Sri Lanka, with a workforce of approximately 8.5 million, is a dynamic South Asian nation known for its strategic location, growing economy, and diverse industries, including tourism, agriculture, and IT services. Employees are typically paid monthly, with salaries disbursed by the end of the month or the beginning of the following month.

Tax residents are subject to personal income tax under the Advance Personal Income Tax (APIT) system, with progressive rates ranging from 6% to 36% based on income levels. 

For companies seeking to do business in Sri Lanka, compliance with payroll and tax regulations is crucial to avoid penalties and maintain credibility with the government and employees.

What is Payroll Tax in Sri Lanka?

Definition and Purpose of Payroll Tax

In Sri Lanka, payroll tax primarily consists of income tax withholdings under the Advance Personal Income Tax (APIT) system and contributions to social security schemes, such as the Employees’ Provident Fund (EPF) and Employees’ Trust Fund (ETF), administered by the Central Bank of Sri Lanka and the ETF Board, respectively. 

APIT withholdings fund government services, while EPF and ETF contributions support employee retirement and welfare benefits. The IRD oversees income tax, including Pay As You Earn (PAYE) for certain employees, as well as other direct taxes.

Employer and Employee Responsibilities

Employers are responsible for withholding and remitting APIT and social security contributions (EPF and ETF) to the IRD and respective authorities. Payments for APIT are due by the 15th of the following month, while EPF and ETF contributions are due by the last working day of the following month. Employers must file annual returns summarizing employee income and withholdings, typically due by April 30 of the following year.

Non-compliance, such as late payments or incorrect reporting, may result in penalties, including fines, interest, and surcharges. 

Businesses can simplify compliance by engaging an Employer of Record (EOR) or Professional Employer Organization (PEO) to manage payroll, contributions, and reporting.

Breakdown of Employer Contributions

Contributions are based on gross earnings, with rates varying by sector and job role:

  • Employees’ Provident Fund (EPF): 12% of gross salary (employee contributes 8%).
  • Employees’ Trust Fund (ETF): 3% of gross salary (employer contribution only).
  • Gratuity: Although not a monthly contribution, employers must make provision for gratuity, payable upon employee termination (typically half a month’s salary per year of service for employees with 5 or more years of service).

There are no caps on EPF and ETF contributions, but certain allowances (e.g., non-recurring bonuses) may be exempt based on IRD guidelines. Employers in specific sectors may also need to account for additional levies, such as the Social Security Contribution Levy (SSCL) at 2.5% on taxable turnover.

Industry-Specific Tax Considerations

Sri Lanka offers tax incentives to promote investment and economic growth:

  • Board of Investment (BOI) Incentives: Companies under BOI agreements may receive tax holidays (5–10 years) or reduced corporate tax rates (14%–18%) for export-oriented or strategic projects.
  • Export-Oriented Industries: Exemptions or reduced rates on Value Added Tax (VAT) for exports.
  • Tourism and IT Sectors: Special tax concessions, including VAT exemptions on certain services and income tax relief for foreign earnings.
  • Foreign Employees: Tax residents (those present in Sri Lanka for 183 days or more) are taxed on worldwide income, but non-residents are taxed only on Sri Lankan-sourced income, with potential relief under Double Taxation Agreements (DTAs).

Employers must register with the IRD for a Taxpayer Identification Number (TIN) and with the EPF and ETF authorities. Monthly APIT filings are submitted via the IRD’s e-services portal by the 15th, while EPF and ETF contributions are filed separately. Annual income tax returns for employees are due by April 30 for the Year of Assessment.

The IRD’s e-Services platform (RAMIS) facilitates electronic filings, payments, and access to helpful tools. Payments can be made through authorized banks or online via the RAMIS portal. 

Overview of Income Tax in Sri Lanka

In Sri Lanka, tax residents are subject to the Advance Personal Income Tax (APIT) on their worldwide income, while non-residents are taxed only on income sourced in Sri Lanka. The Inland Revenue Department (IRD) oversees the administration of personal income tax through the Pay As You Earn (PAYE) system for specific employees and APIT for broader income categories, with employers withholding taxes monthly.

Personal Income Tax Brackets and Rates

The APIT applies progressive rates based on annual taxable income, expressed in Sri Lankan Rupees (LKR). For the Year of Assessment (Y/A) 2025/2026, the APIT brackets and rates, as per IRD guidelines, are:

Annual Taxable Income (LKR)Tax Rate (%)
First 1,000,0006%
Next 500,00018%
Next 500,00024%
Next 500,00030%
Balance36%

Taxable income is calculated after deducting allowable reliefs and exemptions.

Capital gains tax applies at the rate of 10% on profits from the sale of investment assets (e.g., real estate, shares), with exemptions for primary residences held for more than three years and certain movable assets, as per IRD regulations.

