How to Calculate Gratuity in the UAE: End-of-Service Formula

End-of-service gratuity is one of those numbers every UAE employer knows they owe and very few can compute correctly on the first try. It looks simple — a fixed number of days per year of service — but the detail lives in which salary you calculate it on, how resignation affects it, where the cap bites, and which free zones follow different rules entirely. Getting it wrong is expensive in both directions: over-provision and you tie up cash and distort your accounts, under-provision and you face a disputed final settlement the day an employee walks out. This guide sets out exactly how to calculate gratuity in the UAE, with the governing law, the formula, two worked examples, and the traps we see most often when we help employers provision for it.

What gratuity actually is

Gratuity — the end-of-service benefit, sometimes called the end-of-service gratuity or EOSB — is a lump sum an employer must pay an employee when their employment ends, provided the employee has completed at least one year of continuous service. It is not a bonus, not discretionary, and not something an employer can waive in the contract. It is a statutory entitlement that accrues from the first day of employment but only becomes payable once the one-year threshold is crossed.

The governing law is Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations, together with its Executive Regulations, which came into effect in February 2022. This law rewrote the UAE’s employment framework, and the single most important change for gratuity is that it abolished the old distinction between limited and unlimited contracts — every private-sector employment contract is now fixed-term. That one change quietly fixed the most confusing part of the old gratuity rules, and we will come back to it.

The gratuity formula

Here is the whole thing in one place. The end-of-service benefit is calculated on the employee’s basic wage only — not the total package — at these rates:

• 21 days’ basic wage for each of the first five years of service.
• 30 days’ basic wage for each year of service beyond five years.
• The total gratuity is capped at two years’ total wage.

Everything else is just applying those three lines correctly. The first step is always to convert the monthly basic salary into a daily wage, because the entitlement is expressed in days.

Deriving the daily wage

The daily wage is the basic monthly salary divided by 30:

Daily wage = Basic monthly salary ÷ 30

From there, 21 days of gratuity is simply the daily wage multiplied by 21, or put another way:

21 days' gratuity = (Basic monthly salary ÷ 30) × 21

That expression — basic divided by 30, times 21 — is the engine of the whole calculation. A useful shortcut: 21 divided by 30 is 0.7, so 21 days of basic wage is exactly 70% of one month’s basic salary per year of service for the first five years. For years beyond five, 30 days is one full month’s basic salary per year.

Why it must be basic salary, not gross

This is the error we correct more than any other. Gratuity is calculated on the basic wage, and every allowance is excluded — housing, transport, phone, education, cost-of-living, anything that sits on top of basic in the contract. If an employee’s total monthly package is AED 15,000 made up of AED 9,000 basic plus AED 6,000 in allowances, the gratuity is worked out on the AED 9,000, not the AED 15,000.

This matters enormously for provisioning. An employer who accrues gratuity against the gross package rather than the basic wage overstates the liability by the full allowance proportion — often 40% or more. It inflates the balance-sheet provision, distorts the monthly management accounts, and sets an expectation with the employee that will not match their actual final settlement. Provisioning gratuity correctly is part of a properly run monthly accounting and bookkeeping cycle, where the accrual is calculated against each employee’s contractual basic and reconciled at every close.

Worked example one: five years or fewer

Take a hypothetical employee — the numbers here are illustrative, not a real client — on a basic monthly salary of AED 10,000 who resigns after completing exactly 4 years of continuous service on a current fixed-term contract.

Step one, the daily wage: AED 10,000 ÷ 30 = AED 333.33 per day.

Step two, the per-year entitlement: AED 333.33 × 21 days = AED 7,000 per year (which is the 70%-of-basic shortcut in action).

Step three, multiply by years of service: AED 7,000 × 4 years = AED 28,000.

So this employee’s end-of-service gratuity is AED 28,000. Because their whole tenure sits within the first five years, only the 21-day rate applies, and the two-year cap is nowhere near being reached.

Worked example two: beyond five years

Now take a hypothetical employee on the same AED 10,000 basic who leaves after 8 years of continuous service. This one crosses the five-year line, so it uses both rates.

The daily wage is still AED 10,000 ÷ 30 = AED 333.33.

For the first five years, the rate is 21 days per year: AED 333.33 × 21 × 5 = AED 35,000.

For the remaining three years (years six, seven and eight), the rate rises to 30 days per year. Thirty days of basic wage is one full month’s basic, so that is AED 10,000 × 3 = AED 30,000.

Add the two portions: AED 35,000 + AED 30,000 = AED 65,000.

The total gratuity is AED 65,000. As a sanity check against the cap: two years’ total wage would be well above this figure on any reasonable package, so the cap does not bite here. It only becomes a live constraint for very long-tenure employees, where the accumulated 30-days-per-year entitlement eventually brushes up against two years’ pay.

The two-year cap

Whatever the formula produces, the total end-of-service gratuity cannot exceed two years’ total wage. For most employees this is invisible — you would have to accumulate a very long tenure at the 30-day rate before the running total reaches two years of pay. But for genuinely long-serving staff it is a real ceiling, and any accrual model that ignores it will over-provision for your most tenured people. When we build gratuity provisions for employers, the cap check is a standard line in the model: calculate the raw entitlement, then floor it at two years’ total wage, and carry the lower figure.

