I want to know, weather this gratuity is taxable or not?

Question

Aslamoalikom

I am Prof working at IUB. I am working on Tenure track system of HEC. I receive 13th salery each year as gratuity, because TTS system is pentionless.

I want to know, weather this gratuity is taxable or not?

if not please share the reference.

Answer 1

Gratuity is exempt if it is given via an Approved Gratuity fund.
So confirm the status of Fund via you ar egetting this income.

Answer 2

Taxation Status & References

• Part of Salary: According to Section 12(2)(a) of the Income Tax Ordinance 2001, the term "salary" includes any perquisite, allowance, or benefit, including gratuity, unless a specific exemption applies.

Applicable Tax Relief up to Tax Year 2025 as per clause 3A of part III of second schedule of Income tax ordinance 2001.

A full-time teacher or researcher working in a non-profit educational or research institution that is recognized by HEC, a Board of Education, or an HEC-recognized university (including government research institutions) is entitled to a 25% reduction in income tax on their salary income.

This concession does not apply to medical teachers who:

• earn income from private medical practice, or

• receive a share of fees/consideration from patients.

This 25% tax reduction applies from 1 July 2022 and is available only up to Tax Year 2025.

Exemption Available:

• Exemption for Retirement Only: Tax exemptions for gratuity under the Second Schedule (Part I, Clause 13) of the Ordinance typically apply to amounts received upon retirement or death, not to annual payments made during active service.

Final Conclusion: 

In your case, as gratuity is annual and is part of salary by law, it is taxable in full from Tax Year 2026 onward. 

Answer 3

Under the Income Tax Ordinance, 2001, gratuity is treated as salary income unless it qualifies for a specific exemption.

Gratuity is fully exempt from tax only if it is paid through an FBR-approved gratuity fund.

If the amount is paid directly by the employer (not through an approved gratuity fund), then:

Only partial exemption is allowed under Clause 13, Part I, Second Schedule;

The remaining amount is taxable as salary in the year of receipt.

Under HEC Tenure Track System (TTS):

Being pensionless does not automatically make the 13th salary tax-exempt.

Tax treatment depends solely on whether the payment is from an approved gratuity fund.

Legal Reference

Clause 13, Part I, Second Schedule – Income Tax Ordinance, 2001