Gratuity is a terminal benefit paid to an employee on separation after qualifying service. The common formula multiplies a defined portion of monthly wages by the number of completed years of service. The mistake most businesses make is not the formula — it is treating gratuity as a payout to calculate at exit rather than a liability to accrue monthly.
The formula, and the parts people disagree on
The structure is simple: a wage base multiplied by completed years of service. The two variables that cause disputes are which wage figure is used — basic salary, or gross — and how partial years are treated.
These should be settled in your policy and applied consistently, because an inconsistent answer discovered at settlement is how gratuity ends up in a labour dispute. Whichever your policy states, apply it the same way for everyone and record it where it can be audited.
Accrue it monthly, do not discover it at exit
A business with two hundred employees and several years of average tenure is carrying a significant gratuity liability whether or not it appears in any report. Businesses that only calculate at exit are effectively unaware of it until someone resigns.
Accruing monthly turns gratuity into a visible, funded number: finance can see the exposure, and a wave of resignations does not become a cash-flow event.
How it fits into final settlement
At separation, gratuity is one component of a settlement that also includes unpaid salary, leave encashment, outstanding loan balances and any notice adjustment. Calculating those separately in a spreadsheet is where errors and delays come from.
- Unpaid salary to the last working day
- Leave encashment per policy
- Gratuity for completed service
- Less: outstanding loans and advances
- Less or plus: notice period adjustment
Keep the ledger append-only
Gratuity balances should be held in a ledger where entries are added rather than overwritten. When an employee queries a figure two years after a policy change, an append-only history can reconstruct exactly how the number was reached — which a running total cannot.
Questions
Is gratuity calculated on basic salary or gross salary?
It depends on the wage definition your policy and applicable law use. What matters operationally is that the definition is written down and applied identically for every employee, because inconsistency is what turns a gratuity calculation into a dispute.
General information for Pakistani employers, not legal or tax advice. Statutory rates change with each Finance Act — verify current figures before relying on them.
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