Gratuity calculation UAE rules look simple on paper: 21 days, then 30 days, capped at two years. In practice, most mistakes come from the details: using total salary instead of basic, applying old resignation rules, or forgetting the cap. This guide explains how end-of-service gratuity works under the current UAE labour law, walks through worked examples, and covers what employers need to do to stay on the right side of it.
Who is entitled to end-of-service gratuity?
Full-time foreign employees in the UAE private sector are entitled to gratuity once they complete one year of continuous service with the same employer. The entitlement is set by Article 51 of Federal Decree-Law 33 of 2021, the current labour law.
A few groups follow different rules:
- Employees with less than one year of service receive no gratuity.
- Part-time employees are entitled to gratuity on a pro rata basis.
- UAE and GCC nationals are generally covered by pension schemes rather than gratuity.
- DIFC employees are covered by the DEWS savings plan, explained below.
Gratuity calculation UAE: the formula step by step
The standard formula works in three steps:
- Find the daily basic wage. Take the monthly basic salary from the employment contract (not the total package) and divide it by 30.
- Apply the day rates. Multiply the daily wage by 21 for each of the first five years, and by 30 for each year after the fifth.
- Add partial years. Once the first year is complete, part-years count proportionally.
Two limits then apply. Gratuity is based on the last basic wage only, so housing, transport and other allowances are excluded. And the total cannot exceed two years' pay.
Gratuity calculation UAE: worked examples
Here is how the formula plays out at different salaries and lengths of service. All figures are in AED and use basic salary only.
| Employee | Basic salary | Service | Calculation | Gratuity |
|---|---|---|---|---|
| A | 7,000 | 2 years | 7,000 ÷ 30 x 21 x 2 | 9,800 |
| B | 8,000 | 3.5 years | 8,000 ÷ 30 x 21 x 3.5 | 19,600 |
| C | 10,000 | 6 years | (333.33 x 21 x 5) + (333.33 x 30 x 1) | 45,000 |
| D | 7,000 | 7 years | (233.33 x 21 x 5) + (233.33 x 30 x 2) | 38,500 |
| E | 10,000 | 30 years | 35,000 + 250,000 = 285,000, capped at two years' pay | 240,000 |
| F | 12,000 | 10 months | Less than one year of service | 0 |
Employee E shows why the cap matters. The formula produces AED 285,000, but two years of basic pay at AED 10,000 a month is AED 240,000, so the payout is limited to that figure.
Employee C also shows the jump after year five. The sixth year alone adds AED 10,000, compared with AED 7,000 for each of the first five.
Does resigning reduce gratuity?
No, not under the current labour law. The old law cut gratuity for employees on unlimited contracts who resigned within their first five years, by up to two-thirds. Those reductions stopped applying once contracts moved onto the new law's fixed-term model, which had to happen by February 2023.
Today, the calculation is the same whether the employee resigns or the employer ends the contract. If you still see calculators or HR policies that apply resignation reductions, they are out of date.
What can an employer deduct from gratuity?
An employer can deduct only amounts the employee legally owes, such as sums due under a court order or by law, and only following the conditions in the executive regulations. Gulf News sets out when employers can legally deduct and when they cannot.
Whatever the deductions, the law requires the employer to pay the employee's wages, gratuity and other dues within 14 days of the contract ending. Late settlement is a common source of labour complaints, and it is easy to avoid if the amount has been accrued in advance.
How does gratuity work in the DIFC and under the savings scheme?
Two alternatives replace or change the standard lump sum.
DIFC. Employers in the Dubai International Financial Centre pay into the DEWS plan instead of paying a lump sum at the end. They contribute at least 5.83% of monthly basic salary for employees with under five years of service, and 8.33% for those with five years or more. Those rates mirror the 21 and 30 day rule, but the money is set aside and invested every month.
The voluntary savings scheme. Since late 2023, other private-sector employers can join a voluntary alternative scheme approved by the Ministry of Human Resources and Emiratisation. Employers pay monthly contributions on basic salary into approved investment funds, and employees can add their own savings. Joining is the employer's choice, and it changes how gratuity is funded for the periods covered.
What are the most common gratuity mistakes?
Most gratuity disputes come from a handful of avoidable errors:
- Using total salary instead of basic salary. Allowances are excluded, so a generous package with a low basic salary produces a smaller gratuity than many employees expect.
- Applying old resignation reductions. Policies written before the new law may still cut gratuity for resignations, which no longer applies.
- Forgetting the switch at year five. Every year after the fifth is worth 30 days, not 21.
- Ignoring part-years. Once the first year is complete, the extra months count proportionally.
- Missing the cap. Very long-serving employees reach the two-year limit, and the payout stops there.
- Paying late. Settlement is due within 14 days of the contract ending, not at the next payroll run.
How should employers account for gratuity?
Employers should accrue gratuity every month as a liability, rather than treating it as a cost only when someone leaves. Without an accrual, a long-serving employee's departure can mean a five or six-figure payment that was never budgeted.
In practice, that means:
- Keep basic salary separate from allowances in every contract and payroll record, since gratuity depends on it.
- Book a monthly provision for each employee, at 21 or 30 days' rate depending on their service.
- Recalculate when salaries change, because gratuity uses the last basic wage.
- Track service dates accurately, including the date the five-year mark is reached.
- Settle within 14 days of the contract ending, using the accrued figure as the starting point.
Payroll software does most of this automatically. Odoo Payroll's UAE localization includes end-of-service benefit rules and a monthly end-of-service provision, alongside WPS salary files. We cover how that fits into a full payroll run in our WPS guide.
Next step
For employees, the formula above gives a reliable estimate. Check your contract for your basic salary and count your years of service. For employers, the bigger task is making sure gratuity is accrued, recalculated and paid on time across the whole team.
Technova is a certified Odoo Silver Partner based in Dubai, serving businesses across Dubai, Abu Dhabi and Sharjah. If your gratuity still lives in a spreadsheet, book a consultation and we will show you how Odoo Payroll handles it as part of an Odoo implementation.
This article is general guidance, not legal advice. For individual cases, check with the Ministry of Human Resources and Emiratisation or a qualified adviser.