Gratuity Benefits in UAE: A Complete Guide for Employees and Employers

In the UAE, gratuity benefits are a fundamental pillar of the employment relationship, serving as a mandatory "thank you" for an employee's loyalty and service. Governed primarily by Federal Decree-Law No. 33 of 2021 (the New UAE Labour Law), this lump-sum payment acts as a vital financial buffer for workers transitioning between jobs or entering retirement.

As of 2026, it is critical for both employees and employers to understand the latest regulations, including the shift away from unlimited contracts and the introduction of voluntary savings schemes.

What is Gratuity?

Gratuity is a monetary payment mandated by UAE law that an employer must provide to an employee upon the termination of their contract. It is an end-of-service benefit calculated based on the employee's basic salary and years of service.

Important Note: Under the current legal framework, all "unlimited" contracts have been phased out or converted into limited (fixed-term) contracts. This ensures greater transparency regarding employment law and end-of-service entitlements.

• How is Gratuity Calculated?

  • The gratuity calculation formula follows a tiered system. To calculate gratuity, you must use the last basic wage the worker was entitled to, excluding allowances like housing, transport, or utilities.

                 1. Standard Calculation (Mainland & Most Free Zones)

    • 1 to 5 years of service: 21 calendar days’ basic wage for each year.

    • More than 5 years of service: 30 calendar days’ basic wage for each year beyond the first five.

      2. The Maximum Limit

      In all cases, the total end-of-service benefits cannot exceed the equivalent of two years of the employee’s wage.

      3. Pro-Rata for Fractions

      If you have served one or more years, you are also entitled to gratuity for any fraction of a year worked, calculated proportionately.

Who is Eligible for Gratuity?

To be entitled to full gratuity, certain conditions must be met:

• One Year of Continuous Service: An employee must complete at least one year of service to qualify. If they leave before 1 year, they are not entitled to any pay.

• Resignation vs. Termination: Under the new labour law, employees who resign after completing one year are entitled to their full gratuity based on the 21/30-day formula. The old "sliding scale" reductions for resigning from unlimited contracts are largely obsolete now that contracts are fixed-term.

• Unpaid Absence: Days of absence without pay are excluded when calculating the gratuity period.

Employer’s Role in Gratuity Payments

Employers have a legal obligation to ensure the payment of gratuity to their employees when they exit the company.

• Payment Responsibility: Employers must calculate and pay gratuity according to the terms of the employee’s contract and service period.

• Deductions: Employers may deduct amounts for outstanding debts, fines, or any violations of company policies as per the employee's final settlement.

• Compliance with the Law: Employers are responsible for ensuring that employment contracts are compliant with the UAE Labour Law and for fulfilling their obligations to pay gratuity when required.

Impact of Employment Contracts on Gratuity

Gratuity entitlement is influenced by the type of employment contract an employee has:

• Limited (Fixed-Term) Contract: This contract has a specific start and end date. The employee’s gratuity is calculated based on the duration worked.

• Unlimited (Open-Term) Contract: This contract has no fixed end date and may continue indefinitely. Employees with this contract are still entitled to gratuity payments after completing the required service.

Regardless of the contract type, once an employee meets the required service duration, they are entitled to gratuity as per the applicable calculation method.

What is an End of Service Gratuity?

An end-of-service gratuity is a mandatory lump-sum end of service benefit provided to employees in the UAE when their employment contract concludes. Governed by the Federal Decree Law No. 33 of 2021, this gratuity law ensures that workers are financially compensated based on their length of service and final basic salary. To be eligible for this gratuity payout, an employee must complete at least least one year of continuous service. For uae nationals, these benefits in the uae are typically integrated with the national pension scheme rather than a traditional lump sum.

In 2026 ,understanding end of service benefits remains crucial as the uae gratuity law standardizes entitlements across different contracts in the uae. Under the current gratuity system, the gratuity amount is calculated at 21 days' basic wage for each year during the first five years of service, and 30 days per year for every year thereafter. The total end of service benefits are legally capped and cannot exceed two years' worth of salary. To accurately calculate gratuity in the uae, many use an official uae gratuity calculator or a manual gratuity calculator to ensure they are compliant with uae labor standards. These service benefits are calculated excluding allowances, focusing solely on the basic pay. Regarding end of service, it is vital for employees eligible for gratuity to learn how uae regulations protect their rights, ensuring that gratuity to employees is paid within 14 days of the contract termination. Whether in the mainland or seeking end of service benefits dubai, understanding end of service rules helps parties manage gratuity under uae labour law effectively, ensuring a fair calculation of gratuity and smooth uae end of service transitions.

