Gratuity is one of the settlement items Pakistani SMBs get wrong most often. The formula looks simple, but the qualifying conditions, the definition of the base salary and the rules for part years catch out a lot of companies. Here is the clean version with worked examples.

The standard formula

The typical gratuity formula used in Pakistan is:

Gratuity = (Last drawn basic salary / 26 or 30) × 30 × number of completed years of service

Put another way: one month's basic salary per completed year of service. Some companies use 26 days (working days only) and others 30 days (calendar month); 30 is more common for gratuity.

Qualifying conditions (typical)

Minimum service period (often 1 year, sometimes 5; check your contract / scheme)
Eligible for resignation, termination (non-misconduct), or retirement
Misconduct termination may forfeit gratuity per scheme rules
Calculation base is usually basic salary only (not gross including allowances), but some schemes include certain allowances

Worked Example 1: Clean 5-year tenure

Employee: Software engineer in Lahore
Basic salary at exit: PKR 100,000/month
Service: 5 complete years

Gratuity = (100,000 / 30) × 30 × 5 = 100,000 × 5 = PKR 500,000

Worked Example 2: 7 years 6 months

Employee: Senior accountant in Karachi
Basic salary at exit: PKR 150,000/month
Service: 7 years 6 months

For partial years, two approaches are common:

Rounded down: 7 completed years only: 150,000 × 7 = PKR 1,050,000
Prorated: 7.5 years: 150,000 × 7.5 = PKR 1,125,000

Which one applies depends on your scheme rules. Write it down clearly in the policy.

Worked Example 3: Mid-year exit at 3.25 years

Employee: Marketing executive in Islamabad
Basic salary at exit: PKR 80,000/month
Service: 3 years 3 months (rounded down to 3)

Gratuity = 80,000 × 3 = PKR 240,000

Where gratuity gets miscalculated

Calculating on gross salary instead of basic

The gratuity base is usually basic salary only, not gross including allowances (HRA, conveyance, medical, etc.). Calculating on gross overpays by a lot.

Misunderstanding partial year handling

Companies use different rules: round down, round up, or prorate. The policy must say which.

Using last 3 months average instead of last drawn

Some schemes use the average basic of the last 3-12 months so that a last-minute promotion can't inflate the payout. Check your scheme.

Not factoring in mid-year revisions

If the employee got a salary revision in the last few months, the higher basic generally applies, unless the scheme has averaging rules.

Ignoring forfeiture conditions

Misconduct termination may forfeit gratuity. Resigning without serving the notice period may fall under a different rule.

Gratuity vs Provident Fund: the distinction

Gratuity: paid by the employer on exit, based on years of service, not on contributions
Provident Fund (PF): joint contribution scheme during employment, withdrawable on exit per vesting rules

An employee may be entitled to both, depending on the company's schemes.

Tax on gratuity

Gratuity received from an approved gratuity fund or scheme has tax-exemption rules under the Income Tax Ordinance up to specified limits. Gratuity from an unapproved arrangement may be fully taxable. The exact treatment depends on how the scheme is set up. Check with your tax practitioner.

How payroll / HR software should handle gratuity

Service period tracked automatically for each employee from the joining date
Configurable formula (basic salary basis, partial-year rule)
Auto-trigger in final settlement workflow
Tax treatment configurable per scheme
Audit trail of the calculation

The Zaffre HRM gratuity fit

Zaffre HRM's final settlement module calculates gratuity automatically from the joining date and the formula you set, with tax treatment per scheme. See: final settlement playbook.

Book a demo for the final settlement walkthrough.

Caveat

Gratuity entitlement and calculation depend on your company's specific scheme, contract, and applicable labour law. This article is a general guide; consult your HR / labour-law advisor for specific cases.

How to Calculate Gratuity in Pakistan: Formula + Examples