Gratuity is a lump-sum reward paid to an employee when their service ends - a recognition of years given to an employer. In Pakistan it is a statutory right, not a favour, for most workmen in industrial and commercial establishments. Yet many employees leave a job without ever claiming it, and many employers calculate it wrongly. This guide sets out exactly who qualifies, how the sum is worked out, and where the rules differ across the provinces.
What gratuity is and the governing law
Gratuity is a terminal benefit governed by the Industrial and Commercial Employment (Standing Orders) Ordinance, 1968, and in particular Standing Order 12. After the 18th Amendment, labour became a provincial subject, so Sindh, Punjab, Khyber Pakhtunkhwa and Balochistan each retain or adapt the Ordinance through their own standing orders legislation - for example the Sindh Terms of Employment (Standing Orders) Act 2015. The core concept is uniform: an employer must, at the end of service, pay either gratuity or a qualifying provident fund, whichever is more beneficial to the worker.
Gratuity applies to establishments that ordinarily employ the threshold number of workers set by the applicable standing orders (commonly 20 or more, though the figure varies by province). Domestic workers and some categories outside the definition of "workman" fall under separate arrangements.
Who qualifies for gratuity
You are entitled to gratuity if all of the following hold true:
| Condition | Requirement |
|---|---|
| Status | You are a "workman" - skilled, unskilled, manual or clerical - under the Ordinance |
| Length of service | At least 12 months continuous service with the employer |
| Reason for leaving | Resignation, retirement, retrenchment, redundancy or termination - any reason other than proven misconduct |
| Part-years | Any part of a year over six months counts as a full completed year |
Key point: gratuity is not limited to retirement. An employee who resigns after two years, or who is retrenched, is just as entitled as one who retires after thirty. The only common disqualifier is dismissal on the ground of established misconduct.
The gratuity calculation formula
For every completed year of service a workman earns 30 days of wages. The month is treated as 26 working days, so the daily wage is the monthly wage divided by 26. The standard formula is:
Gratuity = (Last drawn gross wage / 26) x 30 x Completed years of service
Three points are frequently misunderstood:
- Gross, not basic. Superior court rulings hold that gratuity is calculated on the last drawn gross wage, which includes fixed allowances such as house rent and utilities - not the bare basic pay.
- Last drawn, not average. The figure is your final monthly wage, so a promotion or raise before you leave increases the whole calculation.
- The 26-day divisor exists because gratuity is measured in "days wages", and a working month is taken as 26 days.
Worked example
Suppose an employee draws a last gross wage of PKR 100,000 per month and has worked different lengths of service. The daily wage is 100,000 / 26 = PKR 3,846, and 30 days of that is PKR 115,385 per completed year:
| Completed years | Calculation | Gratuity payable (PKR) |
|---|---|---|
| 1 year | (100,000 / 26) x 30 x 1 | 115,385 |
| 3 years | (100,000 / 26) x 30 x 3 | 346,154 |
| 5 years 7 months | 7 months over counts as 6 years | 692,308 |
| 10 years | (100,000 / 26) x 30 x 10 | 1,153,846 |
Notice how the employee at 5 years 7 months is credited a full 6 years - because the extra seven months exceeds the six-month threshold. That single rule can add an entire year's worth of gratuity, so the timing of a resignation matters.
Provincial variations in the rate
The "30 days per year" rate is the federal and Punjab standard, but the provinces are not identical. Verify the rate for the province where your establishment is registered:
| Jurisdiction | Gratuity rate per completed year |
|---|---|
| Punjab & Islamabad Capital Territory | 30 days wages |
| Sindh | One month's wages |
| Khyber Pakhtunkhwa | One month's wages |
| Balochistan | Two months wages |
Because rates and establishment thresholds vary by province and are periodically amended, confirm the current position before you rely on a figure. A short consultation with our employment and labour law team will settle exactly which rate applies to your case.
Gratuity vs provident fund
An employer may run a provident fund instead of gratuity - but only where the employer matches the employee's contribution. A provident fund is an investment pool that both sides pay into; gratuity is a defined lump sum the employer alone funds at exit. The law protects the worker by entitling them to whichever is more beneficial. Read our companion guide on the provident fund in Pakistan to see how the two sit side by side, and our overview of wider employee benefits for the full picture.
Gratuity is also distinct from EOBI pension under the EOBI Act 1976, which is a separate state-run old-age benefit funded by monthly contributions. An employee can be entitled to gratuity and EOBI at the same time.
Claiming unpaid gratuity
Gratuity forms part of your final settlement and should be paid promptly when service ends, alongside dues such as leave encashment and notice pay. If an employer refuses or short-pays, you can raise a grievance and, if unresolved, approach the labour authorities. Our guides on resignation and final settlement and the labour court grievance procedure walk through the steps, and our note on labour courts and the NIRC explains the forums that hear such claims.
Frequently asked questions
How is gratuity calculated in Pakistan?
Take your last drawn gross monthly wage, divide by 26, multiply by 30, then multiply by your completed years of service. That is roughly one month's wages for every year worked.
Who is eligible for gratuity?
Any workman with at least 12 months of continuous service whose employment ends for any reason other than proven misconduct - resignation, retirement, retrenchment or termination all qualify.
Does a part-year count?
Yes. Any part of a year over six months is treated as a full completed year, which can add a whole year's gratuity.
Is gratuity on basic or gross pay?
On the last drawn gross wage, including fixed allowances such as house rent and utilities, per superior court rulings - not merely the basic salary.
Can I get gratuity if I was dismissed?
Only if the dismissal was not for misconduct. Termination on proven misconduct forfeits gratuity; any other separation preserves it.