It is no unknown fact that gratuity plays a significant role in the professional life of employees in the Middle East, including Saudi Arabia. It is considered to be monetary token of acknowledgment and financial support given to employees by their employers as a gesture of appreciation for their years of service and hard work. In Saudi Arabia, the gratuity amount is governed by the Saudi Labor Law, which outlines the rights and obligations of both employers and employees.

Understanding the intricacies of gratuity in KSA is essential for employees to ensure that they receive the full gratuity amount they are entitled to. This comprehensive guide aims to provide all the necessary information about KSA gratuity, including its definition, legal framework, eligibility criteria, calculation methods, payment process, and common misconceptions. By the end of this blog, you will have a clear understanding of how gratuity works in Saudi Arabia and how it can financially support employees during their professional journey.

Understanding Gratuity in KSA

Gratuity, also known as end-of-service benefits, is a lump sum amount paid to employees as a form of financial support upon the completion of their employment. The Saudi Labor Law, which governs all aspects of employment in Saudi Arabia, ensures that employees receive their entitled benefits. The amount is calculated based on the employee’s last drawn salary and the number of years of service. Understanding the concept of gratuity and its importance is crucial for employees to plan their finances and secure their future.

Eligibility Criteria for Gratuity in KSA

To be eligible for gratuity in Saudi Arabia, employees must meet certain criteria. The minimum service period required to qualify is two years of continuous service with the same employer. This means that employees must have worked for the same employer for a consecutive period of two years or more to be entitled to receive gratuity. The employment period includes the total number of years an employee has worked for the employer, without any breaks or interruptions. Understanding the eligibility criteria is essential for employees to determine if they are entitled to receive this financial benefit.

Employment Types Covered Under the Gratuity Law

The gratuity law in Saudi Arabia covers employees in the private sector. This includes individuals working for private companies, organizations, and establishments. The law ensures that employees in the private sector are entitled to receive gratuity after completing the minimum service period of five years. It is important for employees to understand that the law only applies to the private sector and may not be applicable to individuals working in the public sector or government organizations. Ensuring that your employment falls under the gratuity law is crucial for determining your entitlement to this financial benefit.

Calculating Gratuity Payments

Calculating gratuity payments requires an understanding of the calculation formula. The amount is calculated based on the employee’s last drawn salary i.e his basic salary and the number of years of service. To simplify the calculation process, individuals can use a calculator that takes into account the basic salary, last drawn salary, and the tenure of service. The calculation formula may vary depending on whether the employee is covered under the gratuity act or not. By using a calculator, employees can estimate the amount they are entitled to based on their specific circumstances.
Upon reaching five years of employment, gratuity increases to the equivalent of one month’s salary for each subsequent year. The calculation is based on the basic salary, exclusive of allowances or bonuses. In case of salary fluctuations during the tenure, gratuity is computed using the average salary of the last three years.

According to the updated Labour Law, all contracts are now limited, resulting in calculations based on 21 days of basic salary for each completed year of service, up to five years. After completing five years of service, gratuity is calculated at 30 days for each subsequent year. Consequently, gratuity is computed as follows:

• 21 days for the first five years, and
• 30 days for each year beyond five years of service.

Under an unlimited contract, an employee who resigns should receive payment according to the previous law one year after the expiration of their old labor contract, unless their company has chosen to adhere to the new labor legislation even if the contract remains in force.

Step-by-Step Guide to Calculating Your Gratuity

Calculating can be simplified by following a step-by-step guide that takes into account the employee’s specific circumstances. Here is a step-by-step guide to calculating your gratuity:

Step 1: Determine your last drawn salary, which includes the basic salary and any dearness allowance.

Step 2: Determine the number of years of service you have completed with the employer.

Step 3: Use the gratuity calculation formula to calculate your amount. The formula may vary depending on whether you are covered under the gratuity act or not.

Step 4: Use a gratuity calculator or manually calculate the amount using the formula.

Step 5: Verify the gratuity amount using the calculation results and cross-reference it with the maximum gratuity limit set by the labor law.

Factors Influencing Gratuity Calculations:

Several elements play a role in determining the final amount in Saudi Arabia. Firstly, the primary factor is the employee’s basic salary. As it hinges on this fundamental figure, any alterations in the salary directly affect the sum. Hence, it’s imperative for employees to grasp how their basic salary is established and if any adjustments have occurred throughout their tenure.

Another critical factor is the length of service. The longer an employee has served, the greater the gratuity entitlement. Those with over five years of service qualify for a heightened rate. This structure not only encourages prolonged commitment but also acknowledges and rewards loyalty and dedication.

Moreover, the average salary over the preceding three years is factored in during calculation. If an employee’s salary has risen over time, the average salary serves as the benchmark for determining gratuity. This ensures fairness, providing employees with this reflective of their overall compensation during their tenure.

Tax Implications:

Gratuity payments in Saudi Arabia typically enjoy exemption from income tax. Therefore, the lump sum received by employees remains untaxed. However, it’s prudent to stay abreast of evolving tax regulations, as laws can evolve. Consulting with tax professionals or referring to authoritative sources helps ensure compliance with prevailing tax norms governing gratuity payments.

How Gratuity is Taxed Beyond the Exemption Limit

The amounts that exceed the tax-free exemption limit are subject to taxation. Any amount received beyond the exemption limit is taxable as per the income tax regulations. The tax rate applicable to the excess amount depends on the individual’s income tax slab. Employees should be aware of the tax implications of amounts that exceed the exemption limit and plan their finances accordingly. Seeking professional advice or consulting with a tax expert can provide further guidance on the tax implications of gratuity payments and help employees make informed decisions regarding their finances.

Gratuity Settlement:

As per Saudi labor regulations, employers must settle the said amount within 30 days post-employment termination. This timeline ensures timely disbursement, offering employees crucial financial support during the transition phase. Failure by employers to meet this obligation may result in penalties or legal repercussions. Employees are advised to maintain thorough documentation, including salary slips and employment contracts, to facilitate the gratuity settlement process if necessary.

Conclusion:

In conclusion, understanding KSA tax scheme is crucial for both employers and employees to ensure fair compensation. From eligibility criteria to tax implications, being informed about gratuity laws in Saudi Arabia is essential. By knowing the legal framework, calculating entitlements, and debunking misconceptions, individuals can navigate their rights and responsibilities effectively. Whether you are an employer discharging gratuity or an employee receiving it, clarity on the process strengthens compliance and transparency. Stay knowledgeable about the nuances of KSA taxes to safeguard your financial well-being and uphold legal obligations.

About Arnifi

Arnifi is digital first Corporate service provider helping companies enter the Middle East region, starting with UAE and Saudi Arabia markets. Founded and backed by professionals from Amazon, Souq and other large companies operating in KSA – the team understands what it takes to succeed as a startup in both UAE and Saudi Arabian markets, apart from going through the setup process multiple times. Arnifi will provide a truly digital experience to entry and scale up of companies both UAE and Saudi Arabia. The Arnifi promise is simple, yet revolutionary, use technology and a great team to provide transparency, efficiency and great customer experience in the whole process. Check out at – www.Arnifi.com for more details.

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