Gratuity payment in Sri Lanka: employer obligations and calculation guide

Last verified against the primary sources on 15 October 2026.

A senior manager with 16 years' service retires on Rs 185,000 a month. Gratuity at the statutory formula is Rs 1,480,000, payable within 30 days. Many employers only see the size of this obligation when it is already due.

Gratuity builds up silently against every long-serving employee. Unlike EPF and ETF there is no monthly payment to remind you it exists. It surfaces when employment ends, and the 30-day clock starts then.

Which employers and employees are covered

Gratuity is governed by the Payment of Gratuity Act No. 12 of 1983. Under section 5(1), an employer that employed 15 or more workmen on any day in the 12 months before the termination must pay gratuity to a workman with at least five completed years of service, within 30 days of the termination [1]. The Act defines "workman" widely, including a person under a "contract personally to execute any work or labour" (s.20) [1], so consultants who are really workers count towards the 15; see consultant or employee: the misclassification risk.

An employer below 15 is outside section 5(1), but that does not settle every case: a contract of employment or a labour tribunal can still require a payment. Take advice before refusing.

Five completed years

The qualifying condition is five completed years of service. Part years do not round up [1]:

• 4 years and 11 months: not eligible
• 5 years and 0 months: eligible
• 7 years and 9 months: 7 years for the calculation

Whether a break in service, such as a layoff and rehire, interrupts continuity depends on the facts. Record the dates and the reason for any break in the employee's file.

When gratuity becomes payable

Section 5(1) ties payment to the termination of a qualifying workman's services, and on the text we read it applies whatever the reason for leaving, including retirement, resignation, retrenchment and termination by the employer [1] [2]. Older guides say gratuity is never payable on dismissal for misconduct; do not rely on that without checking the Act's current wording and taking advice, because withholding a gratuity that is due attracts the surcharge below.

The formula

Section 6(2) sets the amount [1] [2]:

• Monthly-rated workmen: half a month's wage or salary for each completed year of service
• Other workmen: 14 days' wage for each completed year of service

Three points to watch:

1. "Wage or salary". The Act uses the words "wage or salary". Whether a particular allowance is part of it is not settled in the sources we checked. Decide the basis for each allowance, record it, and apply it consistently in your provision and your payments.

2. The last wage or salary. Use the rate at the time employment ends, not an average. If the employee had a recent increase, the new rate applies.

3. Completed years only. 8 years and 7 months counts as 8.

Worked examples

Example 1: monthly-rated employee

• Monthly salary at resignation: Rs 75,000
• Service: 7 years and 3 months, so 7 completed years
• Gratuity: Rs 75,000 × ½ × 7 = Rs 262,500

Example 2: senior manager

• Monthly salary at retirement: Rs 185,000
• Service: 16 years
• Gratuity: Rs 185,000 × ½ × 16 = Rs 1,480,000

Example 3: daily-rated production worker

• Daily wage: Rs 1,500
• Service: 22 years
• Gratuity: 14 days × Rs 1,500 × 22 = Rs 462,000

The half-month formula does not apply to a worker who is not monthly rated; using it understates or overstates the payment depending on the days worked.

Payment deadline and surcharge

Pay within 30 days of the termination [1]. Late payment carries a surcharge on the gratuity under section 5(4), not simple interest [1]:

Disputes usually turn on the termination date, the wage or salary figure, or the years of service. Keep all three documented throughout the employment, not just at the end. If a dispute cannot be resolved directly, the employee can complain to the Commissioner of Labour.

Income tax: APIT Table 03

Gratuity is a once-and-for-all payment taxed under APIT Tax Table 03, not the monthly table and not the bonus method [3]:

• Where gratuity, compensation under a scheme approved by the Commissioner-General, commuted pension and ETF together exceed Rs 5,000,000, the employer and the ETF each retain 12 percent of the excess.
• Compensation under an unapproved scheme and other payments carry 36 percent.
• Nothing is retained if the employee's taxable pay for the year up to termination plus these payments is within Rs 1,800,000.
• The employee then obtains a direction from the IRD within 90 days.

