Voluntary Retirement Scheme (VRS) and Taxation - Sri Lanka

The Voluntary Retirement Scheme (VRS) is a program offered by employers, including government-owned enterprises, allowing employees to retire early with financial compensation. It helps organizations restructure and optimize their workforce.

According to the Inland Revenue Department of Sri Lanka, certain retirement benefits are subject to taxation.

1. Tax on Terminal Benefits from Employment (Under Approved Schemes)

• 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)

Tax Rates:

• First Rs. 10,000,000 – 0%
• Next Rs. 10,000,000 – 6%
• Balance – 12%

2. Compensation Not Approved by CGIR

These are taxed progressively as follows:

6%, 12%, 18%, 24%, 30% on each Rs. 500,000 and 36% on the balance.

Tax Clearance Requirement

Employers must retain 36% of the total retirement benefit until the employee obtains a tax clearance certificate (Direction Letter) from the IRD. This must be done within 90 days of retirement. Required documents include:

• Application form
• Authorization Letter (if submitted by another person)
• Last 3 years' T10 Certificates
• Current year T10 certificate and certified salary slips
• Service Letter to IRD with:
  • Employee name and address
  • ID number
  • Service period
  • VRS details (amounts)
• Certified 3% ETF statement
• TIN number
• Copy of ID

The IRD will calculate the tax, issue a Direction Letter to the employer, and the employer will then settle the tax and disburse the net VRS payment to the employee.