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Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. •

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Do you know?

Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. • Registering a 2001cc to 2500cc luxury vehicle incurs a 7% tax for Active Filers, but a staggering 21% tax for Non-Filers. • Profits on debt from mutual funds deriving 50% or more income from debt carry a huge 50% tax for Non-Filers, compared to 25% for Filers. • The withholding tax on banking and financial institution profits is set at 20% for those on the Active Taxpayers’ List, but jumps to 40% for those off the list. • Dividends from Real Estate Investment Trusts (REITs) and general companies cost Active Filers 15% in tax, but Non-Filers lose a massive 30%. • Companies generating rental income from immovable property pay a 15% tax if they are Active Filers, but face a 30% rate as Non-Filers. • The sale of petroleum products is taxed at 12% for Filers and exactly double that at 24% for Non-Filers. • Salaries under Rs. 600,000 are completely tax-free, maintaining a 0% rate regardless of your taxpayer status. • Active Filers importing CKD kits for Electric Vehicles pay a minimal 1% tax, whereas Non-Filers pay double at 2%. • Pensions under 10 million rupees remain 100% tax-exempt for everyone, no matter what your filing status is. • Buying a high-end 2501cc to 3000cc vehicle leaves Filers with a 9% tax bill, but absolutely punishes Non-Filers with a massive 27% tax rate. • Selling rice, cotton seed, or edible oils comes with a low 1.5% tax for Filers, but a 3% tax for Non-Filers. • Winning a prize bond or crossword puzzle means you lose 15% to taxes as an Active Filer, but a massive 30% if you are a Non-Filer. • Importing basic goods from Part-I of the Twelfth Schedule costs Active Taxpayers just 1% in tax, while Non-Filers have to pay 2%. • Registering a 1000cc motor vehicle costs Filers just 1% in tax, while Non-Filers are penalized with a 3% tax. • Capital gains arising on the disposal of certain debt securities are taxed at 15% for Filers, but double to 30% for Non-Filers. • Purchasing a 1601cc to 1800cc vehicle will cost Non-Filers a 9% tax, which is three times the 3% rate given to Active Filers. • Cash withdrawals by a person whose name does not appear on the Active Taxpayers’ List are hit with an automatic 0.8% advance tax. • Commercial importers of Part-II goods face a 3.5% withholding tax if they are Filers, but the rate doubles to 7% for Non-Filers. • Importing pharmaceutical products carries an 8% tax for Non-Filers, which is exactly double the 4% rate applied to Active Taxpayers. • Commercial importers bringing in Part-III items are hit with a 12% tax rate if they are Non-Filers, compared to only 6% for Active Filers. • Buyers of 1301cc to 1600cc cars pay a 2% advance tax if they are Filers, but Non-Filers pay exactly triple at 6%. • Winning a raffle, lottery, or sales promotion prize costs Non-Filers a whopping 40% in tax, compared to 20% for Filers. • Providing IT and IT-enabled services costs Active Taxpayers just 4% in withholding tax, while Non-Filers must pay 8%. • Payments made to non-resident sportspersons incur a 15% tax if they are on the ATL, and a massive 30% if they are non-ATL. • If you receive dividends from Independent Power Purchasers (IPPs), Filers pay a 7.5% tax while Non-Filers surrender 15%. • Payments to electronic and print media for advertising services are taxed at just 1.5% for Active Taxpayers, compared to 3% for Non-Filers. •

Approved Gratuity Funds (AGFs) in Pakistan: Structure, Tax Benefits, and Compliance

Approved Gratuity Funds (AGFs) offer tax-free gratuity payments and legal protection for employees. Here's how companies can qualify and apply in Pakistan.

Gratuity is a key part of long-term employee compensation in Pakistan. For organizations aiming to formalize their gratuity arrangements and ensure both tax efficiency and regulatory compliance, establishing an Approved Gratuity Fund (AGF) is a strategic move.

Under the Income Tax Ordinance, 2001, AGFs provide a recognized legal and financial framework to manage gratuity payments — offering not just employee security but also significant tax exemptions on gratuity amounts paid under such schemes.

️ What Is an Approved Gratuity Fund (AGF)?

An Approved Gratuity Fund is a gratuity payment scheme that has been formally approved by the Commissioner of Income Tax under Pakistan’s tax law. It must fulfill strict conditions to ensure the trustworthiness, purpose-specific use, and local benefit of the gratuity payments.

Once approved, the gratuity payments made under this fund become fully exempt from tax for the employees, subject to compliance with the governing rules.

✅ Conditions for AGF Approval

For a gratuity scheme to be recognized as an AGF, it must meet the following legal and operational criteria:

1. Irrevocable Trust Structure

The fund must be created under an irrevocable trust, meaning the assets cannot be taken back or redirected for any other use.
It must be directly connected to a trade or undertaking in Pakistan, ensuring local economic relevance.

2. Minimum Employee Coverage (Pakistan-Based)

At least 90% of the employees covered by the AGF must be based in Pakistan.
This ensures that the primary beneficiaries are contributing to the local workforce and economy.

