Terminal Benefits Tax in Sri Lanka — Employee's Guide 2025/26

Terminal benefits are the payments you receive when your employment ends — retirement, resignation, retrenchment, or end of contract. In Sri Lanka they are taxed under a separate, concessionary regime, and the payout is usually one of the largest single amounts an employee will ever receive. Here are the basics every employee should know.

What counts as terminal benefits

1. Gratuity — payable under the Payment of Gratuity Act No. 12 of 1983 after 5 years of continuous service, at 14 days’ wages per completed year (for monthly-paid employees).
2. EPF (Employees’ Provident Fund)— your 8% + your employer’s 12% contributions plus accrued interest. Withdrawn on retirement, permanent disability, migration, or (for women) marriage.
3. ETF (Employees’ Trust Fund) — the 3% employer contribution plus interest. Withdrawable under the same conditions as EPF and also five years after any earlier withdrawal.
4. Compensation for loss of employment — retrenchment or termination payments under the Termination of Employment of Workmen Act (TEWA) or a private scheme.
5. Commuted pension — a lump sum taken in exchange for future monthly pension payments.
6. Contractual end-of-service payments — notice-in-lieu, ex-gratia, or contract-completion bonuses paid on separation.

How they are taxed

1. Terminal benefits are taxed separately from your regular salary under the Fifth Schedule of the Inland Revenue Act, at concessionary rates lower than the normal income slabs.
2. The tax slabs apply to your total lifetime terminal benefits from all employers, not just the current payout. Earlier withdrawals reduce the tax-free portion available now.
3. Your employer must deduct the tax at source and remit it to IRD. You should receive a certificate showing the amount paid and the tax deducted.
4. EPF interest earned after 1 April 1968 is taxable; ETF interest earned after 1 April 1987 is taxable. Contribution principal is generally treated separately.

What to check before you leave

1. Confirm your date of joining, service period, and last-drawn wage — these drive both the gratuity computation and the tax bands.
2. Verify all EPF and ETF contributions were paid monthly — check via the CBSL member portal (epf.lk) or ETF Board.
3. Request the terminal benefit certificatefrom your employer showing the gross amount, tax deducted, and category (gratuity, compensation, etc.).
4. If you have received earlier lump sums from previous jobs, gather those certificates — the tax office looks at total lifetime terminal benefits.
5. Estimate the tax before payout so there are no surprises — use our terminal benefits calculator to run the numbers.

Getting a terminal benefit payout is a one-shot event — errors are hard to reverse once the money is disbursed and the tax deducted. If you are within a few months of retirement, resignation, or contract-end, it is worth reviewing your position ahead of time. Get in touch and we will walk you through what to expect.

Want to run the numbers now? Try our Terminal Benefits Tax Calculator →