Is gratuity taxable in Sri Lanka?

Yes, at concessionary rates. Under the 2025/26 Tax Chart, a retiring gratuity, commuted pension, compensation for loss of office under a scheme approved by the Commissioner General, and an ETF payout are added together and taxed at 0% on the first LKR 10,000,000, 6% on the next LKR 10,000,000 and 12% on the balance.

Why did my employer hold back 12% of my gratuity?

APIT Table 03 requires it. Where those payments exceed LKR 5,000,000, the employer and the ETF each retain 12% of the excess. The amount retained is not necessarily your final tax: you are expected to obtain a direction from the IRD, and the payer acts on it.

How do I get a direction on tax retained from terminal benefits?

Table 03 says the retiring employee should obtain a direction within 90 days of the retention from the IRD's Clearance and Directions Unit at Head Office (2nd Floor, Sir Chittampalam A. Gardiner Mawatha, Colombo 02). If no direction is received within 90 days, the payer remits the amount retained to the Commissioner General.

Is an ETF payout taxed?

The part that represents your contributions is a terminal benefit taxed at the concessionary rates. The share of the fund's investment income earned for any period from 1 April 1987 onwards is exempt.

Which retirement payments are tax-free in Sri Lanka?

Table 03 lists three exemptions: amounts paid from a provident fund approved by the Commissioner General or a regulated provident fund, capital sums paid as compensation or gratuity for personal injury or for the death of another person, and pensions or retiring benefits paid by the Government of Sri Lanka or a government department.

Which terminal payments are taxed at the normal rates?

Compensation for loss of office under a scheme the Commissioner General has not approved, payments from a provident fund that is neither approved nor regulated, any other payment, and retirement benefits in kind. The payer retains 36% of these, unless your taxable pay for the year up to leaving plus these payments is within LKR 1,800,000.

All calculators

Calculator

Gratuity and terminal benefits tax calculator

Tax on what you receive when you leave or retire: gratuity, commuted pension, compensation for loss of office and your ETF payout. It shows both the tax at the concessionary rates and the amount your employer and the ETF retain under APIT Table 03, which is a different number.

From the IRD's Table 03 instructions and the 2025/26 Tax Chart. Nothing you type leaves your browser.

By Dr. Dulan DiasLast reviewed against IRD publications on 25 October 2026

Your terminal benefits

Taxed at concessionary rates

Retiring gratuity

LKR

Commuted pension

LKR

Compensation for loss of office

LKR

Only under a scheme the Commissioner General has approved as applying to all employees.

ETF payout

LKR

Leave out the share of the fund's investment income from 1 April 1987 onwards, which is exempt.

Taxed at normal rates (optional)

Other terminal payments

LKR

Compensation under an unapproved scheme, payments from a provident fund that is neither approved nor regulated, other payments and retirement benefits in kind.

Taxable pay this year up to leaving

LKR

Used for Table 03's LKR 1,800,000 test on normal-rate payments.

An estimate, not tax advice. Amounts from a provident fund approved by the Commissioner General or a regulated provident fund, compensation for injury or death, and government pensions are exempt and should be left out.

The two calculations

1. The tax due, at the concessionary rates

Gratuity, commuted pension, approved compensation and the ETF payout are added together and taxed separately from your salary:

Total terminal benefits	Rate
First LKR 10,000,000	0%
Next LKR 10,000,000	6%
On the balance	12%

2. What the payer retains, under Table 03

Where these payments exceed LKR 5,000,000, the employer and the ETF each retain 12% of the excess. From compensation under an unapproved scheme, payments from an unapproved provident fund, other payments and retirement benefits in kind, the payer retains 36%, unless your taxable pay for the year up to leaving plus those payments is within LKR 1,800,000. You then obtain a direction from the IRD's Clearance and Directions Unit within 90 days, and the payer acts on it. If no direction arrives in 90 days, the payer remits what it retained to the Commissioner General.

An illustration

Table 03 has no worked example, so this one is built from its rules and the Tax Chart: a retiring employee receives a gratuity of LKR 12,000,000 from the employer and LKR 3,000,000 from the ETF.

Tax due

Illustration: tax at the concessionary rates
Gratuity + ETF	15,000,000
10,000,000 at 0%	0
5,000,000 at 6%	300,000
Tax due	300,000

Retained under Table 03

Illustration: Table 03 retention
Employer: 12% of 7,000,000	840,000
ETF: below 5,000,000	0
Retained	840,000

The employer retains LKR 840,000, but the tax at the concessionary rates is LKR 300,000. That gap is what the IRD direction settles.

Sources

Every rate and rule on this page comes from the documents below, checked on 25 October 2026. Where they and this page differ, they are right.

Tax Table No. 03: Rates for the Deduction of Tax from Once-and-for-all Payments (Terminal Benefits, All Employees)Inland Revenue Department of Sri Lanka
Tax Chart, Year of Assessment 2025/2026Inland Revenue Department of Sri Lanka
Guide to fill the Return of Income, Schedules & Statement of Assets and Liabilities for Individual, Year of Assessment 2025/2026 (Asmt_IIT_004)Inland Revenue Department of Sri Lanka
Guideline for employers on deducting Advance Personal Income Tax (APIT) from employment income, SEC/2025/E/01Inland Revenue Department of Sri Lanka, 25 March 2025

Questions about tax on gratuity

Is gratuity taxable in Sri Lanka?: Yes, at concessionary rates. Under the 2025/26 Tax Chart, a retiring gratuity, commuted pension, compensation for loss of office under a scheme approved by the Commissioner General, and an ETF payout are added together and taxed at 0% on the first LKR 10,000,000, 6% on the next LKR 10,000,000 and 12% on the balance.
Why did my employer hold back 12% of my gratuity?: APIT Table 03 requires it. Where those payments exceed LKR 5,000,000, the employer and the ETF each retain 12% of the excess. The amount retained is not necessarily your final tax: you are expected to obtain a direction from the IRD, and the payer acts on it.
How do I get a direction on tax retained from terminal benefits?: Table 03 says the retiring employee should obtain a direction within 90 days of the retention from the IRD's Clearance and Directions Unit at Head Office (2nd Floor, Sir Chittampalam A. Gardiner Mawatha, Colombo 02). If no direction is received within 90 days, the payer remits the amount retained to the Commissioner General.
Is an ETF payout taxed?: The part that represents your contributions is a terminal benefit taxed at the concessionary rates. The share of the fund's investment income earned for any period from 1 April 1987 onwards is exempt.
Which retirement payments are tax-free in Sri Lanka?: Table 03 lists three exemptions: amounts paid from a provident fund approved by the Commissioner General or a regulated provident fund, capital sums paid as compensation or gratuity for personal injury or for the death of another person, and pensions or retiring benefits paid by the Government of Sri Lanka or a government department.
Which terminal payments are taxed at the normal rates?: Compensation for loss of office under a scheme the Commissioner General has not approved, payments from a provident fund that is neither approved nor regulated, any other payment, and retirement benefits in kind. The payer retains 36% of these, unless your taxable pay for the year up to leaving plus these payments is within LKR 1,800,000.