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What is end-of-service gratuity in the UAE?
End-of-service gratuity (EOSG) is a lump-sum payment that UAE employers must pay to employees when their employment ends, as mandated by Federal Decree-Law No. 33 of 2021 (UAE Labour Law). The gratuity is calculated based on the employee's last basic salary and total length of service. It applies to all employees who have completed at least one year of continuous service, regardless of whether the employee resigns, is terminated, or the contract expires. The gratuity is calculated on basic salary only — housing, transport, and other allowances are excluded unless the employment contract specifies otherwise. The total gratuity payment is capped at two years of the employee's total remuneration. Under IFRS (IAS 19 Employee Benefits), the gratuity obligation must be accrued as a provision in the financial statements, calculated and updated monthly, not just paid on departure. TruAccountants calculates and accrues the gratuity provision for all client employees as part of the monthly close process.
The gratuity formula
Cap: The total gratuity amount cannot exceed two years of the employee's total remuneration (basic salary plus all allowances). This cap rarely applies to short-tenured employees but becomes relevant for long-serving staff.
Worked examples
Example 1: Employee with 3 years of service
Basic salary: AED 10,000/month
Daily rate: AED 10,000 ÷ 30 = AED 333.33
Gratuity: 21 days × AED 333.33 × 3 years = AED 21,000
Example 2: Employee with 8 years of service
Basic salary: AED 15,000/month
Daily rate: AED 15,000 ÷ 30 = AED 500
First 5 years: 21 days × AED 500 × 5 = AED 52,500
Next 3 years: 30 days × AED 500 × 3 = AED 45,000
Total gratuity: AED 52,500 + AED 45,000 = AED 97,500
Example 3: Employee with 12 years of service
Basic salary: AED 20,000/month
Daily rate: AED 20,000 ÷ 30 = AED 666.67
First 5 years: 21 days × AED 666.67 × 5 = AED 70,000
Next 7 years: 30 days × AED 666.67 × 7 = AED 140,000
Total gratuity: AED 70,000 + AED 140,000 = AED 210,000
Cap check: 2 years total remuneration (assume AED 30,000/month total) = AED 720,000. Gratuity of AED 210,000 is within the cap.
Gratuity for employees who resign
Under the UAE Labour Law, the gratuity entitlement when an employee resigns depends on the length of service:
These reduced rates apply only when the employee resigns. If the employer terminates the employee (other than for gross misconduct under Article 44), the employee is entitled to the full gratuity regardless of length of service, provided they have completed at least one year.
Accounting treatment under IFRS
Under IAS 19 Employee Benefits, end-of-service gratuity is classified as a post-employment benefit — specifically, a defined benefit plan. The accounting requirements are:
- Monthly accrual: The provision must be calculated for each employee and accrued monthly — debit: gratuity expense (P&L), credit: gratuity provision (balance sheet)
- Based on current salary: The provision is calculated using each employee's current basic salary and service period — it updates when salary changes or service period increases
- Not discounted (simplified approach): Most UAE companies use the simplified approach under IAS 19 for short-term gratuity provisions (all benefits expected to be settled within 12 months of the reporting period). For larger companies with long-tenured staff, the full actuarial valuation approach may be required
- Disclosure: The total gratuity provision must be disclosed in the notes to the financial statements, with a breakdown of the movement (opening balance, charge for the year, payments, closing balance)
Auditors will recalculate independently. The external auditor will obtain the employee list, recalculate the gratuity provision for every employee, and compare their calculation to the company's provision. A material difference results in an audit adjustment. This is one of the most common audit adjustments in UAE audits — avoid it by calculating correctly from the start.
Common gratuity calculation mistakes
- Including allowances in the calculation. Gratuity is calculated on basic salary only — not total salary. Housing, transport, phone, and other allowances are excluded unless the employment contract explicitly states otherwise.
- Using 26 working days instead of 30. The UAE Labour Law specifies daily salary as monthly basic ÷ 30 (calendar days), not ÷ 26 (working days). Using 26 overstates the daily rate and the gratuity.
- Not accruing monthly. Many businesses only calculate gratuity when an employee leaves. Under IFRS, the provision must be maintained at all times — a sudden expense at departure means the prior-period financial statements understated liabilities.
- Not updating for salary increases. When an employee's basic salary increases, the entire gratuity provision (for all years of service) must be recalculated using the new salary. The provision is always based on the last basic salary.
- Ignoring the cap. The total gratuity cannot exceed two years of total remuneration. For long-serving, senior employees, this cap must be checked.
- DIFC and ADGM exceptions. Employees in the DIFC follow the DIFC Employment Law, and ADGM follows the ADGM Employment Regulations — both have different gratuity rules. Don't apply mainland Labour Law calculations to DIFC/ADGM employees.
What TruAccountants does here
- Calculate the gratuity provision for every employee using the correct formula
- Accrue the gratuity provision monthly as part of the monthly close
- Update the provision when salaries change or employees join/leave
- Prepare the IAS 19 disclosure note for the annual financial statements
- Calculate final gratuity payments when employees depart
- Reconcile the provision to the auditor's independent calculation before audit
Need your gratuity provision calculated correctly?
Send us your employee list with basic salaries and start dates. We'll calculate the provision and set up the monthly accrual — so your balance sheet is right from day one.
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