End-of-service benefit paid to employees in Middle Eastern and South Asian countries.
Gratuity is an end-of-service benefit mandated by law in several countries — most notably UAE, Saudi Arabia, Qatar, Kuwait, Bahrain, Oman, Pakistan, and India. It is a lump-sum payment made to an employee upon termination of employment, calculated from years of service and last drawn salary. Because it accrues quietly over years and falls due all at once, gratuity is one of the few payroll liabilities that can surprise a growing employer: the obligation is building on every payslip long before anybody leaves.
Under Article 51 of the UAE Labour Law, a full-time worker who completes at least one year of continuous service is entitled to end-of-service gratuity. A worker with more than one year but fewer than five years receives 21 days' salary for each year of work; beyond five years, 30 days' salary for each year following the first five. In all cases the total gratuity may not exceed the wage of two years.
The critical detail — and the one most often got wrong — is which wage the calculation uses. Gratuity is computed on the last wage the worker was entitled to, namely the basic salary; it does not include allowances such as housing, transport, utilities or furniture. For a package that is heavily allowance-weighted, the figure can be far smaller than the employee expects, which is why it belongs in the conversation at hiring rather than at exit.
Two further rules matter in practice: workers are entitled to gratuity for fractions of a year in proportion to the time served once the first year is complete, and days of absence from work without pay are excluded from the service calculation. Employers must pay outstanding wages and gratuity within 14 days of the termination of the contract.
UAE, first five years: (basic wage ÷ 30) × 21 × years of service. Sixth year onward: (basic wage ÷ 30) × 30 × years, added to the first five years' entitlement.
An employee resigns after seven complete years on a basic wage of AED 9,000 a month. A daily rate of AED 300 (9,000 ÷ 30) gives 21 × 300 = AED 6,300 for each of the first five years, so AED 31,500. Years six and seven accrue at 30 days: 30 × 300 = AED 9,000 each, so AED 18,000. Total gratuity is AED 49,500 — against a two-year cap of AED 216,000, so the cap does not bite.
Note what the example shows about the accrual curve: the last two years contributed more than half again what a single early year did. Gratuity gets materially more expensive per head the longer people stay, which is worth modelling before a retention push, not after.
India's Payment of Gratuity Act, 1972 works on a different basis. Under section 4(1) gratuity is payable on termination after not less than five years' continuous service — though that five-year condition does not apply where employment ends through death or disablement. Section 4(2) sets the rate at fifteen days' wages, based on the wage last drawn, for every completed year of service or part of a year in excess of six months.
The Act does not itself name a maximum figure. Section 4(3) states that gratuity "shall not exceed such amount as may be notified by the Central Government from time to time", so the ceiling lives in a notification rather than in the statute — which is precisely why second-hand figures for it circulate and go stale. Check the current notification rather than any number quoted without one. The Act applies to shops and establishments in which ten or more persons are employed, or were employed on any day of the preceding twelve months.
The five-year threshold makes Indian gratuity behave very differently from the UAE's: an employee who leaves at four years and eleven months normally takes nothing, while the UAE entitlement begins at one year and then builds pro rata. Any HR system handling both countries has to model them as two separate rules, not one parameterised rule.
| UAE | India | |
|---|---|---|
| Qualifying service | 1 year | 5 years (waived on death or disablement) |
| Accrual rate | 21 days/year for years 1–5, then 30 days/year | 15 days per completed year, or part year over six months |
| Pay basis | Basic wage only, allowances excluded | Wages last drawn |
| Overall cap | Two years' wage | An amount notified by the Central Government |
| Authority | Article 51, UAE Labour Law | Payment of Gratuity Act, 1972, s.4 |
In the UAE, yes — a worker who resigns after completing at least one year of continuous service is entitled to end-of-service gratuity. In India, section 4(1) of the Payment of Gratuity Act lists retirement and resignation alongside superannuation, so gratuity is payable on resignation provided the employee has five years' continuous service.
Basic salary. The calculation uses the last wage the worker was entitled to, namely the basic salary, and excludes allowances such as housing, transport, utilities and furniture. Two employees on identical total packages can therefore be owed very different amounts.
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