Gratuity Fund
Gratuity Fund Law in Pakistan
Gratuity is an excellent offer to the retiring employees, providing to workers serving for a long time. Before the inclusion of Gratuity in Standing Order, 1972, Gratuity was optional for employers, but it has turned mandatory for employers since then. Now, Gratuity is a constitutional right of the employee eligible for it.
Any organization that meets the following criteria obliges to grant at least of these retirement bonuses.
- In a commercial organization, if the institution employs 20 or more persons, either directly or indirectly, during any part of the last complete year (12 months).
- In the case of an industrial company, if the organization employs 49 or more workers, either directly or indirectly, during any part of the last complete year (12 months).
The West Pakistan Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, Standing Order 12(6) state:
“Where a workman resigns from service, or if the employer terminates their services for any reason other than misconduct, they should entitle to gratuity equivalent to thirty days’ wages. This gratuity will depend on the employee type. For fix-rated workers, the gratuity will be the last month’s salary. However, in the case of piece-rated workers, the gratuity will be the highest pay drawing by them during the previous twelve months. This gratuity amount will be eligible if the workers have completed at least a year of employment or finished several services during work over six months (in the case of a service-based job). But if the employer has established a provident fund, and his contribution to it is greater than the contribution of the workman (during the provident fund period), no gratuity will be applicable.
Moreover, suppose the employer & workman agrees to an Approved Pension Fund defined in the Income Tax Ordinance (2001). In that case, no gratuity will be payable (during the contribution period) if the employer meets two certain conditions. First, if the contributions make by the employer are not less than 50% of the limitations discussed in the Income Tax Ordinance, second, if the workman is also part of the contributions make in the remaining 50% or less.”
Source: “The Industrial and Commercial Employment (Standing Orders) Ordinance, 1968” http://punjablaws.gov.pk/laws/222.html
Which Establishment is Liable to Pay Gratuity?
Section 1 of the Ordinance states that any commercial establishment that employs twenty or more people or any industrial establishment employing 50 or more people at any instant during any instant in the last 12 months is needed to provide Gratuity to its employees.
When Gratuity becomes payable?
The gratuity fund is to be paying at the end of the service term if:
- The employee has resigned.
- The employer has sacked the employee on any grounds apart from misconduct.
(If the worker is found guilty of misbehaving and violation of Code of Conduct, then the employer is not compelled to pay any Gratuity).
- The employee has expired.
- The employee has retired or is eligible for superannuation.
Who is entitled to Gratuity?
For the qualification of gratuity, there are some specific conditions. They are:
- The Establishment, either commercial or industrial, is legally bound to offer gratuity according to its workforce as described above.
- The employee meets the criteria of “workman” according to Section 2(i) of the Ordinance, which describes a workman as a person employed to perform any kind of work skilled, unskilled, clerical, or manual. The verdicts given by different Courts declare that “nature of work” decides if a person is a workman regardless of his wage and position.
- The employee must have served for at least six months.
Rate of Gratuity
Formerly, the amount of gratuity payable was equal to wages of 15 days for every year that the employee has worked in the establishment; later, it became similar to 20 days wages.
Currently, 30 days’ wages are pays as a gratuity to an employee for every year he has served in the establishment or any time exceeding a six-month term.
How to Calculate the Amount of Gratuity Payable?
Any workman who fulfills the criteria for Gratuity can compute his total payable Gratuity by using the following method:
- Divide the monthly income by 26 to find out the wages of a single day.
- Per-day wages are to be multiplying by the rate of Gratuity, i.e., 30.
- Calculate the amount of the gratuity funds, which is to be paying, use the following formula.
Total Gratuity= per day wage x 30 x whole years served
The last year of employment is counting only if more than six months of service has been providing. If not, the previous year is excluding from the total tenure of employment. That is knowing as the six-month rule.
Explanation of Section 3 of the Minimum Wages for Unskilled Workers Ordinance, 1969 defines 26-days a month. It says that “month” means a working period of 26 days calculated at the rate of 48 working hours per week.
The minimum wage is based on 26-days a month for skilled or semi-skilled workers, as mentioned in the Yearly Provincial Gazettes.
Taxation of Gratuity in Pakistan
Income Tax Ordinance, 2001 contains the system of taxation of gratuity, which is as under:
Taxation of Gratuity under the Head Income from Business
Section 21(e) of Income Tax Ordinance, 2001 states that there won’t be any deduction in the amount contributed to an Unapproved Gratuity under the head “Income from Business.”
Taxation of gratuity for Salaried Individuals
Section 12(2)(a) and Six Schedule Part III Clause 4 of the Income Tax Ordinance, 2001 declares gratuity as a portion of salary.
Exemption criteria under Second Schedule Part I Clause 13
No Income Tax may be charged on the gratuity either collected by the worker or his dependents (in the case of worker’s death) if it is within limits defined under:
If the person was serving the Government, Local Government, any Statutory body, or any other body established under a law enforced at that instant, the payable gratuity complies with the rules of Employee’s Services.
Approved Fund
If employers are collecting any sum by following the procedure of Approved Gratuity Fund according to the Six Schedule for Part III.
Any amount not exceeding Rs. 300,000/= is not liable to Income Tax if the employee receives the gratuity from the approved fund.
Unapproved Fund
If the gratuity is receiving from an Unapproved Fund, the higher is 50% of the total amount and Rs. 75,000/= will enjoy exemption from Income Tax.
Exceptions
According to the second schedule, the exemptions is not maybe giving in the following:
- Where the amount of gratuity received is outside Pakistan.
- Where a director (not a permanent employee) receives the gratuity.
- Any where the person receiving a gratuity is not a resident of Pakistan.
- Where the employee receiving gratuity has already received gratuity from the same or different employer.
Exemption criteria under Second Schedule Part I Clause 57(2)
The tax exemption is maybe giving to the income made by trustees on account of the Approved Gratuity.
Exemption criteria under Second Schedule Part IV Clause 47(B)
The below-mentioned clauses shall not apply to any person making payment to an Approved Gratuity Fund.
- Advance Tax under Section 233
- Dividend under section 150
- Profit on debt 151
- Part I Div VII First Schedule [Capital Gain on disposal of securities]
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