Provident Fund vs Gratuity Fund: What Should Be Implemented First in Your Organization?

In the dynamic business environment of Bangladesh, organizations must navigate a myriad of compliance regulations under both the Bangladesh Labour Act 2006 and the Income Tax Act 2023. Two critical components of employee benefits are the Provident Fund (PF) and the Gratuity Fund (GF). Both funds are optional, but when properly implemented, they can bring significant benefits to both the employer and employee while ensuring compliance with labor and tax laws. But what should an organization prioritize — Provident Fund (PF) or Gratuity Fund (GF)? In this blog, we’ll explore both options, their tax implications, and why prioritizing one may make a big difference for your company.

What is Provident Fund (PF)?

A Provident Fund (PF) is a social security scheme where both the employee and the employer contribute a certain percentage of the employee’s salary towards a fund that is accumulated for the employee’s future retirement needs. It’s designed to ensure that employees have a financial safety net once they retire or are no longer able to work.

Key Features of PF:
✅ 75% of the employees of the organization must formally request the implementation of the Provident Fund.
✅ Both employer and employee contribute to the fund.
✅ It is a form of saving for an employee’s future.
✅ PF is governed by specific rules under the Bangladesh Labour Act 2006.
✅ If implemented, it must be approved by the National Board of Revenue (NBR).

What is Gratuity Fund (GF)?

Gratuity Fund (GF) is a lump sum amount paid to an employee when they retire, resign, or are terminated (except in cases of misconduct). This fund acts as a compensation benefit, ensuring that employees are financially secure post-employment. While it’s entirely optional, organizations that choose to set it up must comply with specific policies.

Key Features of GF:
✅ It’s an alternative to compensation benefits (termination benefits).
✅ It’s a non-recurring lump sum amount paid to an employee for long-term service.
✅ Can replace the statutory termination benefits as per the Bangladesh Labour Act.
✅ Like PF, GF must be approved by the NBR to avoid tax liabilities.

Why Should You Consider Implementing a Provident Fund or Gratuity Fund?

Both PF and GF are advantageous to employees and organizations, but each serves a unique purpose.

Benefits of Provident Fund:

✅ Tax Benefits:
Both the employer and employee’s contributions to the PF are tax-deductible, which reduces the overall tax burden. PF contributions to an approved Provident Fund (Part-3 of 2nd Schedule under Income Tax 2023) are not considered as part of the employee’s perquisites, which helps avoid higher tax liabilities.

✅ Social Security for Employees:
Employees benefit from a secure financial backup, making PF an essential long-term investment for their retirement.

✅ Encourages Retention:
A well-managed PF policy can encourage employee loyalty and retention since employees view it as a future benefit.

Benefits of Gratuity Fund:

✅ Compliance with Labor Laws:
The Gratuity Fund can act as an alternative to the mandatory compensation benefits stipulated by the Bangladesh Labour Act, which provides clear guidelines for how employees should be compensated in case of termination or resignation.

✅ Tax Exemption:
If the GF is approved by NBR, employees can receive up to BDT 25 million tax-free, offering significant tax savings compared to unapproved GFs, which are taxed.

✅ Employee Security:
GF ensures that employees who have worked for an extended period are financially supported when they leave the organization.

How Does Labor Act Compliance Impact PF and GF?

Compensation Benefits under the Bangladesh Labour Act provide a clear structure for paying employees upon termination. However, an organization that doesn’t implement a Gratuity Fund (GF) must adhere to the following statutory rules:

  • Full Year of Service (less than 5 years): No compensation benefits.
  • 5 to 10 Years of Service: 14 days’ basic salary for each year of service.
  • More than 10 Years of Service: 30 days’ basic salary for each year of service.

However, if your organization has a Gratuity Fund (GF) in place, the payout is defined by a more structured policy:

  • Up to 10 Years of Service: 30 days’ basic salary per year of service.
  • More than 10 Years of Service: 45 days’ basic salary per year of service.
  • PF is not directly tied to termination benefits but remains an important contribution to an employee’s retirement security.

Tax Implications: PF vs GF

Both the unapproved Provident Fund and Gratuity Fund are treated as perquisites under the Income Tax Act 2023 (Part-2 of 2nd Schedule). This means that any benefits provided to employees from an unapproved PF or GF are subject to taxation. However, approved funds (either PF or GF) have significant tax benefits:

✅ Unapproved PF or GF:
Considered as perquisites, meaning they are taxable.

✅ Approved PF or GF:
Any payment made from a NBR-approved GF is tax-exempt up to BDT 25 million for the employee, which is a major advantage for long-term employee benefits.

This makes it clear that obtaining approval for PF and GF from NBR is critical for reducing tax liabilities both for the employer and the employee.

PF vs GF: Which Should Be Implemented First?

While both PF and GF have their advantages, Gratuity Fund (GF) is arguably the more urgent priority for most organizations, especially considering the Bangladesh Labour Act 2006.

Here’s why:

✅ Gratuity Fund ensures compliance with the Labour Act’s compensation benefits, potentially saving your organization from hefty fines and legal disputes related to termination benefits.
✅ GF gives employees clear and predictable benefits for long-term service, which is important for retaining skilled employees.
✅ Implementing PF requires organization-wide buy-in and consistent contributions, which might take more time to manage effectively.

However, if your organization already has a strong retention strategy and is looking for long-term employee welfare initiatives, you might want to consider prioritizing the Provident Fund next, as it supports the financial well-being of employees post-retirement.

Conclusion: The Priority Between Provident Fund and Gratuity Fund

If your organization is looking to prioritize one, Gratuity Fund (GF) should be the first choice. This is because it’s directly tied to compliance with the Bangladesh Labour Act 2006 and offers tangible benefits for both the company and employees. However, once GF is in place, implementing a Provident Fund (PF) will further strengthen your company’s employee benefits portfolio and help ensure compliance with Income Tax Act 2023 while providing long-term financial security to employees.

Ultimately, both funds complement each other, and implementing both will provide significant tax savings, better employee retention, and peace of mind that your organization is complying with both labour and tax laws in Bangladesh.

Need Help Implementing PF or GF in Your Organization?

If you’re ready to implement Provident Fund or Gratuity Fund in your organization, ensure you’re doing it in full compliance with the Bangladesh Labour Act and Income Tax Act. Contact our expert consultants to guide you through the process and help you obtain NBR approval for both funds. We’re here to make your employee benefits strategy as seamless as possible.

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