End-of-service gratuity and its tax-exempt portion.
Total gratuity
—
Tax-exempt
—
Taxable
—
Worked example
Suppose your last drawn monthly salary is PKR 120,000 and you have completed 10 years of service. Using
the common one-month-of-salary-per-year basis, the gratuity is 120,000 times 10, which is 1,200,000. For
an approved gratuity scheme the tax-exempt portion is capped at 75,000, so 75,000 of the payout is exempt
and the remaining 1,125,000 is taxable, added to your income for the year. The exemption cap is a fixed
rupee amount rather than a percentage, so the longer you serve and the higher your final salary, the
smaller the exempt share becomes in relative terms. Here only about 6% of the gratuity escapes tax, which
surprises many long-tenured employees who expect a larger break.
Item
Amount (PKR)
Last monthly salary
Rs 120,000
Years of service
10
Total gratuity (1 month x 10)
Rs 1,200,000
Tax-exempt (approved scheme cap)
Rs 75,000
Taxable portion
Rs 1,125,000
How it is calculated
Gratuity is an end-of-service payment, and a widely used formula awards one month of your last drawn
salary for each completed year of service. The tool multiplies your monthly salary by the number of years
to get the total gratuity. It then splits that total into a tax-exempt part and a taxable part based on
the type of scheme. For an approved gratuity scheme the exemption is capped at a fixed amount, so anything
up to that cap is exempt and the rest is added to your taxable income. Because the cap is a flat rupee
figure, larger gratuities are mostly taxable, and the exempt share shrinks as service length and final
salary rise. Employment contracts and the specific scheme rules can vary the per-year multiple and the
exemption treatment, so confirm your scheme is approved and check the current statutory cap before relying
on the split.
Frequently asked questions
How is gratuity calculated in Pakistan?
A common gratuity formula is one month of your last drawn salary for each completed year of service. For an approved gratuity scheme, a portion of the gratuity is exempt from tax up to the statutory cap, and any amount above that is taxable. This tool uses the one-month-per-year basis and applies the approved-scheme exemption cap.
What is the tax-exempt limit on gratuity under an approved scheme in Pakistan?
Under an approved gratuity scheme the tax-exempt portion is capped at a fixed rupee amount set by the Federal Board of Revenue. Any gratuity above that cap is added to your taxable income for the year at the normal progressive slab rates. Because the cap is a flat number rather than a percentage, long-serving employees with high final salaries find most of their gratuity is taxable.
Is gratuity mandatory in Pakistan and how many years of service qualify?
Gratuity is required under the West Pakistan Industrial and Commercial Employment Ordinance 1968 for eligible workers in covered establishments, generally after completing a minimum period of continuous service, commonly one year. The entitlement, calculation formula, and minimum qualifying period can vary by sector and by any contract terms above the statutory floor, so confirm the rules for your specific employer.
How does an approved gratuity scheme differ from an unapproved one?
An approved gratuity scheme is one that meets the criteria laid down by the Federal Board of Revenue, which entitles the employee to the statutory tax exemption up to the prescribed cap. A gratuity paid outside an approved scheme is generally fully taxable as salary income. Employees covered by an approved scheme therefore receive a meaningful tax saving on the exempt portion, though the saving shrinks relative to the total as service length and salary increase.