Goodbyes are never easy, but in every company, employees eventually move on. As an organization, it’s important to handle exits in a fair and legally compliant way. One such obligation is end-of-service gratuity.
There are clear rules under UAE labour law that define how gratuity is calculated based on an employee’s contract type, length of service, and reason for leaving.
This guide will walk you through everything you need to know to calculate gratuity the right way. We’ll help you understand the formulas, factors involved, and common scenarios.
Here’s what we’ll cover:
- Gratuity rules under UAE labour law
- Calculation formula for limited contracts (no more unlimited contracts)
- Impact of resignation vs termination
- Deductions, exclusions, and common mistakes
- Gratuity calculation examples
- Tools to simplify the process
At Token Talent, we help businesses across the GCC & MENA Regions streamline their HR and payroll processes, including accurate gratuity calculations that meet legal standards.
Important Note: This blog follows the latest and updated guidelines as of July 2025 to help you understand how to calculate gratuity amount in the UAE.
What Is Gratuity?
In the UAE, gratuity is a lump sum payment made to employees when they leave a company after completing at least one year of continuous service. It is a legal right under the UAE Labour Law and serves as a form of end-of-service benefit, acknowledging the employee’s contribution over time.
Earlier, there were two types of contracts, limited and unlimited. But with the updated labour law, all employment contracts in the UAE are now fixed-term contracts (limited), renewable every few years.
This change has simplified the gratuity calculation process and brought more clarity to both employers and employees.
Gratuity is calculated based on the employee’s basic salary, not including allowances or bonuses. The amount depends on the length of service and whether the employee completed their notice period and followed contract terms properly.
Who Is Eligible for Gratuity in UAE?
As of 2025, here are the eligibility requirements for receiving gratuity under the UAE Labour Law.
Eligible for Gratuity in UAE
Employees must meet these conditions to qualify for end-of-service benefits:
- Must have completed at least one year of continuous service with the same employer.
- Must be employed under a fixed-term contract as per the current labour law.
- Must not have been terminated for gross misconduct as defined by the law.
- Must have resigned or been terminated following the proper notice period.
- Gratuity is applicable to both full-time and part-time employees, based on the terms of their contract.
- Employees working in free zones are eligible if their contract includes end-of-service benefits and follows UAE Labour Law.
- Employees must not have left the company without notice or committed violations leading to loss of rights under Article 44.
Key Components Needed to Calculate Gratuity
Whether you’re an HR professional or an employee planning your exit, understanding these factors will help ensure accurate end-of-service benefit calculations.
1. Last Basic Salary (Not Total Salary)
Gratuity is calculated based on the last drawn basic salary, not the total (gross) salary. The basic salary excludes allowances such as housing, transport, or bonuses.
For example, if your gross salary is AED 10,000 but your basic salary is AED 6,000, only the AED 6,000 is used in the gratuity formula.
💡 To keep accurate payroll records, use Token Talent’s payroll tools.
2. Years of Continuous Service
The total number of uninterrupted years an employee has worked for the same employer is a direct input in the gratuity calculation. Any part of the year worked beyond that is usually calculated on a pro-rata basis.
3. Resignation or Termination Type
In the new framework, employees are entitled to full gratuity regardless of whether they resign or are terminated, provided they meet the one-year minimum service condition.
4. Contract Type (Historical vs. Current)
In 2025, all active employment contracts are limited-term by law. Contract type no longer affects gratuity calculations.
Gratuity Calculation Formula (Step-by-Step)
Step 1: Determine Your Last Basic Salary
Example: If an employee’s gross salary is AED 8,000 and their basic salary is AED 5,000, use AED 5,000.
Step 2: Check Total Years of Continuous Service
Only full years of uninterrupted service are considered unless your internal policy accounts for partial years.
Step 3: Apply the Standard Gratuity Rule
- First 5 years of service → 21 days’ basic salary per year
- After 5 years → 30 days’ basic salary per year
Example: For 6 years of service: 21 days/year for first 5 years + 30 days/year for 6th year
Step 4: Apply Resignation or Termination Condition
Employees are entitled to full gratuity even upon resignation, as long as they’ve completed one year of service.
Step 5: Use the Gratuity Formula
Gratuity = (Basic Salary ÷ 30) × Gratuity Days × Years of Service
Example:
- Basic salary = AED 5,000
- Years of service = 3
- Gratuity days per year = 21
- Gratuity = (5,000 ÷ 30) × 21 × 3 = AED 10,500
| Years of Service | Basic Salary | Gratuity Days | Gratuity Amount |
|---|---|---|---|
| 3 Years | AED 5,000 | 21 | AED 10,500 |
| 6 Years | AED 7,000 | 21 + 30 | AED 27,300 |
| 10 Years | AED 8,000 | 21 + (30 × 5) | AED 66,000 |
Special Cases & Deductions in Gratuity
1. Dismissal for Misconduct
Employers can withhold gratuity for serious misconduct under Article 44. Documentation is crucial.
2. Resignation Before One Year
Employees who resign before completing one year of service are not eligible for gratuity.
3. Unpaid Leave or Absenteeism
These periods may be excluded from total service duration.
4. Free Zones (DIFC/ADGM)
Check if your zone follows federal gratuity law or a contribution-based scheme.
5. Contractual Clauses and Waivers
Employees cannot legally waive gratuity unless better benefits are provided.
How Token Talent Can Help With Gratuity and Payroll Compliance
Token Talent is a complete HR and payroll management platform designed for businesses across the UAE and GCC.
Key Benefits:
- Automates gratuity calculations as per UAE Labour Law
- Customizable settings for contracts, leave, and service
- WPS integration for compliant payroll processing
- One-click final settlement and end-of-service reports
