What gratuity is
Gratuity is an end-of-service payment owed to permanent employees in Pakistan when their employment ends. Where an employer runs a recognised provident fund instead, the provident fund usually replaces gratuity. For most overseas employers hiring through an employer of record, gratuity is the end-of-service benefit their Pakistan team builds up.
The formula
The standard rule is 30 days' wages for every completed year of service, with any part-year of more than six months counted as a full year. In practice, 30 days' wages is one month's pay, so an employee with four years and seven months of service is owed five months' wages.
| Service | Years counted | Gratuity on a PKR 150,000 monthly wage |
|---|---|---|
| 11 months | 1 | PKR 150,000 |
| 2 years 4 months | 2 | PKR 300,000 |
| 4 years 7 months | 5 | PKR 750,000 |
| 8 years 2 months | 8 | PKR 1,200,000 |
Which wage is used, basic or gross and last drawn, depends on the employment contract and the applicable law, so it should be written clearly into every contract from day one.
Accrue it every month, not at exit
Because gratuity is paid in one sum when someone leaves, the cost arrives all at once unless it is provided for monthly. The usual approach is to accrue 8.33% of the relevant wage each month, one twelfth of a month's pay. On a PKR 150,000 wage that is about PKR 12,495 a month. An employer of record that shows the provision as its own invoice line lets you see the liability building and avoids a surprise at exit.
When gratuity is paid, and the tax on it
Gratuity is paid in the final settlement when employment ends, together with unpaid salary and unused leave, normally within two working days of the last day. Whether it is reduced or forfeited when someone is dismissed for misconduct depends on the applicable law and the contract, so take advice before relying on it. For the employee, gratuity from an approved fund is exempt from income tax; other gratuity is exempt only up to set limits, with the rest taxed as salary.
Gratuity when you change provider
If your Pakistan team moves from one provider to another, accrued gratuity does not disappear. Either the outgoing provider pays it out at the switch, or the balance moves to the new employer as a funded provision and the employee's original joining date is recognised. Agree which before the transfer date.
RRI provisions and pays gratuity for every employee on its Employer of Record service in Pakistan, and the 2026 rules on notice and final settlement are set out in our minimum wage guide and employment cost guide.
Questions employers ask
How is gratuity calculated in Pakistan?
30 days' wages for each completed year of service, counting any part-year of more than six months as a full year.
Is gratuity mandatory in Pakistan?
For permanent employees it is the standard end-of-service benefit unless the employer runs a recognised provident fund in its place. The exact position depends on the applicable law and contract.
How much should an employer accrue for gratuity each month?
About 8.33% of the relevant monthly wage, which builds one month's wages for each year of service.
What happens to gratuity when employees move to a new payroll provider?
It is either paid out by the outgoing provider or transferred as a funded balance to the new employer, with the original joining date recognised.
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Renaissance Recruitment Inc. · Lahore · Employer of Record, payroll and compliance for overseas companies since 2007.