Gratuity Calculation Example

To understand how gratuity is calculated, here are a couple of examples:

• Example 1: Employee with 4 years of service earning AED 10,000 as their basic wage:

  • Gratuity = (21 days * AED 10,000) / 30 days * 4 years = AED 28,000

• Example 2: Employee with 6 years of service earning AED 12,000 as their basic wage:

  • Gratuity = (21 days * AED 12,000) / 30 days * 5 years = AED 42,000

  • Plus gratuity for the 6th year = 30 days' wage = AED 12,000

Legal Framework for Gratuity

Gratuity payments are governed by the UAE Labour Law, specifically Federal Decree-Law No. 33 of 2021, which regulates the labour relations in the UAE. The law outlines the gratuity entitlement, eligibility, and calculation method in Article 51.

• Regulatory Authority: The Federal Tax Authority (FTA) ensures compliance with the law and oversees the gratuity payments and other end-of-service benefits.

Employers and employees must ensure that their contracts comply with these laws to avoid disputes at the time of employment termination.

Tax Considerations for Gratuity

There are no income taxes specifically applied to gratuity payments in the UAE, making it a tax-free benefit. However, employees may need to file their final tax returns if they have multiple income sources or other taxable incomes.

Gratuity Calculation for Limited Contract Employees

Under the current legal framework, service gratuity in the UAE for limited (fixed-term) contracts is highly streamlined. For uae in 2026, the law stipulates that as long as an employee has completed at least one year of continuous service, they are entitled to a full gratuity in uae without the reductions previously seen in old unlimited contract types. Per the new uae labor regulations, the calculation is based on the final basic salary: 21 days’ basic pay for each year of the first five years and 30 days’ basic pay for each subsequent year. This transparency regarding end of service benefits ensures that both parties can easily predict the final settlement, provided the total amount does not exceed two years' worth of basic wages.

Gratuity Payment Process

The process for paying gratuity follows a set procedure that both employers and employees should be aware of:

• Employer’s Responsibility: Employers must ensure that gratuity payments are made on time once the employee exits the company. The amount should be part of the final settlement.

• Payment Method: Gratuity is usually paid as a lump sum after the employment ends. The amount can be transferred through bank transfers or other payment methods agreed upon.

• Legal Timelines: Employers must make the gratuity payment as per the agreed upon timelines mentioned in the employment contract or within a reasonable period after the employee leaves.

How Young & Right Can Help You with Gratuity Benefits in the UAE

At Young & Right, we specialize in helping both employees and employers navigate the complex landscape of service benefits in the UAE, particularly end-of-service benefits like gratuity. Understanding gratuity eligibility and ensuring compliance with the UAE Labour Law regulations is essential for avoiding legal pitfalls and ensuring that both employees and employers are well-informed.

As experts in UAE labour law, we offer tailored guidance regarding gratuity in the UAE and ensure that the gratuity calculation aligns with the new regulations per the UAE Labour Law 2021 and the upcoming changes expected in 2025. Whether you are an employee seeking to understand your end-of-service gratuity upon resignation or an employer aiming to ensure your company complies with the law, Young & Right is here to assist.

Our Services Include:

• Gratuity Calculation and Eligibility: We help employees understand their gratuity eligibility based on service duration, contract type, and other factors.

• Legal Guidance on End-of-Service Benefits in the UAE: We ensure both employees and employers are aware of the UAE labour law regulations regarding end-of-service benefits and gratuity.

• Assistance with Gratuity Disputes: If there are disagreements regarding the calculation or payment of gratuity, our experts can assist with resolution and legal support.

• Compliance with the New UAE Labour Law: With recent updates to the UAE labour law, we guide businesses on ensuring compliance with gratuity and service gratuity requirements.

Conclusion

Understanding end-of-service benefits is essential for financial planning in Dubai and the wider UAE. Whether you are an employee from the gratuity perspective or an employer managing gratuity obligations, staying compliant with the law ensures a smooth transition.

Regarding end-of-service disputes, the Ministry of Human Resources and Emiratisation (MoHRE) serves as the primary regulatory body to ensure gratuity pay in UAE is handled fairly.