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Employee Retirement Benefits
Employee Retirement Benefits
Dear Sir,
This is with reference to your email dated February 16, 2017 wherein you have requested the
legal requirements for retirement benefits of employees with reference of law.
There are two prevalent retirement benefits in the private sector employment in Pakistan.
1. Gratuity
2. Provident Fund
Gratuity
The relevant law on the payment of gratuity applicable to the Company is The Industrial and
Commercial Employment (Standing Orders) Ordinance, 1968 (hereinafter the Ordinance).
Gratuity is actually a benefit for services rendered in the past. It is a reward of good, efficient
and faithful service for a substantial period of time. Before 1972, gratuity was paid by an
employer either on voluntary basis or in consequence of an award by a labor court. However,
the Labour Laws Amendments Ordinance, 1972 made payment of gratuity a legal obligation.
Amendments were subsequently made in the Standing Order 12 of Industrial and Commercial
Establishments (Standing Orders) Ordinance 1968. Gratuity is now a statutory right for workers
who have worked at least twelve months in an organization. The relevant laws governing
gratuity in private sector are:
Payment of Wages Act, 1936 (adapted by the province of Punjab through Amendment
Act of 2014)
Factories Act, 1934 (adapted by the province of Punjab through Amendment Act of 2012)
Shops and Establishments Ordinance, 1969 (adapted by the province of Punjab through
Amendment Act of 2014)
1. Industrial and Commercial Establishments (Standing Orders) Ordinance 1968 (or any of its
variants) is applicable to that establishment (whether commercial or industrial) i.e. it must have the
minimum number of workers as mentioned above
2. A person has to be a workman as defined in Standing Orders Ordinance 1968. A workman is "any
person employed in any industrial or commercial establishment to do any skilled or unskilled, manual
or clerical work for hire or reward".
4. The minimum qualifying employment period is twelve months or above. However, if a worker has
worked over six months in a specific year, he will be entitled to gratuity of one year.
What are the qualifying events for payment of gratuity
to a worker?
An employee is entitled to gratuity when:
2. His organizations terminate his services due to reasons other than misconduct
3. He dies while in service of his employer (it is not necessary that employee should be on
duty at the time of death)
Bonus (at the end of year indicating profitable situation for 10,000
firm)
Gratuity for the whole period served i.e. 26 years 26*34,615.4=Rs. 900,000.4
Types of Gratuities;
Approved Gratuity are funded gratuity approved by the Commissioner of
Income Tax under part-III of the sixth Schedule to the Income Tax Ordinance,
2001. Any payment received by way of gratuity by an employee on his
retirement or, in the event of his death, by his heirs is 100 % exempt under
part I of second schedule of Income tax ordinance 2001.
1- Fund is established under an irrevocable trust and not less than 90%
employees shall be employed in Pakistan.
2- The sole purpose of the fund is to give gratuity to employees on their
retirement at or after a specified age or on their becoming
incapacitated prior to such retirement, or on termination of their
employment after a minimum period of service specified in the
regulations of the fund or to the widows, children or dependents of
such employees on their death.
3- The employer shall be a contributor to the fund; and
4- all benefits granted by the fund shall be payable only in Pakistan
Approved Gratuity Schemes are unfunded scheme but which have been
approved by the FBR. No separate fund is required to be maintained and
merely provision for the unfunded liability are made from year to year which
are not tax deductible until it is paid. Total exemption here is not more than
300 thousand.
Unapproved Gratuity
Provident Fund
PF scheme is a retirement benefit scheme.
PF scheme is contributory in nature and definition
Employee and Employer, both make contribution to PF
Employee and Employer make equal contribution to PF
The contributions from both are invested in profitable schemes.
Investment Income is credited to members account.
At resignation, total of employer and employees contribution and its interest is paid to
the employee free of income tax.
The fundamental liability to pay the PF stem from the SO Ordinance, 1968.
(Industrial Undertaking with > 50 employees and Commercial Undertaking with 20
employees)
Recognized Provident Fund is the PF, which is recognized by the Commissioner under Part l of
the 6th schedule of ITO, 2001. This type of PF is maintained by private sector organizations.
Payment from such fund gets exempt from income tax after recognition.
Un-recognized Provident Fund is actually not a separate type. It is a fund, which is neither a
recognized Fund (as it has not been approved) nor it is a Statutory Fund. No exemption is
available but there is no yearly taxability either. Employers contribution and interest thereon will
be fully taxable at the time of payment to the employee only.
The opinion solicited here above is based on best of our understanding on current law and
interpretation as of today under the facts explained to us. This opinion is only for central
boulevard (private) limited at their specific request without any recourse of liability on us and not
for any third party. This opinion may not be solicited / disseminated to any third party or relied by
any third party without our prior written consent.
Yours truly
Junaidy Shoaib Asad
Chartered Accountants