How gratuity is calculated in Sri Lanka

For monthly-paid employees the formula is one line: half of your last drawn monthly salary, multiplied by your completed years of service. “Salary” here isn’t just your basic — the Act defines it as your basic or consolidated salary plus cost-of-living and similar allowances. Overtime and bonuses are excluded. Daily-paid and piece-rated workers use a different rate: 14 days’ wages for each completed year.

Example: LKR 100,000 salary, 8 years of service
  • Half a month’s salaryLKR 50,000
  • × completed years of service8
  • Gratuity owed to youLKR 400,000

Only completed years count — 8 years and 11 months still counts as 8. If your salary rose over the years, that works in your favour: the whole calculation uses your last drawn salary, not an average.

Who is entitled to gratuity?

Two conditions, both from the Act:

  • Five completed years of continuous service with the same employer. Approved leave counts toward continuity; so does a strike or lock-out that wasn’t your fault.
  • Your employer had 15 or more employees on any day during the 12 months before you left.

If both are met, it doesn’t matter how the employment ended: the Act expressly covers resignation, dismissal, retirement, and death (in which case it’s paid to your heirs). You don’t forfeit gratuity by resigning — that’s one of the most common myths in Sri Lankan workplaces. An employer can withhold gratuity only to cover proven loss from fraud, misappropriation or wilful damage — and only up to the amount of that loss.

Working somewhere with fewer than 15 employees? The Act itself doesn’t apply, but you can still claim gratuity through a labour tribunal.

When must gratuity be paid — and is it taxed?

Your employer must pay within 30 days of your last day. Late payment attracts a statutory surcharge on top — from 10% (up to a month late) rising to 30% (over a year late) — and the Commissioner General of Labour can recover unpaid gratuity through the courts. If you’re kept waiting, put the request in writing, then complain to the Labour Department office in your district.

On tax: gratuity is a “terminal benefit” with concessionary treatment. Under the current IRD rules, your retiring gratuity is aggregated with any commuted pension and approved ETF payments — the first Rs. 5 million of that total is tax-free, and the excess is taxed at 12%. For most employees, that means the full gratuity arrives untaxed.

Before you hand in that resignation letter, it’s worth knowing your full financial picture — check your monthly numbers with our salary & APIT calculator, and see what happens to your EPF when you change jobs.