End of Service Gratuity Settlement (UAE)
A mandatory lump-sum payment made by UAE employers to departing employees, calculated based on years of service under Federal Decree-Law No. 33 of 2021.
- What Is End of Service Gratuity in the UAE?
- How to Calculate End of Service Gratuity
- Key Changes Under Federal Decree-Law No. 33 of 2021
- Special Cases and Exceptions
- When and How Gratuity Must Be Paid
- Tax Treatment of Gratuity in the UAE
- Gratuity in DIFC and ADGM Free Zones
- Frequently Asked Questions About UAE End of Service Gratuity
What Is End of Service Gratuity in the UAE?
Key Takeaways
- ✓End of service gratuity (EOSG) is a mandatory terminal benefit in the UAE, governed by Federal Decree-Law No. 33 of 2021 (UAE Labour Law).
- ✓All employees who complete 1+ years of continuous service are entitled to gratuity, regardless of nationality or contract type.
- ✓The calculation uses basic salary only (excludes housing, transport, and other allowances) and scales with years of service.
- ✓The total gratuity amount is capped at 2 years' total remuneration.
- ✓Since the 2021 law reform, there's no reduction in gratuity for employees who resign. Both resignation and termination receive the full entitlement.
End of service gratuity is the UAE's equivalent of a severance or retirement benefit. Since the UAE doesn't have a social security pension system for expatriate workers (who make up roughly 90% of the private-sector workforce), gratuity serves as the primary long-term savings mechanism for departing employees. Federal Decree-Law No. 33 of 2021, which replaced the older Federal Law No. 8 of 1980, simplified several aspects of gratuity. The most significant change: under the old law, employees who resigned before completing 5 years of service received reduced gratuity (one-third for 1-3 years, two-thirds for 3-5 years). The 2021 law eliminated these reductions. Now, all eligible employees receive full gratuity regardless of whether they resigned or were terminated.
Who is covered?
The EOSG applies to all private-sector employees in the UAE mainland (not DIFC or ADGM free zones, which have their own employment regulations). It covers both UAE nationals and expatriates. Domestic workers are covered under a separate law (Federal Decree-Law No. 9 of 2022) with its own gratuity provisions. Part-time employees are entitled to gratuity calculated proportionally based on their actual working hours. Free zone employees in non-DIFC/ADGM zones generally follow the mainland UAE Labour Law unless the free zone authority has its own regulations.
How to Calculate End of Service Gratuity
The calculation is based on the employee's basic salary (last drawn) and their total years of continuous service. Allowances like housing, transport, commission, and overtime are excluded.
The formula
For the first 5 years of service: 21 days' basic salary for each year. For each additional year beyond 5: 30 days' basic salary per year. Partial years are calculated proportionally. The total gratuity cannot exceed the equivalent of 2 years' total remuneration (basic + all allowances). Daily basic salary is calculated as: monthly basic salary / 30.
Calculation example: 7 years of service
Employee's last drawn monthly basic salary: AED 10,000. Daily basic salary: AED 10,000 / 30 = AED 333.33. First 5 years: AED 333.33 x 21 days x 5 years = AED 35,000. Next 2 years: AED 333.33 x 30 days x 2 years = AED 20,000. Total gratuity: AED 35,000 + AED 20,000 = AED 55,000. Check against cap: 2 years' total remuneration. If total monthly remuneration (basic + allowances) is AED 15,000, the cap is AED 15,000 x 24 = AED 360,000. Since AED 55,000 is well below the cap, the full amount is payable.
Calculation example: 15 years of service
Employee's last drawn monthly basic salary: AED 20,000. Daily basic salary: AED 20,000 / 30 = AED 666.67. First 5 years: AED 666.67 x 21 x 5 = AED 70,000. Next 10 years: AED 666.67 x 30 x 10 = AED 200,000. Total gratuity: AED 270,000. Check against cap: If total monthly remuneration is AED 30,000, the cap is AED 30,000 x 24 = AED 720,000. AED 270,000 is within the cap.
| Service Period | Gratuity Rate | Daily Salary Calculation | Example (AED 10,000 basic/month) |
|---|---|---|---|
| Year 1-5 | 21 days' basic salary per year | Monthly basic / 30 | AED 7,000/year |
| Year 6+ | 30 days' basic salary per year | Monthly basic / 30 | AED 10,000/year |
| Cap | Cannot exceed 2 years' total remuneration | All components included | Varies by total package |
Key Changes Under Federal Decree-Law No. 33 of 2021
The 2021 law introduced several important changes that directly affect gratuity calculations and entitlements.
No more reduction for resignation
Under the old law (Federal Law No. 8 of 1980), employees who resigned received reduced gratuity if they hadn't completed 5 years: one-third of the 21-day entitlement for 1-3 years of service, and two-thirds for 3-5 years. The 2021 law removes these deductions. Employees who resign after 1+ years now receive the full 21-day or 30-day entitlement, the same as terminated employees.
All contracts are now fixed-term
The 2021 law abolished unlimited-term contracts. All employment contracts must be fixed-term (maximum 3 years, renewable). Under the old law, gratuity calculation differed slightly between limited and unlimited contracts. This distinction no longer exists since all contracts are now limited (fixed-term). Existing unlimited contracts had a transition period until February 1, 2023 to convert to fixed-term.