How resignation used to cut gratuity — and why it no longer does

This is the part that causes the most confusion, because the rules genuinely changed. Under the old system, before February 2022, contracts were either “limited” (fixed-term) or “unlimited” (open-ended), and gratuity on resignation depended on which you had. An employee who resigned from an unlimited contract before completing five years could see their gratuity reduced — to one-third of the entitlement for one-to-three years of service, two-thirds for three-to-five years, and the full amount only after five years. Resignation was, in effect, penalised.

Federal Decree-Law No. 33 of 2021 removed that entire mechanism. Because all contracts are now fixed-term, the limited/unlimited distinction is gone, and with it the resignation penalty. An employee who completes at least one year of continuous service on a current fixed-term contract and serves their notice period receives the full 21-days-per-year gratuity whether they resign or their employment is terminated. The reason for leaving no longer scales the entitlement down.

The practical upshot for employers: any accrual model or HR spreadsheet still applying the old one-third and two-thirds resignation fractions is now wrong, and will understate what you owe a resigning employee. If your gratuity template predates 2022, it needs checking.

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The 2022 law did not just tidy up the contract types — it changed the number you owe. Gratuity accrual models built before February 2022 that still apply resignation penalties are systematically under-provisioning for staff who resign. Rebuild the model on the fixed-term basis and the balance sheet finally tells the truth.

Service period, unpaid days and the payment deadline

Two more details decide the final figure. First, the service period counts continuous employment, but unpaid days and periods of unauthorised absence are excluded. A stretch of unpaid leave does not accrue toward gratuity, so it can push an employee’s qualifying anniversary later than the calendar would suggest. When you calculate service years, you count paid, authorised service — not simply the gap between the joining date and the leaving date.

Second, the timing. Gratuity, along with the rest of the final settlement, is payable within 14 days of the contract ending. That is a tight window, and it is one of the reasons we push employers to accrue gratuity monthly rather than scrambling to calculate it at exit — when the settlement is already provisioned and reconciled, paying it inside 14 days is administrative rather than a fire drill.

DIFC, ADGM and the DEWS exception

Everything above applies to onshore (mainland) UAE and to most free zones. The important exceptions are the two financial free zones, DIFC and ADGM, which run under their own employment laws.

DIFC replaced the traditional end-of-service lump sum with the DEWS scheme — the DIFC Employee Workplace Savings plan. Instead of accruing a gratuity to be paid at exit, DIFC employers make a defined monthly contribution into a funded, professionally invested savings account for each employee. The employee’s end-of-service pot is therefore built up and invested over time rather than calculated as a lump sum against basic salary at the end. ADGM likewise operates under its own regulations. So if your workforce sits inside DIFC, the 21-day and 30-day formula in this guide does not apply to them — you are running monthly DEWS contributions instead, and your accounting treatment is a monthly expense, not an accruing lump-sum liability.

For employers with a mix of onshore and DIFC staff, this means two parallel systems: standard accrued gratuity for the onshore team, and monthly funded contributions for the DIFC team. Getting the two treatments right in the same set of accounts is exactly the kind of thing worth checking before a year-end close.

Where gratuity fits in the wider payroll picture

Gratuity does not sit on its own. It is one of several accruals that a properly run UAE payroll function tracks month by month, alongside the salary run itself, leave-balance accruals, and the WPS submission that pays wages lawfully each cycle. A clean payroll and WPS process keeps the master data — basic wage, joining date, contract type, free-zone status — accurate, and that same master data is what feeds an honest gratuity accrual. When the payroll master is right, the gratuity provision is right; when it drifts, the provision drifts with it.

If you want to run the numbers yourself, our deeper gratuity calculator and formula guide walks through the calculation step by step with additional edge cases. And for the monthly provisioning that keeps the liability accurate on your balance sheet, that belongs in your accounting and bookkeeping cycle rather than in a spreadsheet nobody owns.

The short version

To calculate end-of-service gratuity in the UAE: confirm the employee has completed at least one year of continuous service, take their basic monthly salary, divide by 30 for the daily wage, apply 21 days per year for the first five years and 30 days per year thereafter, cap the total at two years’ pay, exclude unpaid days from the service period, and pay it within 14 days of the contract ending. Remember that under the 2022 law resignation no longer cuts the entitlement, and that DIFC staff sit under DEWS instead. Get the basic-versus-gross distinction right and most of the difficulty disappears.

Velmont Crest is a DED-licensed UAE accounting firm providing advisory, preparation and provisioning support across the full payroll cycle — gratuity accrual, end-of-service settlement calculation, WPS processing and monthly bookkeeping — for mainland and free zone businesses. Read more on our insights hub or get in touch via our contact page.

Disclaimer: Velmont Crest is a DED-licensed accounting firm providing advisory, preparation and compliance support services. We are not a law firm, a labour lawyer or a government body, and this guide is general information, not legal advice. UAE Labour Law and its Executive Regulations change, and the treatment of individual cases turns on the specific employment contract and circumstances — verify current rates and rules against the official law and consult a licensed legal professional for advice specific to your situation before acting.

References

• Federal Decree-Law No. 33 of 2021 on the Regulation of Labour Relations
• UAE Ministry of Human Resources and Emiratisation (MoHRE)
• UAE Government portal — End of service benefits
• DIFC Employee Workplace Savings (DEWS) scheme