitlement in Pakistan—a lump-sum payment made to an employee when their employment ends. It rewards long service and is governed by the Payment of Gratuity to Workers Act, 1976. Getting the calculation right protects both you and your staff, and matters especially for businesses with regular turnover.

Eligibility and Minimum Service

An employee becomes eligible for gratuity after completing a minimum of two years of continuous service. Part-time workers on fixed-term contracts may have different rules depending on their agreement, so always check the employment contract and sector-specific regulations. Once eligible, the payment is due within 30 days of the employment ending.

The Gratuity Formula

In Pakistan, gratuity is typically calculated using this straightforward formula:

Gratuity = (Last Drawn Salary) × (Years of Service) ÷ (26)

  • Last Drawn Salary includes basic pay and allowances (but not overtime or bonuses unless contractually specified).
  • Years of Service is counted from the start date to the end date of employment.
  • 26 represents the number of fortnight periods in a year.

For example, if an employee earned a monthly salary of PKR 30,000 and completed 5 years of service, their gratuity would be (30,000 × 5) ÷ 26, roughly PKR 5,769 per fortnight of service.

Special Cases and Exemptions

Some sectors or employer schemes may offer more generous gratuity structures. Check whether your company has a pension or gratuity scheme in place—if it meets or exceeds the statutory requirement, you may satisfy the law through that route instead. Gratuity does not apply if the employee is dismissed for misconduct, though procedural fairness matters here; seek legal counsel if dismissal is contested.

If an employee resigns, they forfeit gratuity unless local law or a collective agreement says otherwise. Early separation due to redundancy typically still triggers the gratuity payment.

Tax and Accounting Considerations

Gratuity paid under statutory obligation is tax-exempt in Pakistan up to certain limits, benefiting the employee. From an employer's perspective, it is a deductible business expense. However, it must be provisioned in your accounts—ideally building a reserve gradually rather than facing a large cash outflow unexpectedly when someone leaves.

Setting Up a Process

To avoid disputes and cash-flow shocks, maintain clear records of each employee's start date, salary history and service breaks. When someone leaves, calculate the gratuity promptly, document it, and ensure payment is made within the legal timeframe. Payroll software that tracks service tenure and salary changes can automate much of this; many organisations in Pakistan use tools like PayTime to embed gratuity calculations into their monthly or exit workflows.

Practical Takeaway

Gratuity is a non-negotiable cost of employment in Pakistan. Plan for it by setting aside funds regularly, keeping accurate service and salary records, and verifying calculation rules for your sector or workforce type. Handling it correctly builds trust with your team and keeps you compliant—far better than scrambling to pay an angry former employee months after they've left.