# Provident fund and gratuity in Pakistan: rules, calculation and tax

URL: https://which.pk/money/guides/provident-fund-gratuity-pakistan/
Author: Ahtisham
Updated: 22 Oct 2026

## Summary

Under the provincial Standing Orders laws, a worker who resigns or is let go other than for misconduct gets gratuity of 30 days' wages (one month's in Sindh) per year of service. An employer-matched provident fund replaces gratuity for those years. A recognised provident fund pays out tax-free. Gratuity on retirement is tax-free from an approved fund; otherwise only 50% or Rs 75,000, whichever is less, is exempt. The federal GP Fund paid 12.05% for 2025-26.

## Key facts

- Gratuity under the law: 30 days' wages a year
- Tax-free employer PF share: 1/10 of salary, max Rs 150,000
- Gratuity tax-free, no approved fund: 50% or Rs 75,000, lower
- GP Fund profit, 2025-26: 12.05%

A provident fund in Pakistan is a savings pot you and your employer both pay into, and gratuity is a lump sum your employer pays when you leave. Under the provincial labour laws, gratuity is **30 days' wages for every year you worked** (one month's wages in Sindh), on your last wage. If your employer runs a provident fund and puts in at least as much as you, it can replace gratuity for those years.

**Gratuity under the Standing Orders laws:** 30 days' wages a year (For each completed year of service, and any part-year over six months. Sindh's law says one month's wages. Not paid if you are dismissed for misconduct.)

## What is the difference between provident fund and gratuity?

| | Provident fund | Gratuity |
|---|---|---|
| Who pays | You and your employer, every month | Your employer, once, when you leave |
| Rules come from | The fund's own rules; the Income Tax Ordinance for tax recognition | The provincial Standing Orders laws |
| How much | A set share of salary; the employer can't put in more than you | 30 days' wages for each year of service |
| If you are dismissed for misconduct | The Standing Orders laws say you still get your balance, including the employer's share | Not payable |
| Tax when paid out | Tax-free from a recognised fund | Tax-free from an approved fund; otherwise partly taxed |

The rules come from two places. The **Standing Orders laws** of each province decide whether you are owed gratuity. The **Income Tax Ordinance** decides how a provident fund must be run to be "recognised", and how much of each payout is taxed.

## How is gratuity calculated in Pakistan?

Each province has its own version of the law, with the same formula:

| Province | Law | Gratuity for each year | Covers establishments with |
|---|---|---|---|
| Sindh | Sindh Terms of Employment (Standing Orders) Act 2015 | One month's wages | 10 or more workers |
| Khyber Pakhtunkhwa | KP Industrial and Commercial Employment (Standing Orders) Act 2013 | 30 days' wages | 10 or more workers |
| Punjab | Industrial and Commercial Employment (Standing Orders) Ordinance 1968 | 30 days' wages | 20 or more workers |

The rules are the same in each:

- You get gratuity if you **resign or are let go for any reason other than misconduct**.
- Count **every completed year**, and a part-year of **more than six months** as a full year.
- A fixed-rate worker's gratuity is based on the **last month's wages**; a piece-rate worker's on the highest pay in the last 12 months.
- If a worker dies in service, the gratuity goes to the family through the Commissioner under the Workmen's Compensation Act.
- The 1968 Ordinance excludes government establishments that have statutory service rules.

**Punjab's text:** Punjab's official law website did not load on 22 October 2026. The Punjab row is from a law firm's copy of the 1968 Ordinance, which refers to Punjab's 2010 industrial relations law. Sindh and Khyber Pakhtunkhwa are from their governments' own published texts.

### Worked example: gratuity

You retire from a Karachi company with more than 10 workers after **6 years and 8 months**, on a last monthly wage of **Rs 80,000**.

- Years counted: 6 completed years, plus 8 months, which is over six months, so **7 years**.
- Gratuity under Sindh's law: 7 × one month's wages = **Rs 5.6 lakh**.

## Do I get both provident fund and gratuity?

Usually not both for the same years. All three laws say that if your employer has a provident fund you pay into, and the employer's contribution is **not less than yours**, no gratuity is due for the period the fund has existed.

Sindh and Khyber Pakhtunkhwa add a safeguard: what you get from the provident fund **must not be less than the gratuity** the law would have paid. Punjab's text has a second exception: no gratuity for years when, through collective bargaining, the employer pays into an approved pension fund instead.

Either way, you are entitled to your whole provident fund balance, **including the employer's contributions**, even if you resign or are dismissed.

## What are the provident fund rules for private companies?

A provident fund gets its tax benefits only if the tax commissioner **recognises** it under the Sixth Schedule of the Income Tax Ordinance. The main conditions:

- Your contribution is a **fixed share of your salary**, deducted every pay day.
- The employer's contribution in a year **can't be more than yours**.
- The money is held by **two or more trustees**, not by the company.
- You get your balance **on the day you leave** the employer. You can ask in writing to keep it in the fund, or move it to your next employer's recognised fund.
- The fund's rules may let the employer take back its own share only if you are dismissed for misconduct, or leave voluntarily before the service period in those rules. For workers covered by the Standing Orders laws, those laws say you get the employer's contributions even if you are dismissed.

## How is provident fund taxed in Pakistan?

The **employer's yearly contribution** is tax-free up to **one-tenth of your salary or Rs 150,000**, whichever is lower. Anything above is added to your taxable income that year.

### Worked example: provident fund tax

Your salary is **Rs 24 lakh a year** and your employer puts **Rs 2 lakh** into a recognised fund.

