diff --git a/CHANGELOG.md b/CHANGELOG.md
index 4a075741f..f8971dd42 100644
--- a/CHANGELOG.md
+++ b/CHANGELOG.md
@@ -14,6 +14,7 @@ Requires `libfranka` >= 0.8.0
   * `franka_description`: `<xacro:franka_robot/>` macro now supports to customize the `parent` frame and its `xyz` + `rpy` offset
   * `franka_hw`: Fix the bug where the previous controller is still running after switching the controller. ([#326](https://github.com/frankaemika/franka_ros/issues/326))
   * `franka_gazebo`: Add `set_franka_model_configuration` service.
+  * `franka_gazebo`: Fix external torque calculation by accounting for internal joint limits
 
 ## 0.10.1 - 2022-09-15
 
diff --git a/franka_gazebo/include/franka_gazebo/joint.h b/franka_gazebo/include/franka_gazebo/joint.h
index b301e8b7d..90c52d3ed 100644
--- a/franka_gazebo/include/franka_gazebo/joint.h
+++ b/franka_gazebo/include/franka_gazebo/joint.h
@@ -55,6 +55,10 @@ struct Joint {
   /// \f$Nm\f$ without gravity
   double command = 0;
 
+  /// The clamped applied command from a controller acting on this joint either in \f$N\f$ or
+  /// \f$Nm\f$ without gravity. Set to zero when joint command is saturated due to joint limits.
+  double clamped_command = 0;
+
   /// The current desired position that is used for the PID controller when the joints control
   /// method is "POSITION". When the control method is not "POSITION", this value will only be
   /// updated once at the start of the controller and stay the same until a new controller is
diff --git a/franka_gazebo/src/franka_hw_sim.cpp b/franka_gazebo/src/franka_hw_sim.cpp
index fb80907b2..49f324e1f 100644
--- a/franka_gazebo/src/franka_hw_sim.cpp
+++ b/franka_gazebo/src/franka_hw_sim.cpp
@@ -679,7 +679,8 @@ void FrankaHWSim::updateRobotState(ros::Time time) {
     }
 
     if (this->robot_initialized_) {
-      double tau_ext = joint->effort - joint->command + joint->gravity;
+      // NOTE: Use clamped_command to account for internal joint saturation.
+      double tau_ext = joint->effort - joint->clamped_command + joint->gravity;
 
       // Exponential moving average filter from tau_ext -> tau_ext_hat_filtered
       this->robot_state_.tau_ext_hat_filtered[i] =
diff --git a/franka_gazebo/src/joint.cpp b/franka_gazebo/src/joint.cpp
index 919dc3292..c8d81a565 100644
--- a/franka_gazebo/src/joint.cpp
+++ b/franka_gazebo/src/joint.cpp
@@ -59,6 +59,12 @@ void Joint::update(const ros::Duration& dt) {
   }
   this->jerk = (this->acceleration - this->lastAcceleration) / dt.toSec();
   this->lastAcceleration = this->acceleration;
+
+  /// Store the clamped command, clamped to zero when joint is at its limits.
+  this->clamped_command =
+      (this->position > this->limits.min_position && this->position < this->limits.max_position)
+          ? this->command
+          : 0.0;
 }
 
 double Joint::getDesiredPosition(const franka::RobotMode& mode) const {
@@ -114,11 +120,13 @@ double Joint::getLinkMass() const {
 }
 
 bool Joint::isInCollision() const {
-  return std::abs(this->effort - this->command) > this->collision_threshold;
+  // NOTE: Clamped_command used to handle internal collisions.
+  return std::abs(this->effort - this->clamped_command) > this->collision_threshold;
 }
 
 bool Joint::isInContact() const {
-  return std::abs(this->effort - this->command) > this->contact_threshold;
+  // NOTE: Clamped_command used to handle internal contacts.
+  return std::abs(this->effort - this->clamped_command) > this->contact_threshold;
 }
 
 void Joint::setJointPosition(const double joint_position) {