Gratuity, the Provident Fund and the Workers' Profit Participation Fund: What the Labour Act Requires, Setting Up the Funds and Getting NBR Recognition

In this guide: Gratuity under s.2(10): the entitlement and the fund · The provident fund under s.264, before and after the 2026 Act · The Workers' Profit Participation Fund (Chapter XV) · NBR recognition under the Second Schedule to the Income Tax Act 2023 · Setting up the three funds: a working sequence · Common disputes and how they are decided

The short answer

Three questions set the obligations. How many workers, and what have they asked for? Under a hundred, a provident fund is required only if three-quarters of the workers demand it in writing (s.264 as it stood); at a hundred or more, the 2026 Act is reported to require one on a two-thirds written demand, with a fifty-fifty contribution of 7 to 8% of basic, and the fund must be a trust with equal representation and an NBR-recognised deed. What is the paid-up capital, and what are the fixed assets? Tk 1 crore of capital or Tk 2 crore of assets brings Chapter XV in: 5% of net profit, 80:10:10, within nine months, trustees, audit, distribution two-thirds equally and one-third by wages; the Foundation’s 10% goes to the government fund. Do you want gratuity to be a deductible provision rather than a cash shock at separation? Then an approved gratuity fund under Part 3 of the Second Schedule, which also lets the fund’s income grow at the fund rate rather than the company rate. The calculator below does the arithmetic for one worker and one company year; the sections after it cover the trust deed, the recognition application and the mistakes DIFE and the auditors find (no trust, no recognition, PF deducted but not deposited, WPPF accrued but not paid, gratuity “forfeited” on dismissal). Our termination guide shows where gratuity enters the separation sum.

Gratuity under s.2(10): the entitlement and the fund

Section 2(10) defines gratuity as the wages of at least 30 days for every completed year of service or part of a year exceeding six months, and of 45 days for every year where the worker has served for more than ten years, payable to the worker on termination of employment at the rate of the wages last drawn, in addition to any compensation, wages in lieu of notice or other payment due. Three consequences. First, gratuity is a comparator, not an addition, in ss.19, 20, 22, 26 and 27: the employer pays 30 days’ compensation per year or gratuity, whichever is higher, and because gratuity is 45 days per year after ten years, a worker with eleven years’ service receives 45 days per year, not 30. Second, the definition does not create a stand-alone right to gratuity on every exit; it defines what is paid where Chapter II or the service rules provide for it; in practice every establishment pays it on retirement, resignation after the qualifying period, retrenchment, discharge, death and termination, and the Labour Courts read a gratuity scheme in the service rules as a vested right. Third, gratuity cannot be forfeited by a service rule, including on dismissal where the rules provide for gratuity; the Act’s only forfeiture is of notice pay on resignation without notice. “Wages” is the last drawn basic and dearness allowance (s.2(45) read with the definition), and most employers compute on basic. No fund is required: gratuity may be paid from revenue. An approved gratuity fund under Part 3 of the Second Schedule to the Income Tax Act 2023 is a trust into which the company contributes an actuarially or formula-based annual amount; the contribution is deductible when paid (a mere provision is not), the fund’s income is taxed at the fund rate, and payments to workers are exempt up to Tk 2.5 crore under the Sixth Schedule. The deed names the trustees (usually three to five, including worker representatives), vests the fund irrevocably for the benefit of employees in Bangladesh, fixes the benefit formula at not less than s.2(10), and prohibits reversion to the employer except on winding up after all claims.

The provident fund under s.264, before and after the 2026 Act

What has not changed is the mechanics. The fund is a trust under a deed approved by the board of trustees; the worker’s contribution is deducted from wages (a permitted deduction under s.125) and the employer’s equal contribution added; both are deposited monthly into the fund’s own bank account, never retained in the company’s accounts; the trustees invest within the Rules and the deed (government securities, scheduled bank deposits, approved bonds); each member has an account showing both contributions and interest; the fund is audited; and a member’s balance is paid within the period the Rules fix on separation, with the employer’s share vesting after the service period the deed sets (commonly three to five years, full vesting on retirement, death or retrenchment). Section 268 makes the balance immune from attachment and from the worker’s own creditors, and s.269 ranks unpaid PF contributions ahead of other debts on insolvency. The Labour Court treats contributions deducted but not deposited as both a civil debt with interest and an offence; DIFE’s inspectors check the monthly challans. Tea estate and newspaper funds have their own sections (ss.265–266). For the tax side, see the recognition section below: an unrecognised fund is a cost without the deduction.

