Guide to Lump Sum Tax in Sri Lanka

As tax regulations and rates have been changing a lot recently, we thought we’d give you a breakdown of yet another important tax in Sri Lanka – lump sum tax. In this blog, we’ll be discussing the rules and obligations surrounding lump sum taxes in Sri Lanka, as well as how to calculate and pay them. So if you’re interested in learning more about this topic, keep reading!

What is Lump Sum Tax?

In Sri Lanka, there is a tax called a “lump sum tax” that is applied to large, one-time payments called “lump sums.” These could be bonuses, severance, or other types of one-time payments.

Still didn’t get it?

Meet Jotipala.

He is a resident employee at a private company in Sri Lanka and has been working there for the past year. His boss has just informed him that he will be receiving a bonus of Rs. 500,000 in recognition of his hard work and dedication.

So in this scenario, according to the Inland Revenue Act (IRA) of Sri Lanka, bonuses like this are considered to be lump sum payments and are therefore subject to lump sum taxes. In order to determine how much tax Jotipala will owe on his bonus, his employer will need to calculate his Estimated Gross Aggregate Remunerations (EGAR) for the year. This is done by adding up all of the money Jotipala has earned from his job during the year, including his regular salary and any other bonuses or benefits he has received.

Once Jotipala’s EGAR has been calculated,  his employer will use the tax table, as per shared by the IRA (we will touch on this topic later in the blog), to determine the amount of tax that Jotipala will owe on his bonus. His employer will then deduct this amount from Jotipala’s bonus and pay it to the government on his behalf before giving Jotipala his bonus. 

When should tax on Lump Sum payments be deducted?

There are three different situations where lump sum payments should be deducted in Sri Lanka:

• Scenario 01 – When a resident or non-resident employee who is a citizen in Sri Lanka receives a lump sum payment and has agreed to pay tax on it. However, lump sum tax for a non-resident employee who is a citizen of Sri Lanka can be deducted without their consent
• Scenario 02 – When a non-resident employee who is not a citizen of Sri Lanka receives a lump sum payment
• Scenario 03 – When a resident employee or a non-resident employee but a citizen who is a citizen in Sri Lanka receives a lump sum payment for which the employer or any other person;
  1. settled income tax liability of an employee, without it being deducted from his salary or;
  2. reimbursed the tax which has already been deducted from the employee

How to calculate Lump Sum Tax in Sri Lanka?

Step 01 – Calculate the Estimated Gross Aggregate Remunerations (EGAR) for the employee for that year. 

1. Calculate your aggregate gross monthly remunerations before the lump sum payment (not including any other lump sum payments) for the assessment year
2. Calculate your aggregate gross monthly remunerations after the lump sum payment (not including any other lump sum payments) for the assessment year
3. Calculate aggregate gross lump sum payments received up to date, and any you will receive after this one (excluding monthly remunerations already counted above under (1.) and (2.))

Add up all these amounts to find out how much money you received in total that year (including lump sum payments). This total amount is called your Estimated Gross Aggregate Remunerations (EGAR). You will then use EGAR to calculate how much tax you have to pay on the lump sum payment.

Step 02 – Calculate tax deductible on lump sum payment based on the scenario you fall under (explained in detail here).

Table for Scenario 01 (For the time period: January to March 2023)

Table for Scenario 02 (For the time period: January to March 2023)

Table for Scenario 03 (For the time period: January to March 2023)

For example: 

Say hi to Jothipala again.

He will receive a bonus of Rs. 600,000 in December 2022. His monthly regular profits and gains from employment (including non-cash benefits) are Rs. 300,000.

Calculating his EGAR:

Calculating his tax-deductible on lump sum payment in December 2022:

As the EGAR  falls between Rs. 2,250,001 and Rs. 4,500,000, the following formula should be applied in computing the amount tax-deductible in December 2022 on the bonus.

(D x 6%) – [(135,000 + Aggregate of monthly tax deducted on A + Aggregate of monthly tax deductible on B, as per Table 01) + Tax deducted previously on lump sum payments if any]

= (3,300,000 x 6%) – [(135,000 + (3,000 x 9) + (3,000 x 0) + 0]

= 198,000 – (135,000 + 27,000)

= 36,000

Therefore, the tax-deductible on the bonus in December 2022 is Rs. 36,000.

Why Simplebooks?

In conclusion, the lump sum tax system in Sri Lanka can be complex and confusing for many individuals and businesses. However, with the right guidance and support, you can navigate the system and ensure that you are paying the correct amount of tax. That’s where Simplebooks comes in.

Our team of experienced professionals can provide you with the expertise and knowledge you need to understand and manage your taxes under the lump sum system. We understand the complexities of the system and can help you identify any deductions or exemptions you may be eligible for.

In addition, our team can also provide you with ongoing support and advice, ensuring that you stay compliant with the ever-changing tax laws in Sri Lanka.

Don’t let lump sum tax payments stress you out. Let us take care of it for you. Contact us today to schedule a free consultation and see how we can help you manage your taxes with ease.

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