- One-tenth of salary is Rs 2.4 lakh; the cap is Rs 1.5 lakh. The lower is **Rs 1.5 lakh**.
- So **Rs 50,000** is added to your taxable salary that year.
- When you leave, the whole balance is paid out **tax-free**.

Use our [salary tax calculator](/business/tools/salary-tax-calculator/) and [income tax slabs](/business/guides/income-tax-slabs-2026-27/) to see what that Rs 50,000 costs at your income.

## Is gratuity taxable in Pakistan?

Gratuity counts as **salary**. The Second Schedule of the Income Tax Ordinance exempts some or all of the gratuity you get **on retirement** (or your heirs get on your death), depending on how it is paid:

| How the gratuity is paid | Tax-free amount |
|---|---|
| Government, local government or statutory body employee | Whatever the service rules give |
| From a gratuity fund approved by the tax commissioner | All of it |
| Under a scheme for all employees approved by FBR | Up to Rs 300,000 |
| Any other gratuity | 50% or Rs 75,000, whichever is less |

The exemption doesn't apply if the gratuity is paid outside Pakistan, to a director who isn't a regular employee, to a non-resident, or to someone who has **already received gratuity** from the same or any other employer.

The exemption's wording covers gratuity on retirement; it doesn't mention resignation, so ask a tax adviser if you are resigning. In our retirement example, Rs 5.6 lakh paid directly by the company (no approved fund or scheme) is tax-free only up to **Rs 75,000**. The other **Rs 4.85 lakh** is taxed as salary. From an approved gratuity fund, the full Rs 5.6 lakh would be tax-free. Ask your HR department which applies before you leave.

## What is GP Fund for government employees?

The **General Provident Fund (GP Fund)** is the provident fund that government employees subscribe to. The Provident Funds Act 1925 protects these compulsory deposits: they can't be assigned and no court can attach them for your debts. Payments from a provident fund under that Act are **exempt from income tax**.

For the federal GP Fund, the Finance Division fixed **12.05%** for 2025-26 (resolution of 3 September 2026), down from **12.46%** for 2024-25. Railways and Defence provident funds get their own rates from their ministries.

Private-sector workers can add to their retirement savings through [EOBI](/money/guides/eobi-pension/), which pays a monthly pension, and a [voluntary pension fund](/money/guides/pension-fund-pakistan/), which gives a tax credit.

More guides: [government pension calculation](/money/guides/government-pension-pakistan/), [EOBI pension](/money/guides/eobi-pension/), [pension funds (VPS)](/money/guides/pension-fund-pakistan/), [investment options in Pakistan](/money/guides/investment-options-pakistan/), [salary tax calculator](/business/tools/salary-tax-calculator/), [Money](/money/).

## Questions people ask

### How is gratuity calculated in Pakistan?

Under the Standing Orders laws, you get 30 days' wages (one month's wages in Sindh) for every completed year of service, and a part-year of more than six months counts as a full year. A fixed-rate worker's gratuity is worked out on the last month's wages.

### Do I get both provident fund and gratuity?

Not necessarily. If your employer runs a provident fund that you pay into and it contributes at least as much as you, the law does not require gratuity for those years. In Sindh and Khyber Pakhtunkhwa, your provident fund payout must not be less than the gratuity would have been.

### Is provident fund taxable in Pakistan?

The balance you get from a recognised provident fund when you leave is tax-free. Each year, employer contributions above one-tenth of your salary or Rs 150,000, whichever is lower, are added to your taxable income.

### Is gratuity taxable in Pakistan?

Gratuity counts as salary, but on retirement some or all of it is exempt: all of it if paid from an FBR-approved gratuity fund, up to Rs 300,000 under an FBR-approved scheme, and otherwise 50% or Rs 75,000, whichever is less.

### What is the GP Fund profit rate for 2025-26?

12.05% a year for the federal General Provident Fund, under the Finance Division's resolution of 3 September 2026. It was 12.46% for 2024-25.

## Sources

- [Income Tax Ordinance, 2001 (amended up to 30.06.2026)](https://download1.fbr.gov.pk/Docs/2026724177725705IncomeTaxOrdinanace2001.pdf), FBR (accessed 22 Oct 2026)
- [The Sindh Terms of Employment (Standing Orders) Act, 2015](https://www.sindhlaws.gov.pk/Setup/Publications_SindhCode/PUB-NEW-18-000108.pdf), Government of Sindh (accessed 22 Oct 2026)
- [The Khyber Pakhtunkhwa Industrial and Commercial Employment (Standing Orders) Act, 2013](https://www.pakp.gov.pk/wp-content/uploads/2024/04/The-Khyber-Pakhtunkhwa-Industrial-and-Commercial-Employment-Standing-Orders-Act-2013-Act-No-XI-2013.pdf), Provincial Assembly of Khyber Pakhtunkhwa (accessed 22 Oct 2026)
- [Resolution on the General Provident Fund rate of profit for 2025-26 (3 Sep 2026)](https://finance.gov.pk/circulars/circular_03092026.pdf), Finance Division (accessed 22 Oct 2026)
- [The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968 (Punjab text)](https://khalidzafar.com/wp-content/files_mf/1530866979TheIndustrialandCommercialEmploymentStandingOrdersOrdinance1968.pdf), Khalid Zafar & Associates (accessed 22 Oct 2026)
- [Provident Funds Act, 1925](https://khalidzafar.com/wp-content/files_mf/1701177300ProvidentFundsAct1925.pdf), Khalid Zafar & Associates (accessed 22 Oct 2026)