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Sri Lanka

Comprehensive Guide to Payroll in Sri Lanka: Key Requirements and Compliance

Sri Lanka is a tropical island off the southern coast of India. The country gained its independence from the Britishers in 1948. It has faced several challenges since changing its name from Ceylon in 1972. Tourism drives most of the economy. The population of Sri Lanka is 22 million. Apart from tourism, the people are employed in the manufacturing and service industry. Some popular industries of Sri Lanka include coconuts, rubber, precious stones, etc.

Sri Lanka has seen some tremendous growth in recent years. In 2019, the GDP of the country was $84 billion. The GDP has increased five times since 2000. The government of Sri Lanka encourages foreign investments. Hence, it is easy for businesses to set up their subsidiaries in Sri Lanka.

Setting up a business in Sri Lanka has several advantages. However, you’ll have to deal with more complex issues, such as setting up your payroll in Sri Lanka. You can choose from various Sri Lanka payroll services that will help you set up Sri Lanka Payroll requirements.

How is Payroll Calculated in Sri Lanka? 

Several components are involved in the calculation of the payroll in Sri Lanka. Some of these includes –

  • Names and other basic details of the employees
  • Hours worked
  • Any payroll deductions in Sri Lanka
  • Minimum wages
  • Taxes
  • Employee benefits
  • Gross pay
  • Net pay

Sri Lanka payroll requirements are relatively straightforward to set up. When you set up the payroll for your company, you need to adhere to the labor laws of Sri Lanka. When setting up a payroll in Sri Lanka, you must follow all Sri Lanka payroll process that is in place.

Important Elements of the Salary Structure in Sri Lanka 

According to the payroll rules in Sri Lanka, there are some important elements of the salary structure. Some of the components of the salary are:

  • Gross income
  • Employee benefits
  • Tax deductions
  • Social security contributions

1. Gross income

The total wages earned by an employee during a pay period before deductions or taxes is referred to as gross income. The gross income calculation alters if an employee is paid hourly or on a salary. Multiply the hourly pay rate by the total number of regular hours worked to obtain an hourly employee’s gross income.

The number of hours worked must be multiplied by the overtime compensation rate if an employee works overtime. After that, the two amounts are added together to generate the total gross revenue for employees.

The National Minimum Wage of Workers Act No. 3 of 2016 establishes a minimum monthly wage of LKR 10,000 and a daily wage of LKR400 for all employees (regardless of industry).

In addition to the national minimum wage, all wage boards have established minimum rates for specific worker groups. The wages and the salaries of the employees are determined based on several factors like:

  • The minimum wage rate decided by the government
  • Benefits provided by the company,
  • Over time,
  • Allowances
  • Bonus

The payroll regulations in Sri Lanka ensure that the minimum wage is adjusted from time to time. This is done to mitigate the impact of external factors like inflation, etc.

2. Employee benefits

Employee benefits are an essential part of the compensation structure of the company. They may be monetary or non-monetary, depending on the company policy. Depending on the organization, employee benefits may or may not be linked to payroll. This decision is taken into account during the hiring process. Employee benefits are a great way to show employees that you care about them while attracting and retaining talent.

3. Tax deductions 

Employees from other countries who work in Sri Lanka are taxed at the same rates as Sri Lankan residents but solely on income earned. The payroll tax in Sri Lanka is quite simple to understand. Sri Lanka, like most countries, follows a progressive tax system. Hence, with an increase in the income, the tax levied on the revenue also increases. As per the standard Sri Lanka payroll tax rate, taxes are applicable on employees with an annual income of up to LKR 750,000. The income tax rates applicable at different income levels are:

  • Exemption for cumulative work income of up to LKR 750,000
  • Between LKR 750,001 and LKR 1,500,000 in cumulative employment, income is taxed at 6%
  • Employment income ranging from LKR 1,500,001 to LKR 2,250,000 is taxed at 12 percent
  • Employment income over LKR2,250,001 is taxed at a rate of 18 percent

4. Social security contributions

The Employees Provident Fund Act No. 15 of 1958 (EPF) requires the employer to contribute 12 percent of the employee’s monthly earnings to the EPF Fund. Also, the employee contributes 8% of their income towards EPF. The employer should also contribute 3% of each employee’s monthly wages to the ETF Fund under the Employees Trust Fund Act No 46 of 1980 (ETF).

The EPF and ETF stipulate that these contributions must be calculated based on the employee’s “total earnings.”

How to Set up a Payroll in Sri Lanka?

