Payroll & Employment Guide Sri Lanka

Employment contracts in Sri Lanka are governed by employment agreements together with labour laws such as the Shop and Office Employees Act and broader labour protection principles. Written contracts are strongly recommended to clearly define the terms of employment and reduce legal risks.

Notice periods: Typically determined by the employment contract and the employee’s position or length of service. Termination with notice or payment in lieu of notice is common, but dismissals may still be subject to fairness review.

Termination of employment: Employment may end through resignation, mutual agreement, or employer termination. Resignation is generally straightforward if contractual notice obligations are met, while mutual termination is commonly used as a lower-risk and consensual exit arrangement.

Employer-initiated termination is more strictly scrutinised under Sri Lankan labour law and must generally be supported by valid and defensible reasons such as misconduct, poor performance, or operational restructuring.

Employers in Sri Lanka must provide several mandatory employee benefits under local labour laws and statutory contribution schemes. In addition to these legal requirements, many companies offer additional benefits and allowances to remain competitive and improve employee retention.

Mandatory benefits:

• Employees’ Provident Fund (EPF): Mandatory retirement savings scheme funded through a 12% employer contribution and an 8% employee contribution
• Employees’ Trust Fund (ETF): Additional employer-funded social security contribution of 3%
• Gratuity payments: Mandatory lump-sum payment for employees with at least 5 years of continuous service in companies employing 15 or more employees
• Workers’ compensation: Mandatory protection for work-related injuries, occupational diseases, and commuting accidents under the Workmen’s Compensation Ordinance

Common perks: This includes private health insurance, company vehicles or transport allowances, housing or accommodation support, mobile and internet allowances, performance bonuses, concessionary staff loans, and additional disability or accident insurance coverage.

Leave policies:

• Annual leave: Employees are generally entitled to 14 days of annual leave from the third calendar year of employment onward
• Casual leave: Employees are generally entitled to 7 days of paid casual leave annually from the second year onward, which is commonly used for illness-related absences
• Maternity leave: Female employees are entitled to 84 days of paid maternity leave for a live birth, with additional protections during pregnancy and after childbirth
• Paternity leave: Not mandatory in the private sector and depends on employer policy or employment contracts
• Weekly rest: Employees are generally entitled to one full day and one half-day of weekly rest

Health and social security: Sri Lanka does not require employers to provide private health insurance, but it remains one of the most common corporate benefits in the private sector. The country’s social protection system is primarily based on EPF and ETF contributions, which provide retirement savings, disability support, welfare assistance, and limited medical benefits.

Sri Lanka has a progressive income tax system that applies to both employees and employers. Employers are responsible for withholding Advance Personal Income Tax (APIT) from employee salaries and managing applicable withholding taxes on certain types of income. Tax residency is generally based on physical presence in the country for 183 days or more during a year of assessment.

Personal income tax: Sri Lanka applies progressive tax rates with a tax-free allowance of LKR 1.8 million per year (LKR 150,000 per month). The current tax brackets are:

• Up to LKR 1.8 million: 0%
• Next LKR 1 million: 6%
• Next LKR 500,000: 18%
• Next LKR 500,000: 24%
• Next LKR 500,000: 30%
• Above LKR 4.3 million: 36%

Withholding taxes:

• Interest income: Generally subject to 10% Advance Income Tax (AIT)
• Dividends: 15% withholding tax, generally treated as a final tax for individuals
• Capital gains: Taxed at 10% on investment assets such as land and unquoted shares
• Quoted shares listed on the Colombo Stock Exchange remain exempt from capital gains tax

Tax allowances and non-taxable benefits:

• Employer-paid medical insurance and medical reimbursements are generally non-taxable if provided equally to all employees
• Small non-cash staff benefits provided on a non-discriminatory basis may be exempt
• Telephone and internet benefits are usually only partially taxable, with a significant portion treated as business-related expenses
• Compensation paid for injury or death is generally exempt from income tax

Tax allowances and deductions:

• Medical insurance and employer-paid medical benefits are generally non-taxable if provided equally to all employees
• Telephone and internet benefits are partially tax-exempt where linked to business use
• Approved pension fund contributions, charitable donations, and qualifying solar panel expenses may qualify for deductions
• Retirement lump sums are concessionally taxed, with the first LKR 10 million generally exempt

Special tax regimes: Sri Lanka offers a Digital Nomad Visa allowing remote workers employed by foreign companies to live in the country with 0% tax on foreign-sourced remote income during the visa period. A concessionary 15% tax rate may apply to qualifying foreign currency earnings remitted through the banking system

Double taxation relief: Sri Lanka has double taxation agreements with several countries to reduce the risk of double taxation on cross-border income.

Employers in Sri Lanka must manage payroll in compliance with local labour, tax, and social security regulations. Payroll obligations include salary payments, APIT withholding, and mandatory EPF and ETF contributions. Sri Lanka follows a highly structured monthly payroll reporting system, with strict filing and payment deadlines enforced through digital compliance platforms.

Salary payment deadline:

• Weekly wage periods: Within 3 days after the wage period ends
• Wage periods between 1 and 2 weeks: Within 5 days after the period ends
• Monthly payroll: Within 10 days after the end of the salary period (commonly by the 10th of the following month)
• Termination payments: Outstanding wages and dues must generally be paid within 2 working days after termination

Taxes and contributions payment deadline:

• Advance Personal Income Tax (APIT): By the 15th of the following month
• Employees’ Provident Fund (EPF): By the last working day of the following month
• Employees’ Trust Fund (ETF): By the last working day of the following month

Payroll declarations deadline:

• Monthly declarations required for APIT, EPF, and ETF
• Annual Employer APIT Return: Due by April 30 following the end of the tax year
• T10 Certificates for employees: Must be issued by April 30
• No separate quarterly payroll tax declarations for standard employment payroll

Payroll currency: Sri Lankan Rupee (LKR)

Sri Lanka’s labour law is governed by several key statutes, including the Shop and Office Employees Act, Wages Boards Ordinance, Employment of Women, Young Persons and Children Act, and the Payment of Gratuity Act.

These regulations define employment conditions, payroll compliance, minimum wages, working hours, social security obligations, taxation, and termination protections. Employers must comply with labour, payroll, tax, and social security requirements administered by the IRD, EPF, and ETF.

Total employment cost: Approximately 16%–19% above gross salary

• Employer’s social security contributions: 12% EPF + 3% ETF
• Employees’ social security contributions: 8% EPF

Minimum wage: LKR 30,000 per month as of 2026 under the National Minimum Wage of Workers (Amendment) Act

Probation period: Typically 3–6 months in practice, depending on the employment contract and role

EOR services in Sri Lanka enable you to legally employ individuals in the country without opening legal entities. Your EOR will take over all the legal responsibilities as an official employer, including:

• Legal employment and contracts
• Payroll processing
• Tax withholding
• Benefits administration
• Onboarding/offboarding employees

PEO services in Sri Lanka provide HR and administrative support, while you remain the legal employer for your team. They are ideal for employers who already have legal entities in Sri Lanka but need support to manage their workforce operations, including:

• HR support and workforce administration
• Payroll and benefits management
• Compliance and local labour law guidance
• Employment contracts assistance

Native Teams’ payroll calculators are adjusted to 95+ countries’ local labour laws, including Sri Lanka. Using our calculator, you can easily estimate net and gross salaries, employer/employee contributions, and other mandatory deductions in the country.