3. Exclusive Purpose – Gratuity Only

The AGF must serve only one purpose: providing gratuity payments to employees upon:

Retirement at or after a certain age
Medical incapacitation before retirement
Termination after completing minimum years of service
Death, with payments going to legal heirs or dependents

4. Employer Must Contribute

The employer must contribute financially to the AGF, proving its genuine commitment to long-term employee benefits.
Without employer contribution, the fund does not qualify.

5. Payments Must Be Made Within Pakistan

All benefits and payouts from the AGF must be paid inside Pakistan, not abroad.
This maintains the local impact and jurisdictional integrity of the fund.

How to Apply for AGF Approval

The trustees of the proposed AGF are responsible for submitting an application to the Commissioner of Income Tax. The following documents are required for consideration:

Required Documents:

Trust Deed (Certified Copy): This is the legal foundation of the AGF and must clearly state its irrevocable nature and purpose.
Fund Rules (2 Copies): These rules govern how the fund operates, including eligibility criteria, contribution process, disbursement terms, and administrative powers.
Audited Financial Accounts (Optional but Advised): If the fund was operating before applying for approval, submitting audited accounts for the last 3 years is recommended to showcase financial credibility.
Any Additional Information (On Request): The Commissioner may ask for further documents to verify compliance and intent.

Ongoing Compliance After Approval

Approval is not a one-time exercise. Once granted, the trustees must ensure the AGF remains compliant with:

1. Income Tax Ordinance, 2001

All relevant clauses and changes in the law must be followed.
Amendments in tax law could affect fund operations and exemptions.

2. The Fund’s Own Rules and Trust Deed

The fund must operate strictly within its originally approved framework.
Any deviation or misuse could risk revocation of approval and loss of tax benefits.

Trustees are responsible for keeping records, managing distributions transparently, and filing any necessary reports or declarations as required.

Frequently Asked Questions (FAQs)

What is an Approved Gratuity Fund (AGF)?

An Approved Gratuity Fund is a gratuity scheme that has been officially approved by the Commissioner of Income Tax. It must be established under an irrevocable trust and meet strict legal and regulatory conditions to provide tax-free gratuity benefits to employees.

Who can set up an Approved Gratuity Fund?

Any employer in Pakistan—whether a company, partnership, or organization—can establish an AGF, provided it is linked to a legitimate trade or undertaking within the country and adheres to all conditions set in the Income Tax Ordinance, 2001.

Is gratuity paid from an AGF exempt from tax?

Yes. Gratuity paid to employees from an Approved Gratuity Fund is fully exempt from income tax, subject to compliance with AGF rules and approval by the tax authorities.

Who applies for AGF approval?

The trustees of the gratuity fund are responsible for applying to the Commissioner of Income Tax, along with submitting required documentation like the trust deed, fund rules, and (if available) audited financials.

Can an AGF lose its approved status?

Yes. If the fund violates any legal conditions or deviates from its original rules, the Commissioner may revoke its approval. This could lead to loss of tax exemptions and potential penalties.

Is AGF approval permanent?

Approval remains valid as long as the fund remains compliant with the Income Tax Ordinance and the fund’s own governing rules. Trustees must ensure ongoing adherence to avoid regulatory issues.

Final Thoughts

An Approved Gratuity Fund (AGF) is not just a tax-saving tool — it’s a commitment to long-term employee welfare. Companies that set up AGFs demonstrate professionalism, legal compliance, and financial discipline.

For employees, an AGF-backed gratuity ensures full tax exemption, predictable payment, and peace of mind during retirement, resignation, or family transitions.

If your company is planning to register a gratuity fund or needs assistance preparing the application documents, contact TaxationPk for expert help.

Mah Noor

An aspiring Chartered Accountant with a growing footprint in Pakistan’s tax education and digital finance content landscape. Currently, I work as the Editor-in-Chief at TaxationPk, where I lead content strategy, quality control, and editorial planning for tax-related blogs, news articles, and social media outreach.

Articles: 36

4 Comments

Muhammad Amjad Ilyas

July 31, 2025 / 3:10 pm Reply

Dear Concern
I have applied for the adoption of average tax rate on my gratuity received to the commissioner office, but they told me that the gratuity will taxed at normal rate for the preceding year.
Kindly advice as per law & oblige
Mansoor

July 30, 2025 / 2:34 pm Reply

If employee resigns from his job and receive gratuity amount from approved gratuity fund then this amount will be exempt or taxable and on what rate?
- Binte Zafar
  
  July 30, 2025 / 4:34 pm Reply
  
  Gratuity from Approve Gratuity Funds is exempt.
Veo 3 API

July 12, 2025 / 6:07 am Reply

Thanks for breakingAGF Blog Comment Creation down the structure and tax benefits of AGFs so clearly. One aspect I’d love to see explored further is how companies handle compliance over time—especially with changing tax regulations. Do most organizations appoint dedicated trustees, or is that typically outsourced?

Approved Gratuity Funds (AGFs) in Pakistan: Structure, Tax Benefits, and Compliance

️ What Is an Approved Gratuity Fund (AGF)?