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The Quarterly
Employee Benefits

Vol. 6 SS No.1 May 2003

Zakat Not Applicable to Investments of Pension

and Gratuity Funds - A High Court Ruling
Dear Readers,

On August 26, 2002 a landmark judgement was passed by the Honourable Lahore High Court
effectively ruling that assets of Pension and Gratuity Trust Funds are not liable to compulsory
Zakat deduction.

Although there was no fanfare, this was a momentous ruling especially in the current environment
where Zakat is a factor that further reduces effective yields on available investments when the rates
of return are already at an all time low.

We shall briefly review the background to this judgement.

The Zakat and Ushr Ordinance, 1980 clearly addressed the situation in respect of Provident Funds.
Provident Funds are excluded from the definition of “Sahib-e-Nisab”, hence, no Zakat is liable
on the investments, and their accumulation held by such funds. Secondly, at the time of benefit
payment, Zakat is only liable on the employee's own share of the proceeds. However, even at
that stage any employee proving himself/herself of not being “Sahib-e-Nisab” would not be liable to

Although there has been general acceptance that investments of Pension and Gratuity funds are
liable to Zakat, this was an uneasy tolerance since these funds were not addressed by the statutes and
not all deducting authorities were following the compulsory deduction process.

In fact, in the early history of Pension and Gratuity Funds, due to the nature investments held, Zakat
deduction was hardly a factor. Over time two features broght about a change in this.Firstly, in the late
1980's and early 1990's National Investment Trust (NIT) began to constitute a growing component
of many such funds. Secondly, the Administrator General, Zakat issued a directive to NIT for
compulsory deduction of Zakat in respect of Pension and Gratuity Funds.

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Consulting Actuaries

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E.B.N Special Supplement Page 2

Some Trustees began to question the validity of the Administrator General's directive. At that time
one of our longstanding and esteemed clients sought our opinion on the issue. As a result the client
communicated with the Administrator General seeking clarification regarding the directive to NIT
but did not obtain a clear and compelling response. In view of these events, the client felt that there
was sufficient grounds and cause to seek redress from the judicial system.

Hence, two constitutional writ petitions were filed with the Honourable Lahore High Court in 1996
(W.P. No. 3354/96 and W.P. No. 3387/96), one was in respect of the Client's Pension Fund and the
other for its Gratuity Fund.

It was of great satisfaction to learn that the Honourable Lahore High Court accepted the arguments
put forward by our Client's legal representative, which were constructed with our Firm's

In framing its August, 2002 decision in favour of our Client, the Honourable Lahore High Court
focused on the Administrator General, Zakat statement that “…. Pension and Gratuity Funds are
nothing but annuities and liable to compulsory deduction of Zakat under item 9 of the First Schedule
of Zakat and Ushr Ordinance 1980….”. The High Court found this interpretation to be “without
lawful authority and of no legal effect” on the following grounds:

? A Pension and Gratuity Fund cannot be considered, under any circumstance or situation, as
being a recipient of an “annuity” nor can it be considered as being an “annuity” in itself.
? Only in certain specific cases can the members of the fund be considered as being recipients
of an “annuity”.
? The amount payable from the fund to a member as pension or gratuity may be considered as
an “annuity” and be subject to compulsory deduction of Zakat but not while it remains in
the fund.
? If Zakat is deducted on the monies of the funds, then at the time a beneficiary being a “Sahib-
e-Nisab” receives benefits in the form of gratuity or pension he would again be liable to
payment of Zakat. Thus, this would lead to Zakat being levied twice which is not
permissible in accordance with injunctions of Quran and Sunnah.
? Monies received by the fund are not annuities and not liable to deduction of Zakat on
compulsory basis.

The ruling of the High Court makes it very clear that the deduction of Zakat on assets of Pension and
Gratuity Funds is unjustified and without legal ground.

We strongly recommend Trustees of Pension and Gratuity Funds to take note of this judgment and
bring it to the notice of organisations/institutions continuing to deduct Zakat on a compulsory basis.

We would be glad to address any queries that you may have in this regard.

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