The Workers' Profit Participation Fund (Chapter XV)

Chapter XV applies to every company or establishment that, on the last day of its accounting year, has paid-up capital of Tk 1 crore or more or the value of its fixed assets at cost of Tk 2 crore or more (s.232(1)); the 2013 amendment removed the old “industrial undertaking” limit and there is no hundred-worker test, which comes from the repealed 1968 Act and still appears in older articles. The Government may extend the chapter to other establishments by notification and may constitute a central fund for 100% export-oriented sectors (s.232(3)); the garment sector pays into the central fund under that provision. Within nine months of the year-end the company pays 5% of its net profit (defined in s.233 by reference to the audited accounts, before tax, with stated adjustments) in the proportion 80% to the Participation Fund, 10% to the Welfare Fund and 10% to the Bangladesh Workers’ Welfare Foundation Fund established under the 2006 Foundation Act (s.234). Beneficiaries are all employees, including apprentices, who have been in the service of the company for at least nine months in the year, whatever their designation, which is why Chapter XV reaches managers whom Chapter II does not (s.233). A board of trustees with equal representation of the company and the beneficiaries manages the two company funds (s.235). The Participation Fund is distributed each year, two-thirds equally among the beneficiaries and one-third in proportion to wages (s.242 as reported), with payment within a set period after the year-end and the balance invested; the Welfare Fund is spent on housing, education, medical and similar benefits as the trustees decide. Failure to comply, after a Government order under s.236, carries a fine of up to Tk 1 lakh plus Tk 5,000 for each day of continuing default, extendable to directors, officers and trustees. The funds are exempt from tax on their income within the Act’s provisions as last notified, and the company’s contribution is a deductible expense. The commonest findings are: the 5% computed on profit after tax rather than before; the Foundation’s 10% never remitted; the funds accrued in the balance sheet for years without a trust, trustees or a bank account; and managers left out as “not workers”.

NBR recognition under the Second Schedule to the Income Tax Act 2023

The application is a letter from the trustees enclosing the executed and registered trust deed, the fund rules, the trustees’ resolution, the list of members, the employer’s TIN and incorporation documents, and an undertaking to file annual accounts and returns; the Commissioner may call for changes and issues an order of recognition or approval, which practitioners report as subject to a 180-day decision window with deemed approval under the 2023 Act. Recognition is lost if the deed is amended without approval, the fund invests outside the permitted list, or the employer draws on it. One change caught many employers: from the 2023-24 year the income of private provident, gratuity and WPPF trusts, previously exempt, became taxable at the rate for “other entities”, and later NBR notifications reduced or clarified that burden; the trustees should take the current rate from the latest SRO and file the fund’s return accordingly. A fund that is not recognised still exists as a trust under the Trusts Act 1882 and still pays its members, but the employer’s contributions are not deductible and the members’ receipts are not exempt.

Setting up the three funds: a working sequence

Decide the trigger. Headcount and demand for the PF; capital and assets for the WPPF; the company’s own choice for a gratuity fund. Draft the deeds and rules. One deed per fund, naming the trustees (equal representation for the PF and the WPPF under the Act; three to five trustees for a gratuity fund), the beneficiaries, the contribution and benefit formulae at not less than the Act, the investment powers within the permitted list, the vesting and forfeiture (none for the worker’s own PF contribution; the employer’s share by the vesting schedule; gratuity none), nomination, accounts, audit, amendment with the Commissioner’s approval, and winding up without reversion. Execute and register. Stamp duty on a trust deed and registration with the Sub-Registrar; a separate TIN for the fund; a bank account in the fund’s name operated by two trustees. Apply for recognition to the Commissioner of Taxes under Parts 1, 2 or 3 of the Second Schedule. Run it. Monthly PF deposits by challan into the fund account within the Rules’ period; the WPPF 5% paid within nine months with the Foundation’s 10% remitted; gratuity contributions by the formula; member statements annually; audited accounts and the fund’s tax return; distribution of the Participation Fund within the period. Keep the file. DIFE asks for the deeds, the trustees’ minutes, the challans and the audits; the Labour Court asks for the member’s statement; buyers’ auditors in garments, footwear and electronics ask for all of it and for proof that the Foundation’s share was paid.

Common disputes and how they are decided

“We provided for gratuity but never paid it when the worker resigned after four years.” If the service rules or practice provide gratuity on resignation, it is payable; s.27(4)’s own benefit is the floor and gratuity applies where higher. “The worker was dismissed for theft; the rules say gratuity is forfeited.” The Labour Courts have refused forfeiture of earned gratuity; the employer may pursue the loss separately. “PF was deducted for three years and sits in the company account; we will pay it at separation.” Non-deposit is an offence (s.269–270) and the Labour Court orders deposit with interest; s.125 permits the deduction only for payment into the fund. “We have 120 employees but only 60 are workers; the PF demand came from the staff.” Section 264 counts workers; the demand must come from workers; staff can be members by the deed. “Our paid-up capital is Tk 50 lakh but our fixed assets cost Tk 3 crore.” Chapter XV applies: either limb suffices. “We paid 5% of profit after tax.” Net profit under s.233 is before tax with the stated adjustments; the shortfall is recoverable with the s.236 penalty. “The Foundation’s 10% was never remitted.” It is a debt to the Foundation and the usual audit finding; pay with a covering letter. “The fund was never recognised; the NBR has disallowed five years of contributions.” Apply now; recognition is prospective in practice, so the disallowance stands for the earlier years, which is the cost of delay. Our employer’s guide places these within the Act; the point of this guide is that each fund needs a deed, a trustee board, a bank account and a recognition order, and that the money must leave the company.