Neither is automatically mandatory — but as of 2026, that answer no longer means what employers think it means.
For years, HR and finance teams in Bangladesh treated Provident Fund (PF) and Gratuity Fund (GF) as optional. The law said a company only had to create a Provident Fund if three-fourths of its workers formally demanded one, and gratuity could simply be paid out of pocket whenever someone left. So most organizations did nothing, and nothing happened.
That position has quietly become far riskier. Here's what actually changed, what it means for your organization, and how to decide.
Two things every employer with a sizeable permanent workforce needs to know:
For organizations with 100 or more permanent workers, a Provident Fund must now be formed if two-thirds of workers demand it in writing. Previously the requirement was three-fourths. That is a meaningfully easier threshold for a workforce to reach — and once they reach it, you have no discretion left.
At least 50% of the total amount held in the fund must now be invested in government-owned investable sectors. This is not something you can reconstruct in a spreadsheet at year-end, it has to be demonstrable.
(For the record: these changes sit in Section 264 of the Bangladesh Labour Act. But you don't need the section number — you need to know what it costs you.)
Not as a funded scheme — and that is exactly where most employers go wrong.
Under the Labour Act, employees are entitled to termination compensation calculated at 30 days' wages for every completed year of service — or gratuity, whichever is higher (Sections 20, 22, 26, 27). The obligation exists whether or not you maintain a Gratuity Fund. What you choose is only whether that cost is pre-funded and tax-advantaged, or paid in a lump sum from working capital with no relief attached:
No Gratuity Fund | NBR-Approved Gratuity Fund | |
Liability | Accrues invisibly on the books | Pre-funded and visible |
Cash impact | Full lump sum, on the day they resign | Structured monthly contribution |
Employer tax treatment | No deduction on contributions | Contributions are allowable business expenses |
Employee tax treatment | Taxed as a perquisite | Tax-exempt up to BDT 2.5 crore |
Planning | Unpredictable | Predictable |
Setting up an approved Gratuity Fund does not create a liability. The liability already exists. It converts an unmanaged, unpredictable one into a funded, tax-advantaged, plannable one.
This is the objection every CFO raises, and it deserves a straight answer.
Contributions are tax-deductible, not sunk cost. Employer contributions to a Recognized Provident Fund and an Approved Gratuity Fund are allowable business expenses. Employee contributions reduce their taxable income. Approved gratuity payouts are tax-exempt up to a defined threshold, while unapproved funds are taxed as perquisites. You are not simply adding cost — you're moving compensation spend into a form the tax code rewards, on both sides of the table.
Unfunded liabilities don't disappear — they ambush you. Every year you do not fund gratuity, the eventual bill grows. It arrives as a cash shock, at a moment you do not control, with no tax efficiency attached.
A powerful employee retention mechanism. Employer contributions build up in an employee's account and are only fully earned the longer they stay — which quietly discourages early exits and strengthens employee engagement and long-term loyalty. Set that against the real cost of employee turnover — recruitment, ramp-up, and lost institutional knowledge — and the monthly contribution is cheap. A properly governed provident and gratuity fund also lifts how the organization is viewed across the industry, positioning you as an employer of choice that invests in its people.
It builds trust and credibility. A recognized fund means a trust deed, a trustee board, audited financials, NBR approval, and its own annual tax return (not mandatory, unless asked by tax authority). Regulators, auditors, lenders, and serious candidates all read that as a marker of how the organization is run.
The real question is not the cost of Provident Fund and Gratuity — it is whether you pay predictably, with tax relief attached, or unpredictably, all at once, with none.
Deciding to fund is one thing; setting up a recognized fund is a defined, one-time process:
Step 1: Draft trust deed and rules governing the Provident Fund and Gratuity Fund.
Step 2: Appoint a trustee board to administer the fund independently of company accounts.
Step 3: Register the trust and obtain a separate Taxpayer Identification Number (TIN) for the fund.
Step 4: Apply to the National Board of Revenue (NBR) for recognition of the Provident Fund and approval of the Gratuity Fund.
Step 5: Set the contribution structure — for a Provident Fund, contributions typically range between 7%–10% of basic salary from both employer and employee.
Step 6: Open a dedicated fund bank account and begin processing monthly contributions.
Step 7: Invest at least 50% of the fund in government-approved sectors, and maintain audited annual accounts and an annual fund tax return (not mandatory, unless requested by the tax authority under Section 166(2) of the Income Tax Act 2023).
Deciding to establish PF and GF takes an afternoon. Administering them well is the part that breaks HR and finance teams:
Run this on spreadsheets and you erode the exact governance benefit the fund was supposed to deliver. Every year-end becomes a reconstruction exercise.
AccordHRM treats fund management as a system of record — not a spreadsheet bolted onto payroll. It is why organizations across banking, manufacturing, NGOs, pharmaceuticals, and technology run their funds on it.
That's the difference between PF and GF being something you dread at audit time — and a governed, auditable asset your finance team can report on with confidence.
Is Provident Fund mandatory in Bangladesh?
Not automatically. An organization with 100 or more permanent workers must form a Provident Fund if two-thirds of its workers demand it in writing. Below that headcount, the older threshold applies. In practice, most employers of scale should expect to face the requirement.
Is gratuity mandatory in Bangladesh?
Employees are entitled to termination compensation benefits under the Labour Act regardless. What's optional is whether the employer pre-funds that obligation through an NBR-approved Gratuity Fund — which is where the tax benefits and cash-flow predictability come from.
What are the tax benefits of a recognized PF and approved GF?
Employer contributions are deductible business expenses; employee contributions reduce taxable income; and approved gratuity payouts are tax-exempt up to BDT 2.5 crore (Tk 25 million). Unapproved funds don't receive this treatment and are taxed as perquisites. Employees also get investment tax rebate on both employer’s and employee’s contributions to the RPF. Proportionate interest accrued on the provident fund’s balance (ROI), received by an employee, is also tax-exempt under para 28 of the 6th Schedule, Part 1 of the Income Tax Act, 2023.
How is Provident Fund money allowed to be invested?
At least half of the total amount deposited in the fund must be invested in government-owned investable sectors.
Does a Provident Fund help with employee retention?
Yes. Because employer contributions to a Recognized Provident Fund are only fully earned the longer an employee stays, those who leave early forfeit part of the benefit — which quietly discourages early exits and lowers the cost of employee turnover. A well-governed PF and Gratuity Fund also strengthens employee engagement and signals to the market that you invest in your people, improving how the organization is viewed as an employer.
What's the best software for managing PF and Gratuity in Bangladesh?
AccordHRM offers dedicated Provident Fund and Gratuity Fund modules with real-time fund tracking, automated contribution processing, investment management & reporting, and direct payroll integration. For employers who want PF and GF managed as a governed, auditable asset rather than a year-end spreadsheet exercise, it is the most complete employee fund management option in Bangladesh.
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