Gratuity in Sri Lanka: who qualifies, how to calculate it and when it is paid (2026)
The Payment of Gratuity Act explained for employers: the 15-employee and 5-year thresholds, the half-month formula, forfeiture, deadlines, tax treatment and a worked example.
Last updated by HR Community Editorial
Key facts
- Governing law
- Payment of Gratuity Act No. 12 of 1983
- Employer threshold
- 15 or more employees on any day in the 12 months before termination
- Service threshold
- 5 or more years of continuous service
- Formula
- Half a month's last drawn salary for every completed year of service
- Salary used
- Last month's basic wage or salary (monthly-rated); average of last 3 months (daily or piece-rated)
- Payment deadline
- Within 30 days of termination
- Late payment
- Surcharge of 10% to 30% depending on delay, plus the Commissioner may recover as a debt
- Tax
- Terminal benefit taxed under APIT Table 2 concessionary rates
Gratuity is a lump sum an employer pays an employee at the end of employment in recognition of long service. In Sri Lanka it is a statutory right under the Payment of Gratuity Act No. 12 of 1983, with clear thresholds and a fixed formula.
Who must pay
An employer that employed 15 or more workers on any day during the 12 months immediately before the employee's termination. Once the threshold is crossed it applies to all employees of that employer, not only those above the fifteenth.
Who qualifies
Any employee, in any capacity, who has completed five or more years of continuous service with that employer at the date of termination. Termination means the end of employment for any reason: resignation, retirement, redundancy, dismissal, expiry of a contract, or death (paid to the heirs).
Continuous service is not broken by approved leave, temporary lay-off, strike or lock-out, or a transfer between companies in the same group where service is recognised.
The formula
For monthly-rated employees:
Gratuity = (last drawn monthly basic salary ÷ 2) × completed years of service
For daily-rated or piece-rated employees:
Gratuity = 14 days' wages × completed years of service, using the average daily wage of the last three months
Worked example. An employee joined on 1 March 2018, resigned effective 31 August 2026, and had a last basic salary of LKR 120,000.
| Item | Value |
|---|---|
| Completed years (1 Mar 2018 to 31 Aug 2026) | 8 years, 5 months → 8 years |
| Half a month's salary | LKR 60,000 |
| Gratuity | LKR 60,000 × 8 = LKR 480,000 |
Had the employee left after 8 years and 7 months, most employers and the Labour Department treat the final part-year over six months as a full year, giving 9 years and LKR 540,000. State the practice in your handbook so it is applied consistently.
Deadline and surcharge
Gratuity must be paid within 30 days of termination. Late payment attracts a surcharge on the unpaid amount:
| Delay | Surcharge |
|---|---|
| Up to 1 month | 10% |
| 1 to 3 months | 15% |
| 3 to 6 months | 20% |
| 6 to 12 months | 25% |
| Over 12 months | 30% |
The Commissioner of Labour can recover unpaid gratuity and surcharge as a debt, and default is an offence.
Forfeiture
An employer may withhold gratuity only where the employee was dismissed for fraud, misappropriation of the employer's funds or property, wilful damage to property, or causing financial loss, and only up to the amount of the loss. Ordinary poor performance or a disciplinary dismissal for other reasons does not forfeit gratuity.
Tax
Gratuity is a terminal benefit. It is taxed under APIT Table 2 using the concessionary terminal-benefit rates and thresholds published by the Inland Revenue Department, not the regular monthly slabs. Check the current terminal benefit table when processing a leaver.
Provisioning
Auditors expect employers over the threshold to carry a gratuity provision in the accounts, usually calculated as half a month's current salary per completed year for every employee with more than five years' service, and often actuarially for larger companies under LKAS 19. Payroll software that stores join dates and basic salaries can produce this schedule at each year end.
Employer checklist
- Track headcount over each rolling 12 months to know when the Act applies.
- Store the original join date and recognise transferred service in writing.
- Use basic salary for the formula unless a contract promises more.
- Pay within 30 days of the last working day and include it in the final settlement.
- Apply Table 2 terminal benefit tax and issue the T10.
Frequently asked questions
- Is gratuity payable on resignation?
- Yes. Gratuity is due on termination of employment for any reason after five years, including resignation and retirement. Only specified misconduct allows forfeiture.
- Is gratuity calculated on basic or gross salary?
- On the last drawn basic wage or salary for monthly-rated employees, not on gross with allowances, unless the contract or a collective agreement provides a more generous basis.
- Do part years count towards gratuity?
- The Act counts completed years of service. A period of more than six months in the final year is generally treated as a full year in practice; check your contract or collective agreement.
- Can gratuity be forfeited?
- Only where the employee was dismissed for fraud, misappropriation, wilful damage to property or causing loss to the employer, and only to the extent of the loss.
- Do employers with fewer than 15 employees pay gratuity?
- The Act does not require it. Many still do by contract, and any contractual promise is enforceable.