Alternative savings schemes (DEWS)
DIFC introduced the DIFC Employee Workplace Savings Scheme (DEWS) in 2020 as an alternative to traditional gratuity. Under DEWS, employers make monthly contributions (equivalent to the gratuity accrual) into a defined contribution investment plan managed by an external fund administrator. Employees can choose from multiple investment options and the fund grows based on market returns. Abu Dhabi's ADGM followed with a similar scheme. The UAE mainland government has discussed but not yet mandated a similar alternative for mainland employers.
Special Cases and Exceptions
Several scenarios affect gratuity eligibility and calculation beyond the standard formula.
Termination during probation
Employees terminated during the probation period (maximum 6 months under the 2021 law) are not entitled to gratuity if they haven't completed 1 year of service. Probation counts toward the 1-year qualifying period but doesn't independently trigger gratuity eligibility.
Dismissal for gross misconduct (Article 44)
An employer can dismiss an employee without notice and without gratuity if the employee commits any of the offenses listed in Article 44 of the Decree-Law. These include assuming a false identity, committing forgery, assaulting the employer or a colleague, being absent without valid reason for more than 20 non-consecutive days (or 7 consecutive days) in a year, disclosing confidential business information, being found intoxicated or under the influence of drugs at work, or being convicted of a crime involving honor, honesty, or public morals. Even in gross misconduct cases, some MOHRE precedents suggest the employee may still be entitled to partial gratuity. Legal advice is recommended.
Part-time employees
The 2021 law explicitly recognizes part-time employment. Part-time employees are entitled to gratuity calculated proportionally. If a part-time employee works 4 hours per day (compared to the standard 8), their gratuity is calculated at 50% of what a full-time employee with the same basic salary and tenure would receive. The specific pro-rata calculation depends on the terms of the part-time contract.
When and How Gratuity Must Be Paid
The UAE Labour Law requires employers to settle all end-of-service entitlements, including gratuity, within 14 days of the employee's last working day (Article 53).
What can be deducted from gratuity
The employer can deduct from the gratuity any amounts owed by the employee, including outstanding loans, salary advances, or penalties for damage to company property caused by the employee's negligence. However, the deductions must be documented and proportionate. The employee can dispute excessive deductions through MOHRE.
Consequences of late payment
If the employer fails to pay gratuity within 14 days, the employee can file a complaint with the Ministry of Human Resources and Emiratisation (MOHRE). MOHRE will attempt to resolve the dispute through mediation. If mediation fails, the case is referred to the Labour Court. The court can order immediate payment plus compensation. Employers with a pattern of late gratuity payments may face administrative penalties including fines and suspension of work permit processing.
Tax Treatment of Gratuity in the UAE
The UAE does not levy personal income tax. Gratuity payments are received tax-free in the UAE. However, employees who are tax residents of another country may owe tax on their gratuity in their home jurisdiction.
For Indian nationals
Indian residents (under the Income Tax Act definition) must declare UAE gratuity as income in their Indian tax return. However, relief is available under the India-UAE Double Taxation Avoidance Agreement (DTAA). The taxability depends on the employee's residential status in the year they receive the gratuity. Non-resident Indians (NRIs) who are not ordinarily resident in India may not owe Indian tax on UAE gratuity. Tax advice specific to the individual's circumstances is essential.
For other nationalities
Employees from countries with worldwide taxation (US, UK, Australia, etc.) may owe tax on gratuity in their home country. The treatment depends on the specific tax treaty between the UAE and the employee's home country, the employee's tax residency status, and whether the home country considers gratuity as employment income or a retirement benefit. US citizens and green card holders, for example, must report UAE gratuity as income on their US tax return regardless of where they live.
Gratuity in DIFC and ADGM Free Zones
The Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) are financial free zones with their own employment laws, separate from the UAE mainland.
DIFC: DEWS scheme
Since February 2020, DIFC employers contribute to the DIFC Employee Workplace Savings Scheme (DEWS) instead of holding a gratuity liability on their balance sheet. Employer contributions are: 5.83% of basic salary for employees with less than 5 years of service, and 8.33% for employees with 5+ years. Employees can make voluntary contributions up to a combined total. The funds are invested through Equiom (the scheme administrator), and employees choose from risk-rated investment profiles. On departure, the employee receives their accumulated fund balance, which may be more or less than what traditional gratuity would have been, depending on market performance.
ADGM
ADGM follows its Employment Regulations 2019, which provide for gratuity based on 21 days' basic wage for each year of the first 5 years and 30 days for each additional year, similar to the mainland formula. ADGM also introduced an end-of-service benefit savings scheme similar to DEWS in principle, though the specifics differ. Employers in ADGM should check the latest ADGM Employment Regulations for current requirements.
Frequently Asked Questions
Does the employee receive gratuity if they resign during probation?
Is housing allowance included in the gratuity calculation?
What happens to gratuity if the company goes bankrupt?
Can an employer offer a higher gratuity than the statutory minimum?
How does the 2-year cap work in practice?
Written by Adithyan RK