In Example 2, a Rs 1,480,000 gratuity is below Rs 5,000,000, so no APIT is retained on it. Take a hypothetical director who receives a Rs 6,000,000 gratuity and no other terminal payment: the excess over Rs 5,000,000 is Rs 1,000,000, and 12 percent of it, Rs 120,000, is retained. Report the payment in Schedule 02 of the APIT annual statement, which is for terminal benefits only [4]. Our lump-sum and bonus tax guide explains how Table 03 differs from the Table 02 method.

The retention is not the final tax. From 1 January 2020, paragraph 1(2)(b)(iii) of the First Schedule to the Inland Revenue Act taxes a retiring gratuity, commuted pension, compensation under an approved scheme and ETF paid at retirement at 0 percent on the first Rs 10,000,000 for the year of assessment, 6 percent on the next Rs 10,000,000, and Rs 600,000 plus 12 percent above Rs 20,000,000; the IRD's 2025/2026 tax chart shows the same rates [5] [6]. On those rates, the Rs 6,000,000 gratuity above carries no final tax, on our reading. Table 03's 12 percent retention above Rs 5,000,000 does not match the Act's 0 percent band, and we have not found an IRD explanation of how the two are reconciled, so we treat it as an open point: the IRD's direction to the employee settles what is finally due.

Provision for gratuity in the accounts

Sri Lanka Accounting Standard LKAS 19, Employee Benefits, treats the gratuity obligation as a long-term employee benefit to be estimated and recognised as it builds. Many smaller entities use a simplified approach: wage or salary × ½ × years served for each employee, recognised as a liability. If you do not provision, your net assets are overstated. A business with 15 long-serving employees could carry a gratuity liability of several million rupees that does not appear in its accounts.

Calculate the gratuity exposure at each year end when the accounts are prepared. If it is material, get an actuarial estimate.

Payroll records for gratuity

At minimum, the payroll register should record for each employee:

• date of commencement
• current wage or salary and whether they are monthly rated
• completed years of service
• the accrued gratuity provision

These let you see the full liability at any point and spot employees approaching five years. Our gratuity calculator gives a quick figure to check against.

For the wider employment law framework, see the labour law guide for employers and our guide to employee termination.

Talk to us. If you want your gratuity liability worked out across your current staff, our payroll team can go through it with you; book a consultation at our contact page.

This guide is general information on the law as at 15 October 2026 and is not advice on your specific situation.

References

1. Parliament of Sri Lanka. Payment of Gratuity Act, No. 12 of 1983, ss.5(1), 5(4), 6(2) and 20. Official PDF is image-only; section wording read from the reproduction at reference 2. https://www.parliament.lk/uploads/acts/gbills/english/3120.pdf . Primary. Accessed 15 October 2026.

1. LankaLaw. Payment of Gratuity Act No. 12 of 1983 (text reproduction). https://lankalaw.net/wp-content/uploads/2025/02/1983Y0V0C12A.html . Secondary. Accessed 15 October 2026.

1. Inland Revenue Department. APIT Tax Table 03, Y/A 2025/26, once-and-for-all payments. https://www.ird.gov.lk/en/publications/APIT_Tax_Tables/2025-2026/Table%20-%203/04.%20APIT_2526_Table_03_Text.pdf . Primary. Accessed 15 October 2026.

1. Inland Revenue Department. Instructions to complete the APIT Annual Statement, Y/A 2025/2026, Schedule 02. https://www.ird.gov.lk/en/Downloads/Other_PAYE_Doc/Asmt_APIT_Guide_2025_2026_E.pdf . Primary. Accessed 15 October 2026.

1. Inland Revenue Department. Inland Revenue Act, No. 24 of 2017, consolidated, First Schedule paragraphs 1(2)(b)(iii) and 1(3). https://www.ird.gov.lk/en/publications/Acts_Income%20Tax_2017/IRA_Cons_Act_-_2025_Changes.pdf . Primary (IRD consolidation, not a statutory text). Captured 16 October 2026.

1. Inland Revenue Department. Tax chart, Year of Assessment 2025/2026, terminal benefits. https://www.ird.gov.lk/en/publications/SitePages/tax_chart_2526.aspx?menuid=1404 . Administrative guidance. Accessed 22 October 2026.