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Compensation & Compliance — end-of-service benefits, gratuity, and separation payments may vary by country, industry, employment contract, and local regulations. Configure policies according to your organization's requirements and applicable laws.

What is end-of-service gratuity?

Gratuity (also known as an end-of-service benefit, severance benefit, or service award) is a lump-sum payment that may be provided to employees upon separation from employment, such as resignation, retirement, redundancy, or termination, depending on organizational policy and local legal requirements.

Policy and legal requirements may vary: Eligibility criteria, qualifying service periods, and calculation methods differ across jurisdictions and organizations. Consult your HR, payroll, or legal advisor to determine the requirements applicable to your workforce.

Standard gratuity formula

Organizations may use different gratuity or end-of-service benefit formulas based on company policy, employment contracts, collective agreements, or local regulations.

Gratuity = Last drawn basic salary × Completed years of service Example: Last basic salary = PKR 80,000 / month Service period = 7 years 4 months Completed years = 7 (months below 6 are dropped; ≥6 months round up to next year) Gratuity = 80,000 × 7 = PKR 560,000

Octal HR supports this formula as well as custom formulas if your company policy differs (e.g., based on gross salary or a different multiplier per year of service).

Configuring gratuity policy in Octal HR

1
Navigate to Settings → Payroll → Gratuity Policy.
2
Set the minimum qualifying service (e.g., 3 years). Employees with less than this duration are not entitled to gratuity.
3
Set the calculation base: Basic Salary, Gross Salary, or a custom formula.
4
Set the multiplier per year (default: 1 month's salary per completed year).
5
Configure partial year rounding: round up from ≥ 6 months, or always drop partial years.
6
Set dismissal for misconduct: toggle whether gratuity is forfeited on dismissal (typical practice).
7
Save. The policy applies to all future separation settlements.

Monthly gratuity provisioning

Many companies provision for gratuity monthly (booking a liability each month rather than recognising the full expense at separation). Enable this under Settings → Payroll → Gratuity Policy → Monthly Provisioning.

When enabled, Octal HR calculates each employee's accrued gratuity balance at each month-end and posts a journal entry to the gratuity provision account (if Octal Accounts integration is active). This keeps your balance sheet accurate and prevents year-end shocks.

Processing gratuity at separation

1
Go to Employee → [Name] → Separation and enter the last working day and reason for separation.
2
Octal HR calculates the gratuity entitlement automatically based on the policy and displays it for confirmation.
3
Review and adjust if needed (e.g., if part of the gratuity was paid as interim gratuity earlier).
4
Approve the separation. Octal HR creates a final settlement payroll run that includes:
  • Remaining salary for the last partial month
  • Encashment of unused annual leave
  • Gratuity amount
  • Any outstanding loan deductions
  • Income tax WHT on the final settlement
Gratuity tax treatment: Under FBR rules, gratuity received from an approved gratuity fund is exempt from income tax up to PKR 75,000 (or three times the average salary, whichever is lower). Gratuity from unapproved arrangements is taxable. Octal HR applies the correct tax treatment based on your fund status — set this under Settings → Payroll → Gratuity Policy → Fund Type.

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