Gratuity Entitlement in Pakistan: What You're Owed and What's Taxed

Gratuity is one of the few retirement-adjacent benefits Pakistani labour law actually guarantees for many employees, yet most people only think about it once they're already resigning or being let go — by which point it's too late to have negotiated the scheme type that determines how much of it survives tax.

What gratuity actually is

Gratuity is a lump-sum payment tied to your years of service, typically calculated from your last drawn basic salary. It exists separately from provident fund, pension, or any severance negotiated at exit — an employer with a gratuity scheme owes it regardless of why your employment ended, subject to the scheme's own vesting rules (many require a minimum service period, often one year, before gratuity accrues at all).

The three scheme types, and why they matter

Government employees — Gratuity paid in line with applicable service rules is generally fully exempt from tax. If you work for the federal or provincial government, or a statutory body following government-style rules, this is the most favourable category.

Approved Gratuity Fund (AGF) — Many larger private employers maintain a gratuity fund formally approved by the Commissioner under the Income Tax Ordinance. Payments from an approved fund are exempt up to a threshold, with amounts above it taxed as normal income.

Unapproved or no scheme — Smaller employers, or ones that never formalized approval for their gratuity arrangement, fall here. A smaller portion is exempt, and the remainder is added to your income and taxed at your normal slab rate for the year you receive it.

Our gratuity calculator walks through all three scenarios and shows the exempt and taxable split for your specific numbers.

Why the scheme type is worth knowing before you need it

Most employees never ask whether their employer's gratuity arrangement is government-style, formally approved, or informal — until the payment lands and the tax treatment is a surprise. If you're early in a job and gratuity matters to you, it's a reasonable question to ask HR directly: is our gratuity fund FBR-approved? The answer materially changes what you'll actually keep.

How gratuity interacts with your annual return

The exempt portion of gratuity doesn't need to be reported as taxable income. The taxable portion, however, gets added to whatever else you earned that tax year and taxed at your normal slab rate — which can push you into a higher bracket in the year you receive a large gratuity payment, even if your regular salary alone wouldn't have reached it. If you're planning the timing of a resignation and gratuity is a meaningful amount, it's worth running the combined figure through our income tax calculator to see the actual bracket impact before deciding when to leave.

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