Tax-Free Allowances and Deductions

  • Social Security Contributions: Mandatory employee contributions to the Employees’ Provident Fund (EPF, 8%) and Employees’ Trust Fund (ETF, 0% employee contribution) are deductible.
  • Qualifying Payments: Donations to approved charities, contributions to approved pension funds, and specific medical insurance premiums are deductible, up to a cap of LKR 500,000 or one-third of assessable income, whichever is lower.
  • Employment Income Relief: Certain allowances (e.g., transport, subsistence) are exempt up to limits specified by the IRD.
  • Investment Relief: Interest income relief up to LKR 1,500,000 annually for savings or fixed deposits.

Key Components of Payroll in Sri Lanka

Payroll Cycle and Pay Slips

Employers typically pay salaries monthly, by the end of the month or early the following month. Pay slips must detail:

  • Basic salary
  • EPF and ETF contributions
  • APIT withholdings
  • Other deductions or benefits (e.g., overtime, allowances)

Pay slips must comply with IRD and Department of Labour regulations, with electronic submissions facilitated through the IRD’s RAMIS e-Services platform.

Employer Responsibilities for Income Tax Compliance

Employers are responsible for:

  • Calculating and withholding APIT based on employee salaries, using IRD-provided tax tables.
  • Remitting APIT withholdings to the IRD by the 15th of the following month and EPF/ETF contributions by the last working day of the following month.
  • Filing annual returns summarizing employee income and withholdings, due by April 30.
  • Conducting year-end adjustments to reconcile APIT withholdings, submitted via RAMIS if employees file personal returns.

Corporate Tax in Sri Lanka

Companies operating in Sri Lanka are subject to Corporate Income Tax (CIT), administered by the IRD. Compliance with corporate tax obligations is critical to avoid penalties and maintain good standing.

Corporate Tax Rates

The corporate tax rate for 2025 varies by industry and activity; these are:

  • Standard Rate: 30% on taxable profits for most resident companies.
  • Concessional Rates: 14% for export-oriented businesses, agriculture, and IT services. 18% for the manufacturing and tourism sectors.
  • Non-Resident Companies: Taxed at 30% on Sri Lanka-sourced income, typically withheld at source for payments like dividends (14%), interest (5%), or royalties (14%).
  • Small Businesses: Companies with annual turnover below LKR 500 million may qualify for simplified tax regimes, as per IRD guidelines.

Taxable profits are calculated after deducting allowable expenses, such as operating costs, employee salaries, and depreciation. Companies must file annual tax returns by November 30 of the following year, with quarterly advance payments due by the 15th of August, November, February, and May.

Common Payroll Errors and How to Avoid Them in Sri Lanka

  • Misclassifying Employees: Classifying employees as independent contractors can lead to penalties, as contractors have different tax and EPF/ETF obligations. Verify classifications using IRD and Department of Labour guidelines.
  • Incorrect Tax Calculations: Errors in applying APIT brackets or failing to account for reliefs can result in tax miscalculations. Use IRD’s Schedule File Verifier Tool or consult local accountants.
  • Breaching Labor Rules: Sri Lanka’s labor laws mandate a 45-hour workweek, with overtime rates of 1.5 times the regular rate for weekdays and 2 times the regular rate for holidays. Failing to track or pay overtime correctly can lead to disputes under the Department of Labour.

Tax Treaties and Withholding Taxes

Sri Lanka’s tax treaties and withholding regulations impact payroll and cross-border payments, aiming to prevent double taxation and ensure compliance.

Sri Lanka’s Double Taxation Treaties

Sri Lanka has double taxation treaties (DTTs) with over 40 countries, including India, China, and the UK, to prevent taxing the same income twice. These treaties allow foreign workers and businesses to claim tax credits or exemptions for taxes paid in Sri Lanka. The IRD provides forms for claiming treaty benefits via the RAMIS portal.

Totalization Agreements

Sri Lanka doesn’t have any publicly known social security totalization agreements. These agreements ensure expatriates contribute to only one country’s system (based on residency) and receive benefits accordingly. Contact the IRD directly to seek clarification.

Withholding Tax on Foreign Income

  • Dividends: Dividends paid to non-residents are subject to a 14% withholding tax, reducible under DTTs (e.g., 7.5%–10% for certain countries).
  • Interest: Interest paid to non-residents faces a 5% withholding tax, reducible under DTTs.
  • Royalties: Royalties paid to non-residents are subject to a 14% withholding tax, often reduced to 0% under DTTs.
  • Services: Fees for technical or professional services provided by non-residents are subject to a 14% withholding tax, reducible under DTTs.

Employers must file withholding tax returns and payments by the 15th of the following month via the RAMIS portal.

Sri Lankan Payroll Tax Calculator

The Remote People Global Payroll Calculator is a handy tool that calculates payroll taxes for local and foreign employees in any country. It’s free to use.