Taxation of Gratuity in Pakistan

Following are the procedures of taxation of gratuity laid down in the Income Tax Ordinance, 

2001.

We have summarized all the provisions of Income Tax Ordinance, 2001 relating to Gratuity in one place for the ease of our readers.

Taxation of gratuity under the head Income From Business

In the head “Income from Business” if contribution is made to an unapproved Gratuity than no deduction will be allowed for the same- Section 21(e) of the Income Tax Ordinance, 2001

Taxation of gratuity for Salaried Individuals

Gratuity is part of salary as specified under section 12(2)(a) and Six Schedule Part III Clause 4 of the Income Tax Ordinance, 2001. 

Exemption criteria under Second Schedule Part I Clause 13

Any Gratuity received on retirement of employee by employee himself or by his legal heirs after death of employee shall be exempt from levy of income tax subject to the following limits not exceeding: 

1)        in the case of an employee of the Government, a Local Government, a statutory body or corporation established by any law for the time being in force, the amount receivable in accordance with the rules and conditions of the employee’s services 

Approved Fund

2)       Any amount received by way of approved gratuity fund as specified in Six Schedule Part III 

3)       Gratuity received from approved fund by any employee other than retired or dead shall be exempt up to Rs. 300,000/- from levy of income tax. 

Unapproved Fund

4)       Any amount received by way of gratuity from an unapproved fund shall be exempt from income tax up to 50% of total amount received or Rs. 75,000/- which ever is higher. 

Exceptions:

The exemptions under second schedule shall not be applicable in following cases: 

1) Payment received outside Pakistan; 

2) Payment received by director who is not a regular employee of company; 

3) Payment received by non resident; 

4) Payment to employee who has already received any gratuity from same or any other employer 

Exemption criteria under Second Schedule Part I Clause 57(2)

Any income generated by trustees on behalf of the approved gratuity fund is exempt from tax. 

Exemption criteria under Second Schedule Part IV Clause 47(B)

Following clauses shall not be applicable to person making payment to a 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]