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Provident fund in Pakistan and gratuity explained: the law pays 30 days' wages a year, a matched provident fund can replace it, and how each is taxed.
AI 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.
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.
| 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.
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 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.
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.
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:
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.
Your salary is Rs 24 lakh a year and your employer puts Rs 2 lakh into a recognised fund.
Use our salary tax calculator and income tax slabs to see what that Rs 50,000 costs at your income.
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.
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, which pays a monthly pension, and a voluntary pension fund, which gives a tax credit.
More guides: government pension calculation, EOBI pension, pension funds (VPS), investment options in Pakistan, salary tax calculator, Money.
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.
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.
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.
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.
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.
Photo by Olena Kholina on Unsplash
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