The Department of Inland Revenue (IRD) has introduced a new circular setting out the procedures employers must follow when calculating tax credits on salary arrears under the newly introduced Section 96A of the Inland Revenue (Amendment) Act No. 11 of 2026. The guidance is intended to ensure a consistent approach to the calculation of Advance Personal Income Tax (APIT) on salary arrears and the application of tax credits.

Issued under Circular No. SEC/2026/E/05 dated 26 June 2026, the directive clarifies what qualifies as “salary arrears”, including payments arising from reinstatements following court decisions, backdated promotions, and delayed remuneration resulting from circumstances beyond an employer’s control. It also outlines the documentary evidence employers must retain to substantiate such claims.

The circular introduces a structured formula for calculating tax credits and provides a step-by-step methodology for determining APIT liabilities, ensuring that employees receiving delayed remuneration are not unfairly taxed because payments relate to previous years of assessment rather than the current year. Detailed worked examples illustrate how employers should compute the applicable tax credit under different scenarios, including backdated promotions and court-ordered salary payments.

The IRD has also stated that any excess APIT deducted from eligible salary arrears and remitted after 1 January 2024 but before the issuance of the circular will be refunded, with the refund mechanism to be announced separately. Employers are advised to retain all supporting documentation together with calculation worksheets, while employees may be required to obtain employment income information from previous employers where necessary.

The new framework is expected to improve fairness, transparency and consistency in Sri Lanka’s personal income tax administration while providing greater certainty for employers, payroll professionals and employees dealing with retrospective salary payments. The Commissioner General of Inland Revenue has also indicated that further guidance, including updates to the APIT/T10 certificate, will be issued in due course.