How to Calculate Gratuity Amount in the UAE: A Complete Guide

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 Yomly, 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. 

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

Here are some of the major components you need to consider while calculating gratuity in the UAE, based on the latest guidelines. 

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. This is a crucial distinction as many employees mistakenly assume their gratuity will be calculated on their full package. 

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. Accurate payroll records are essential to avoid disputes at the time of exit.

💡 To keep accurate payroll records, use Yomly as your payroll software. 

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. The UAE Labour Law stipulates that an employee is eligible for gratuity only after completing at least one full year of service. 

Any part of the year worked beyond that is usually calculated on a pro-rata basis. For example, 3 years and 6 months of service would entitle an employee to 3.5 years’ worth of gratuity.

3. Resignation or Termination Type

While resignation or termination used to impact the gratuity amount under older (unlimited) contracts, this distinction is less relevant under the current law. 

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. This change provides more fairness and consistency in end-of-service benefits across employment types.

4. Contract Type (Historical vs. Current)

Previously, the type of employment contract—limited or unlimited—had a significant impact on gratuity, especially for those who resigned early under unlimited contracts.

However, as of February 2022, the UAE Labour Law mandated a shift to limited (fixed-term) contracts only, with a transition deadline of December 2023.

In 2025, all active employment contracts are now limited-term by law. Contract type no longer affects gratuity calculations as everyone is treated under the same set of rules.

Still, if you’re dealing with a case from before 2024, it’s worth reviewing the employee’s contract type to ensure compliance during the transitional period.

Gratuity Calculation Formula (Step-by-Step)

Understanding how to calculate gratuity correctly is important for both employees and employers. The UAE Labour Law outlines a clear process for determining the end-of-service benefit, primarily based on the employee’s basic salary and years of service. 

Below is a simple step-by-step method you can follow to calculate gratuity accurately as per the latest guidelines.

Step 1: Determine Your Last Basic Salary

Gratuity is based only on the employee’s last drawn basic salary. Do not include allowances such as housing, travel, overtime, or performance bonuses.

Example: If an employee’s gross salary is AED 8,000 and their basic salary is AED 5,000, use AED 5,000 for all gratuity calculations.

Step 2: Check Total Years of Continuous Service

Only full years of uninterrupted service are considered unless your internal policy accounts for partial years. Many companies round down to the nearest year.

Step 3: Apply the Standard Gratuity Rule

As per the latest law, if the employee has completed at least one year of service, apply the following:

For the first 5 years of service → 21 days’ basic salary per year

After 5 years → 30 days’ basic salary per year

Example: For an employee with 6 years of service, the gratuity is:

• 21 days/year for the first 5 years
• 30 days/year for the 6th year

Step 4: Apply Resignation or Termination Condition

Under the old law, employees who resigned before completing 5 years were eligible for reduced gratuity (⅓ or ⅔ of the total).

However, as per the new UAE Labour Law (2022 onwards):

• These reductions no longer apply under standard limited contracts.
• 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 calculation formula UAE:

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

Here are some other examples for different years of services:

Years of Service	Basic Salary	Gratuity Days	Gratuity Amount
3 Years	AED 5,000	21	AED 10,500
6 Years	AED 7,000	21 for first 5 yrs + 30 for 6th	AED 27,300
10 Years	AED 8,000	21 + 30 × 5	AED 66,000

Special Cases & Deductions in Gratuity (If Any)

While the new UAE Labour Law has made gratuity rules more uniform and employee-friendly, there are still a few special cases where gratuity may be reduced, forfeited, or adjusted. 

These exceptions are important for HR teams and employers to track closely to ensure compliance and avoid disputes. 

Here are the key situations that may impact end-of-service gratuity payouts:

1. Dismissal for Misconduct

If an employee is terminated for serious misconduct under Article 44 of the UAE Labour Law, the employer has the right to withhold gratuity. 

Misconduct includes offences such as theft, workplace violence, intentional damage to company property, breach of confidentiality, or repeated violations of company policy despite prior warnings. To enforce this, employers must have documented proof and follow due process to avoid legal issues.

2. Resignation Before Completing One Year

Employees are not entitled to any gratuity if they resign or are terminated before completing one full year of continuous service. 

This rule is clearly stated in the labour law and applies across all sectors. Employers must still clear any pending dues or leave encashments, but gratuity is not payable in such cases.

3. Unpaid Leave or Absenteeism

Gratuity is calculated only for the period of active service. If an employee has taken long periods of unpaid leave or has unauthorised absenteeism, those days may be excluded from the total service duration used in the calculation. 

This adjustment must be backed by leave records and company policy.

4. Free Zones or DIFC/ADGM Jurisdictions

Employees working in certain Free Zones, especially those governed by DIFC or ADGM, may not follow the federal gratuity system. 

These areas often operate under a funded End of Service Savings Scheme, where monthly contributions are made into a managed investment account. HR managers must refer to the applicable local laws before applying federal gratuity rules in these zones.

5. Contractual Clauses and Waivers

While companies can include gratuity-related clauses in employment contracts, they must align with UAE Labour Law. 

An employee cannot be made to waive their legal right to gratuity, even if they sign an agreement stating so. Any such clause is not enforceable unless it offers better terms than the statutory requirement.

How Yomly Can Help With Gratuity and Payroll Compliance

Yomly is a complete HR and payroll management platform designed for businesses across the UAE and wider GCC region. 

Our payroll software helps HR teams stay fully compliant with UAE Labour Law, including gratuity calculations, contract tracking, and payroll automation. With Yomly, managing employee exits and final settlements becomes faster, more accurate, and fully aligned with local regulations.

Here’s how Yomly can support your organisation:

• Automates gratuity calculations based on the latest UAE Labour Law rules, including updates to contract structures and resignation policies
• Customizable configuration for each employee’s profile, allowing accurate handling of individual contract terms, unpaid leave, and service duration
• Seamless WPS integration to ensure compliant payroll processing and timely payments through approved channels
• One-click generation of end-of-service reports and final settlements, reducing manual work and eliminating errors

Book a free demo today and our experts will show you how Yomly can simplify your payroll operations while keeping you 100% compliant.