Understanding Voluntary Retirement Scheme (VRS)
The Voluntary Retirement Scheme (VRS) is a strategic program offered by employers, including government-owned enterprises, that allows employees to retire early with financial compensation. This initiative helps organizations optimize their workforce while providing employees with a dignified exit option.
According to the Inland Revenue Department of Sri Lanka, specific retirement benefits received under VRS are subject to taxation. Understanding these tax implications is crucial for maximizing your financial outcome.
Taxation of VRS Benefits in Sri Lanka
1. Tax on Terminal Benefits from Approved Schemes
Benefits received under government-approved retirement schemes are taxed as follows:
- Amount received in commutation of a pension
- Amount received as a retiring gratuity
- Amount received as compensation for loss of office
- Amount paid from the Employees' Trust Fund (ETF)
Applicable Tax Rates for Approved Schemes
| Amount Range (Rs.) | Tax Rate |
|---|---|
| First 10,000,000 | 0% (Tax Exempt) |
| Next 10,000,000 | 6% |
| Balance Amount | 12% |
2. Compensation Not Approved by CGIR
Benefits from non-approved schemes are taxed progressively:
6%, 12%, 18%, 24%, 30% on each Rs. 500,000 and 36% on the balance amount.
Tax Clearance Certificate Requirements
Employers are required to withhold 36% of the total retirement benefit until the employee obtains a Tax Clearance Certificate (Direction Letter) from the Inland Revenue Department. This must be completed within 90 days of retirement.
Required Documentation
- Completed application form
- Authorization Letter (if submitted by a representative)
- T10 Certificates for the last 3 years
- Current year T10 certificate and certified salary slips
- Service Letter to IRD containing:
- Employee name and address
- National Identity Card number
- Service period details
- VRS compensation breakdown
- Certified 3% ETF statement
- Tax Identification Number (TIN)
- Copy of National Identity Card
The IRD will calculate the applicable tax, issue a Direction Letter to your employer, who will then settle the tax liability and disburse the net VRS payment to you.
Frequently Asked Questions
The process typically takes 2-4 weeks, provided all documentation is complete and accurate. The IRD requires applications to be submitted within 90 days of retirement.
Yes, if you believe the tax calculation is incorrect, you can file an appeal with the Inland Revenue Department within 30 days of receiving the assessment.
The first Rs. 10,000,000 of approved retirement benefits is tax-exempt. Amounts above this threshold are subject to progressive tax rates as outlined by the IRD.