How Do I Calculate Gratuity in UAE
Gratuity in the UAE is calculated using the employee’s last basic salary, not including allowances or bonuses. The standard formula is (basic salary ÷ 30) × 21 × years of service for employees with up to 5 years of service. For those with more than 5 years, the formula changes to 21 days’ salary for the first 5 years and 30 days’ salary for each additional year.
What is Gratuity in UAE?
Gratuity in the UAE is a mandatory end-of-service payment given to employees who complete at least one full year of continuous employment under a valid labor contract.
It is calculated using a formula based on the employee’s last drawn basic salary and total duration of service. The benefit functions as a lump sum payment that compensates employees for their years of work after the contract ends.
The legal basis for gratuity comes from the UAE Labour Law – Federal Decree-Law No. 33 of 2021, which standardizes end-of-service benefits for both expatriates and UAE nationals across all sectors.
Gratuity applies whether the employee was hired under a limited-term contract or an unlimited-term contract, although the rules for calculation differ between the two. The law covers employees in private sector jobs, including free zones, unless otherwise specified by contract or internal labor agreements.
Gratuity is calculated on the basis of: Only basic salary (excluding housing, transport, or commission)
Continuous service time, without unpaid breaks
The reason for separation (resignation or termination)
This benefit is not part of the monthly wage and is paid at the time of final settlement after employment ends.
Who is Eligible for Gratuity in UAE?
Minimum Service Period
To qualify for gratuity
The employee must work for at least 12 consecutive months
The employment must be uninterrupted, excluding legally approved leaves
Unpaid leaves or sabbaticals are excluded from the service duration used in the gratuity formula
Contract Type and Eligibility
Gratuity entitlement exists under both
Limited contracts, where terms are fixed
Unlimited contracts, where the end date is flexible
In both cases, the employee must meet minimum service tenure and exit lawfully to receive payment
Nationality and Job Sector
Both UAE citizens and expatriate workers are covered under the gratuity law
Applies across private sector companies, including free zones, unless exempted by special labor rules
Disqualification Conditions
An employee may lose the right to gratuity if
Terminated under Article 120 for serious misconduct
Resigned without serving the required notice period
Cannot prove employer violations in disputes (in unlimited contracts)
Employees who leave before completing 1 year of employment are not eligible for gratuity under any condition
Key Factors That Affect Gratuity Calculation
Basic Salary Only Is Used
Gratuity is calculated using the last drawn basic salary, excluding: Housing
Transport
Overtime
Bonuses or commissions
Example: If an employee earns AED 10,000 per month with AED 6,500 as basic salary and the rest as allowances, only AED 6,500 is used for gratuity calculation
Years of Continuous Service
Employees must complete at least 12 consecutive months with the same employer. The formula uses the total full years of service, not partial years
Service must be
Continuous
Without unpaid gaps
Verified from start date to final working day
Any unpaid leave or suspension period is not included in the final tenure used for gratuity
Contract Type Influences Calculation
Gratuity rules differ for
Limited contracts, where resignation and termination have consistent rules
Unlimited contracts, where resignation reduces entitlement in early years
Each contract type has a separate tiered formula, affecting how many days of salary are paid per year of service
Exit Type Impacts Entitlement
Whether the employee resigned or was terminated changes
Entitlement percentage (in unlimited contracts)
Number of salary days used per year
Whether payment is owed at all
For instance
In an unlimited contract, an employee who resigns after 2 years receives only one-third of the full gratuity amount
Limited vs Unlimited Contracts in UAE
Limited Contract Explained
A limited contract
Has a fixed start and end date
Is typically used for project-based roles or temporary positions
Ends automatically unless renewed
If an employee resigns before the contract ends, they may face
Loss of gratuity
Compensation liabilities to the employer
Labor bans in some cases
Gratuity is paid if
The employee completes the contract
The service period is at least 1 full year
Unlimited Contract Explained
An unlimited contract
Has no fixed end date
Can be terminated by either party with notice (1–3 months)
Is the most common contract in UAE private sector jobs
Employees on unlimited contracts may receive
Partial gratuity if resigning early
Full gratuity after completing 5 years or more
Why the Contract Type Matters
The type of contract affects
Entitlement percentage for early resignation
Formula used for gratuity calculation
Legal implications during separation
Example:
An employee on a limited contract completing 4 years is entitled to 21 days’ salary per year
An employee on an unlimited contract resigning after 2 years gets only 7 days’ salary per year (⅓ of 21 days)
