Pakistan Gratuity
Employee Rights 2026

1. The Legal Foundation of Gratuity in Pakistan

In Pakistan, the primary legislation governing end-of-service benefits is the West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968. This law applies to every industrial or commercial establishment employing 20 or more workers. While the law originated as a provincial ordinance, it has been adopted (with minor variations) by Sindh, Punjab, Khyber Pakhtunkhwa, and Balochistan following the 18th Amendment.

Gratuity is considered a "deferred wage" and a reward for an employee's long-term loyalty and service to their employer.

2. The "30-Day" Gratuity Rule

Under Standing Order 12(6), every permanent employee is entitled to a gratuity equivalent to 30 days' wages for every completed year of service. A period exceeding six months is treated as a full year for calculation purposes.

Important Note on "Wages": Unlike the UAE, where gratuity is based on "Basic Salary," in Pakistan, it is generally calculated on the Gross Wage (including fixed allowances), unless the employment contract specifically limits it to basic pay in a way that remains compliant with provincial minimum wage laws.

3. Gratuity vs. Provident Fund: Can you have both?

This is the most misunderstood area of Pakistan labor law. The Standing Orders Ordinance states that an employer is exempt from paying statutory gratuity if they have established a Provident Fund. However, this is subject to strict conditions:

• Employer Contribution: The employer's contribution to the Provident Fund must be at least equal to the amount of gratuity the employee would have earned.
• The Comparison: If the employer's total contribution to the PF is less than 30 days of pay per year, they must pay the difference to the employee upon termination.
• The "Double Benefit": Some progressive companies offer both Gratuity AND Provident Fund as a competitive benefit. In such cases, the gratuity is treated as a contractual benefit above the statutory minimum.

4. EOBI: The National Pension Scheme

The Employees' Old-Age Benefits Institution (EOBI) is a mandatory social security scheme. It is distinct from gratuity and applies to all organizations with 5 or more employees.

Benefits of EOBI: After 15 years of insured service, employees become eligible for a monthly pension. It also provides invalidity pensions and survivor's pensions (for widows/widowers).

5. Provincial Social Security (SESSI / PESSI)

In addition to EOBI, employers must register workers with provincial bodies like SESSI (Sindh) or PESSI (Punjab). Employers contribute 6% of the wage (up to a specific cap) to provide:

• Free medical treatment for the employee and their family.
• Sickness and injury benefits (cash payments).
• Maternity benefits.
• Death grants and survivor's financial support.

6. Case Study: Calculating Pakistan Benefits

7. Taxation on Gratuity (FBR Rules 2026)

The Federal Board of Revenue (FBR) provides specific exemptions for gratuity payments under the Income Tax Ordinance 2001:

• FBR Approved Fund: Exempt up to Rs. 300,000.
• Government Employees: The entire gratuity is usually tax-exempt.
• Unapproved Funds: Exemption is limited to Rs. 75,000 or 50% of the amount (whichever is less).

8. How to Claim or Dispute

If an employer fails to settle dues within the legal timeframe, the employee should:

1. Serve a Grievance Notice in writing to the employer within 90 days.
2. If no response within 15 days, file a case in the Labour Court.
3. For inter-provincial disputes, the National Industrial Relations Commission (NIRC) has jurisdiction.