Karachi, September 18, 2025 – The Federal Board of Revenue (FBR) has reported a 45 percent reduction in income tax exemption on gratuity payments to employees.
According to the recently issued Tax Expenditure Report 2025, the exemption available under Clause 13 of Part I of the Second Schedule of the Income Tax Ordinance, 2001, has significantly declined.
The report revealed that tax exemption on gratuity fell to Rs. 902 million in the tax year 2024, compared to Rs. 1.65 billion in the preceding year. This reflects a sharp contraction in benefits available to retiring employees who rely on gratuity as a critical component of their retirement income.
Under current provisions, any income received as gratuity or commutation of pension is exempt up to specific limits. For government employees, local governments, and statutory bodies, exemption applies to amounts receivable in line with service rules. In other cases, gratuity received from an approved gratuity fund or employer scheme is eligible for exemption, subject to monetary ceilings prescribed by law.
The FBR clarified that payments not received in Pakistan, those given to company directors who are not regular employees, or to non-resident individuals, do not qualify for this exemption. Moreover, an employee who has already received gratuity from a current or former employer cannot claim exemption again.
The decline in tax exemptions on gratuity highlights the government’s broader fiscal consolidation efforts, even as it impacts employees planning their post-retirement financial security.