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Difference Between Gratuity and Pension in Pakistan
Last updated: 15 October 2026 | Reviewed by Habiba, founder of PakCalculators.com
Many government and private employees in Pakistan are confused between gratuity and pension. Both are retirement benefits but they are different.
What is Gratuity?
Gratuity is a one-time lump sum payment given to an employee when he leaves a job after completing minimum service period. It is common in private companies and some government contract jobs.
Formula of Gratuity
Gratuity = Last Monthly Salary x Years of Service (as per your contract and company policy). In many companies it is paid after a minimum service period set in the contract. Eligibility for gratuity depends on contract and labour rules.
What is a Pension?
Pension is a monthly payment given to a retired government employee for life. It is mostly for permanent government servants (Federal and Provincial). The amount depends on length of service and pay.
Formula of Pension (New Rule 2024-25)
According to the Finance Division Pakistan, pension is now calculated on Average Basic Pay of the last 24 months (2 years), not just the last pay. Gross Pension = (Average Basic Pay x Service Years x 7) / 300. Then net pension after commutation.
Key Difference
Gratuity = One time payment, Pension = Monthly payment for life. Pension needs 10 years minimum qualifying service (30 years for full pension as per many government rules, giving up to 70% of last pay). My pension tool uses 7/300 per year of service with a maximum of 30 years. Gratuity is taxable as per FBR rules in some cases, Pension is mostly exempt.
Use my calculators to estimate both. For exact calculation, check your appointment letter and Finance Division circular.
Tax on gratuity and pension can depend on your salary and service. In some cases gratuity may be taxable as per FBR rules, while pension is mostly exempt. This is general information only, not tax advice. Please check the latest FBR guidelines or ask a tax professional.
Another Worked Example
Gratuity example: A person with a last monthly salary of 60,000 PKR and 8 years of service gets 60,000 x 8 = 480,000 PKR in this calculator.
Pension example: A government employee with an average basic pay of 50,000 PKR over the last 24 months and 20 years of service gets (50,000 x 20 x 7) / 300 = 23,333 PKR as a full monthly pension, before commutation.
Gratuity and Provident Fund
A provident fund is a savings fund built from contributions, while gratuity is a lump sum linked to the length of service. Some employers offer one of them and some offer both, so check your appointment letter.
Common Mistakes
A common mistake is entering gross salary in the pension calculator. The pension calculation uses basic pay, not gross pay with allowances. Another mistake is treating the results here as a final settlement. Final figures come from your employer or accounts office.
FAQ
1. Is gratuity paid every year?
No. Gratuity is usually paid once, when service ends, as per the contract and the applicable labour rules.
2. Does the pension formula use gross pay?
No. The pension calculation uses basic pay, not gross pay with allowances.
3. Can I use these amounts as my final settlement?
No. These are estimates for planning. Final figures come from your employer or accounts office.
Related Tools and Guides
This comparison is for general guidance only. For final settlement, refer to your HR policy or Finance Division rules. Please read my Disclaimer.