The full guide
Gratuity in Sri Lanka: your legal entitlement explained
Reviewed and updated July 16, 2026 · Written for Sri Lankan investors and borrowers
Gratuity is one of the most misunderstood employee benefits in Sri Lanka. Many employees believe it is a discretionary “thank you” payment; in reality, for qualifying employees it is a legal entitlement under the Payment of Gratuity Act No. 12 of 1983, payable even when you resign.
This guide covers who qualifies, the exact formula, the concessionary tax treatment of terminal benefits, and what to do if an employer refuses to pay.
Who qualifies for gratuity
Two conditions matter. First, you must have completed five or more years of continuous service with the employer. Second, the employer must have employed 15 or more workers on any day during the twelve months before your employment ended. If both hold, gratuity is payable on termination for any reason — resignation, retirement, redundancy, or dismissal (an employer may forfeit gratuity only in narrow cases such as termination for fraud or willful damage causing loss, and only to the extent of the loss).
The five-year rule is about completed years: someone leaving after 4 years and 11 months is not entitled under the Act, which makes timing a resignation around a service anniversary financially meaningful.
The formula: half a month per year of service
For monthly-rated employees, gratuity equals half of the last-drawn monthly salary or wage for each completed year of service. For daily-rated workers, it is 14 days’ wages per completed year. Because the calculation uses the last drawn salary, a raise or promotion shortly before leaving increases the entire entitlement retroactively across all service years.
| Years of completed service | Gratuity payable |
|---|---|
| 5 years | Rs. 625,000 |
| 10 years | Rs. 1,250,000 |
| 15 years | Rs. 1,875,000 |
| 25 years | Rs. 3,125,000 |
How gratuity is taxed
Gratuity and other qualifying terminal benefits (such as commuted pensions and compensation for loss of office under approved schemes) are taxed at concessionary rates instead of normal salary slabs. Under the 2025/26 rules, the first Rs. 10 million of terminal benefits is taxed at 0%, the next Rs. 10 million at 6%, and any balance at 12%.
In practice this means the overwhelming majority of Sri Lankan employees receive their gratuity entirely tax-free — a Rs. 3 million gratuity after 25 years of service attracts no tax at all under the current bands.
Payment deadlines and enforcement
The Act requires the employer to pay gratuity within 30 days of the termination of employment. Failure to pay on time attracts a statutory surcharge that escalates with the delay, and the Commissioner of Labour can recover unpaid gratuity as if it were a fine — meaning you do not need to fund a civil lawsuit to enforce the entitlement. Complaints go to the Labour Department office covering the workplace.
If your employer has not paid
- Write to the employer requesting payment, referencing the Payment of Gratuity Act No. 12 of 1983.
- Keep evidence of your service period and last-drawn salary (letters of appointment, payslips).
- Lodge a complaint with the Department of Labour if payment is not made within 30 days of leaving.
- Note that statutory surcharges accrue in your favour the longer the employer delays.
Gratuity in your retirement plan
For long-serving employees, gratuity plus EPF and ETF can form a meaningful retirement lump sum. Use this calculator together with the EPF & ETF calculator to estimate your total terminal package, then feed the combined figure into the retirement withdrawal planner to see what monthly income it can sustainably support.
One planning note: because gratuity is based on final salary rather than career-average salary, it is effectively inflation-protected in a way fixed savings are not — your entitlement grows automatically with every increment.
Sources & further reading
This guide is educational and reflects publicly available rules and market conventions at the review date. Tax rates, bank rates, and regulations change — verify current figures with the institution or the Inland Revenue Department before making a financial decision. Nothing here is financial, tax, or investment advice.