Gratuity Calculation Rules for Limited Contracts
Resignation Cases
If an employee resigns under a limited contract
Less than 1 year of service: No gratuity
1 to 5 years: 21 days of basic salary for each full year
More than 5 years
21 days of basic salary for the first 5 years
30 days of basic salary for each additional year
Example
Basic salary = AED 9,000
Service = 6 years
Gratuity = 135 days’ salary
Termination Cases
If the employer terminates the contract
1 to 5 years: 21 days of basic salary per year
More than 5 years
21 days for first 5 years
30 days for each year after
Example
Basic salary = AED 12,000
Service = 7 years
Daily wage = AED 400
Gratuity = 400 × 165 = AED 66,000
Step-by-Step Formula
Daily wage = Basic salary ÷ 30
Gratuity = Daily wage × (21 or 30) × service years
Use 30-day rate only after 5 full years
Legal Cap on Payout
Maximum gratuity = 2 years’ basic salary
Example: Basic salary = AED 15,000, max = AED 360,000
Gratuity Calculation Rules for Unlimited Contracts
Resignation Scenarios
Less than 1 year: No gratuity
1 to 3 years: ⅓ of 21 days’ salary per year
3 to 5 years: ⅔ of 21 days’ salary per year
More than 5 years: Full 21 days per year
Example
Basic salary = AED 10,000
Service = 4 years
Daily wage = AED 333.33
⅔ of 21-day salary = AED 4,666.67 per year
Total = AED 18,666.68
Termination Scenarios
1 to 5 years: 21 days per year
More than 5 years
21 days per year for first 5
30 days per year beyond 5
Example
Basic salary = AED 11,000
Service = 6 years
Gratuity = AED 49,000.35
Calculation Formula
Daily wage = Basic salary ÷ 30
Apply: Daily wage × 21 × service years
Add Daily wage × 30 × extra years if over 5
Payment Cap
Max payout = 2 years’ basic salary
Example: AED 14,000 × 24 = AED 336,000
How the New 2025 UAE Labor Law Changes Gratuity
Mandatory Limited-Term Contracts
As of 2025, all contracts are limited-term
Maximum duration = 5 years
Old unlimited contracts have been phased out
Unified Gratuity Calculation
Gratuity now same for resignation and termination
1 to 5 years: 21 days’ salary per year
More than 5 years: 30 days’ salary per year
Cap: 2 years’ basic salary
Final Wage Still Matters
Only last basic salary is used
All allowances are excluded
Enforcement and Penalties
Employers face fines, permit delays, or license issues if gratuity is:
- Paid late
- Calculated incorrectly
- Not settled
Maximum Limit on Gratuity Payout
Legal Cap Defined
Max payout = 2 years’ basic salary, regardless of service length or salary changes
High-Salary Employee Implications
Basic salary = AED 30,000
Cap = AED 720,000
Even long service doesn’t increase payout beyond this cap
Comparison with Long Tenure Cases
Employee A
Basic salary = AED 8,000
Service = 12 years
Gratuity = AED 72,000
Employee B
Basic salary = AED 45,000
Service = 6 years
Gratuity = AED 337,500
Still within cap
Common Mistakes in Gratuity Calculation
Using Total Salary Instead of Basic Salary
Only basic salary applies
Example: Total salary = AED 18,000, basic = AED 11,000
Wrong calculation inflates gratuity by over 60%
Miscounting Service Tenure
Only full continuous years are counted
Partial years and unpaid leave are not included
Applying Wrong Contract Rules
In 2025, only limited contracts are valid
Still, some employers use outdated unlimited formulas
Ignoring the Legal Gratuity Cap
Max = 24 months’ basic salary
Example: Eligible gratuity = AED 410,000, but cap = AED 396,000
Payout must be AED 396,000
Conclusion
Understanding how gratuity works in the UAE is essential for accurate financial planning during job transitions. Whether an employee resigns or is terminated, calculating the correct entitlement depends on service duration, basic salary, and contract type.
With the updated 2025 labor regulations applying standardized rules across all fixed-term contracts, it’s now easier to estimate final settlements. To simplify the process and avoid errors, employees and HR professionals can use a reliable Gratuity Calculator UAE for fast and accurate results based on current laws
Frequently Asked Questions (FAQs)
How is gratuity calculated in UAE?
Gratuity is calculated using the formula:
(Basic salary ÷ 30) × 21 × number of years of service,
or 30 days per year if the employee has worked more than 5 years. Only the basic salary is used, excluding all allowances.
Who qualifies for end-of-service gratuity in UAE?
Employees are eligible if they have completed at least 1 full year of continuous service under a valid employment contract. This applies to both UAE nationals and expatriates.
Is gratuity affected by resignation?
Yes. In resignation cases under unlimited contracts (before 2023), the gratuity was reduced to ⅓ or ⅔ depending on years of service. Under the 2025 law, all contracts are limited and resignation no longer reduces gratuity as long as legal terms are met.
What is the maximum gratuity an employee can receive?
The gratuity amount cannot exceed 24 months’ basic salary, regardless of years worked. For example, an employee with a basic salary of AED 20,000 can receive a maximum of AED 480,000 in gratuity.
Is gratuity paid on gross or basic salary?
Gratuity is paid only on the basic salary. Any benefits such as housing, transport, commissions, or bonuses are excluded from the calculation.