To set up payroll in Sri Lanka, you’ll need to create a subsidiary first. You’ll be able to hire employees, give salaries and benefits, and manage your payroll through that subsidiary. You must register your business, to begin with, payroll processing. Post that, you need to open an active bank account. Collect all the financial and tax documents from the employees and then create profiles for all of your employees on these portals. Once you check the employees’ work schedules, you can calculate their gross and net pay. Decide the payment schedule, and you are good to go.

When you deal with Multiplier, you can use our Sri Lanka PEO to start working immediately while we take care of compliance. 

A Step-by-Step Process of Payroll Processing in Sri Lanka

Setting up payroll policies in Sri Lanka can be pretty complicated. However, if you take a step-by-step approach, you can easily navigate through the process:

Step 1: Register the employees to the system

All the employees should be registered on a local system to access the company’s payroll. Once the information gets collected, it gets registered in the Government system. You will need the details of the employees and their payment schedules while registering the employees to a payroll system.

Step 2: Calculate the gross salary

To calculate a monthly salary, add up all the payments the company owes the employee for the month. You must include the cash components and the benefits offered while calculating the gross pay.

Step 3: Consider the deductions

Once you calculate the gross pay for all your employees, you can subtract any payroll deductions in Sri Lanka. Some payroll deductions in Sri Lanka include:

  • PAYE
  • EPF
  • ETF
  • salary advances
  • No-pay leaves

All of these are deducted from the employee’s gross pay. The employers will also have to consider any unpaid leaves the employee has taken. Unpaid leaves are those leaves for which the employer does not pay any salary or wage to the employee. Generally, employees take these leaves when they exhaust the allotted number of casual or sick leaves. 

Also, the approval of unpaid leaves depends entirely on the employer.

Step 4: Double-check everything

Now that you have calculated the salary that the employee needs to pay, you must cross-check all the information. You can start by examining your tax records, ledgers, etc., to ensure that you have not made any errors.

Step 5: Share the payslips

Once you have verified all the information, you can share the pay slips with the employees. A pay slip generally contains the gross pay, the deductions, etc.

Payroll Contributions


Companies in Sri Lanka must pay a corporation tax rate of 28 percent; however, profits can be taxed at up to 40 percent depending on the type of operation. The non-resident corporations are solely taxed on their Sri Lankan income. Employees will be taxed at a progressive income tax rate ranging from 6 to 18 percent. Sri Lanka follows a PAYE system – Pay as you earn. Hence, the companies must immediately deduct Sri Lanka payroll taxes from employees’ paychecks.


Sri Lanka has two different social security schemes:

  • Employees’ Provident Fund
  • Employees’ Trust Fund

Employees typically contribute 8%, and companies usually contribute 12%.

Payroll Cycle

In Sri Lanka, payroll compliance is relatively simple. Salary can be paid daily, weekly, fortnightly, or monthly, depending on the employer’s preference. However, the salary period cannot exceed 31 days. Employers must decide on a payday date, and you must pay your employees on that particular day.

Sri Lanka Payroll Options for Companies

Your organization can pick from four distinct payroll alternatives in Sri Lanka:


When you run your payroll within the company’s premises, this is referred to as an internal payroll structure. This solution will necessitate a larger subsidiary with an entire HR team to assist you with compliance.


You can share their payroll system if you have a parent company. You will have to add all the details of your employees to your parent company’s payroll. However, keep in mind that employees from different countries will have their own Sri Lanka payroll process. 

Payroll processing company in Sri Lanka

You can contact a processing business in Sri Lanka. A local company can handle your payroll, but you will still be responsible for compliance.

Sri Lanka payroll outsourcing

Choosing Multiplier for Sri Lanka payroll outsourcing is the best way to set up and run payroll for your company. Here, all the regulatory issues and payroll processing will be outsourced. The company members like Multiplier will manage the payroll and act as the Employer of Record for all the employees.

Entitlement and Termination Terms

Establishing entitlement and termination terms before setting up your payroll in Sri Lanka might help you and your employees reach clear agreements. Employees can seek relief under the Termination Act if they file a claim with the Commissioner of Labour within six months after their termination date.

How Multiplier Can Help With Global Payroll?

In Sri Lanka, payroll can be easily outsourced to a company like Multiplier. Multiplier is well-known for providing PEO services to various businesses across the country. So, you can focus on operating your business, and we can handle all of your employee payroll operations.

We take great pride in providing the best SaaS-based PEO services, which can help you with everything from calculating gross pay to filing federal payroll taxes in Sri Lanka.

Frequently Asked Questions

An employer contributes 12% of the basic salary to the EPF account.

While some companies might follow a different procedure, most companies follow a monthly pay cycle in Sri Lanka.

Yes, the employees are entitled to receive several paid leaves they can avail themselves of as and when required.

Need help hiring in Sri Lanka?

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