Delayed salary payments to get tax relief under new IRD framework

The employees receiving years of unpaid salary, due to labour disputes, reinstatements and delayed promotions, could see a lighter tax burden under the new Inland Revenue Department (IRD) guidelines, aimed at ensuring fairer treatment of salary arrears.

The guidance, issued through Circular No. SEC/2026/E/05, provided the operational framework for implementing tax credits on salary arrears, under the newly introduced Section 96A of Inland Revenue (Amendment) Act No. 11 of 2026.

According to a recent KPMG Sri Lanka Tax Flash, the move addresses a longstanding concern, where the employees receiving several years of accumulated salaries in a single lump-sum payment could be pushed into higher tax brackets and taxed at rates that would not have applied had the income been received when it was originally due.

The circular covers salary arrears arising from court-ordered reinstatements, reappointments, backdated promotions and other delayed remuneration entitlements relating to previous years of assessment. Under the new framework, the eligible employees may qualify for tax credits that reduce the tax impact of such one-off payments.

The IRD has also laid out the methodology the employers must follow in calculating the tax credit and the corresponding Advance Personal Income Tax (APIT) deductions, while providing illustrative examples involving the reinstated employees and workers receiving backdated promotions.

A notable feature of the framework is the provision for refunds of excess APIT deducted on qualifying salary arrears and remitted after January 1, 2024. The tax authority said the procedure for claiming such refunds would be announced separately.

The guidelines are expected to be particularly relevant for the employees involved in lengthy labour disputes and public sector workers receiving delayed promotions or salary revisions, where substantial arrears are often paid years after they were earned.

The employers are required to maintain documentary evidence supporting the arrears payments, including court orders, Cabinet decisions and other official approvals, while the employees may be required to obtain the remuneration details from the previous employers where necessary, for the tax credit calculations.

According to KPMG, the circular provides long-awaited clarity on the practical implementation of Section 96A, which came into effect from January 1, 2024 and seeks to align the tax treatment of salary arrears more closely with the period in which the income was actually earned.