Does No-Pay Leave Reduce EPF, ETF and Gratuity?
No-pay leave lowers gross pay, so EPF, ETF and APIT fall. Section 20 counts approved leave as completed service, with no length limit.
On this page
- How a no-pay day changes gross pay
- EPF and ETF on the reduced figure
- APIT in a no-pay month
- Gratuity: earnings vs continuous service
- Long unpaid absence: where service can break
- Worked example: five no-pay days on LKR 90,000
- Frequently asked questions
- Does no-pay leave reduce EPF for the month?
- Do I need to deduct EPF for annual leave?
- Does no-pay leave affect gratuity eligibility?
- Does unauthorised absence count the same as approved no-pay leave?
- Does no-pay leave reduce ETF too?
- What about unpaid study leave?
- Do this automatically in Humanised
Yes for EPF and ETF. Both are worked out on actual monthly earnings, so a no-pay day lowers earnings and lowers both contributions for that month. Usually no for gratuity eligibility. Section 20 of the Payment of Gratuity Act counts service interrupted by approved leave “on any ground whatsoever” as completed service. It sets no length limit. Unapproved absence is different, and can put service in doubt.
How a no-pay day changes gross pay
No-pay leave means the employee is not paid for that day. So gross pay for the month falls by the daily rate for each day taken. The no-pay calculator works out the daily-rate cut itself. This page picks up from there and looks at what that lower figure does to EPF, ETF, APIT and gratuity.
EPF and ETF on the reduced figure
EPF and ETF are both a percentage of “total monthly earnings”, not a fixed sum. The EPF employer guide sets out what counts as earnings: salary, regular allowances, holiday pay, commissions and piece-rate pay. No-pay days are simply not paid, so they are not part of that base to begin with. Cut the earnings and both contributions fall with it:
- Employee EPF: 8% of the reduced monthly earnings.
- Employer EPF: 12% of the reduced monthly earnings.
- ETF: 3% of the same reduced base, paid by the employer only.
There is nothing special about a no-pay day here. It works exactly like any other month where gross pay is lower, say because a new joiner started mid-month, or someone worked fewer commission-earning hours.
APIT in a no-pay month
APIT (income tax you take out of an employee’s pay) is worked out on their taxable pay for the month, after the monthly personal relief. In some cases a cumulative method across the year is used instead. Lower gross pay in a no-pay month usually means lower taxable pay and a lower APIT deduction that month, under the current APIT tables. It does not change the annual relief or the employee’s total tax for the year. It only shifts which month the tax falls in.
Gratuity: earnings vs continuous service
Gratuity works differently from EPF, ETF and APIT, because it is not worked out monthly. The rule is in the Payment of Gratuity Act No. 12 of 1983. An employee gets half a month’s wage or salary, at the rate last drawn, for each completed year. Both of these must be true: the employer had 15 or more workmen on any day in the 12 months before the employee left, and the employee has five years of continuous service. So the final salary figure matters, not each month’s dip from occasional no-pay days along the way.
The question that matters for gratuity is not “did this month’s pay drop”. It is “did continuous service break”. Ordinary leave, including approved no-pay leave for a reasonable stretch, does not usually break continuous service. Service can be put in doubt by any of these:
- a long unauthorised absence
- resignation and re-hire
- a gap the employer treats as a break rather than leave
This is a case-by-case call under the Act and general labour law practice. Confirm any specific long-absence case with a labour law adviser before treating service as broken.
Long unpaid absence: where service can break
Section 20 sets no day-count and no length limit for approved leave. What matters is whether you approved the leave, and whether the employment was formally suspended or ended. Treat a lengthy unpaid absence, say several months, as something to review with a labour law adviser. Do this before you assume continuous service is unaffected.
Worked example: five no-pay days on LKR 90,000
An employee on LKR 90,000 basic pay takes five no-pay days in a 30-day month:
| Step | Figure |
|---|---|
| Daily rate | LKR 90,000 ÷ 30 = LKR 3,000 |
| No-pay deduction | 5 × LKR 3,000 = LKR 15,000 |
| Reduced monthly earnings | LKR 90,000 − 15,000 = LKR 75,000 |
| Employee EPF (8%) | LKR 6,000 (was LKR 7,200) |
| Employer EPF (12%) | LKR 9,000 (was LKR 10,800) |
| ETF (3%) | LKR 2,250 (was LKR 2,700) |
Source: EPF/ETF rates from the EPF employer guide; daily-rate method from the no-pay calculator. These five days do not affect gratuity on their own. Gratuity is worked out on last-drawn pay at the time of leaving, using continuous years of service, not this month’s reduced figure. The free gratuity calculator works out a figure from last-drawn pay and years of service.
This is general payroll guidance. Every case is different. For your own case, speak to a payroll practitioner or a lawyer.
Frequently asked questions
Does no-pay leave reduce EPF for the month?
Yes. EPF is a percentage of actual monthly earnings. So unpaid days lower the earnings base, and lower both the employee and employer EPF contributions for that month.
Do I need to deduct EPF for annual leave?
No. Properly taken annual leave is paid leave, so it is part of earnings, and EPF applies to it as normal. The “reduce EPF” effect here is specific to no-pay (unpaid) leave, not paid annual leave.
Does no-pay leave affect gratuity eligibility?
Ordinary approved no-pay leave does not usually break the continuous service a gratuity claim depends on. It can affect the final “last-drawn pay” figure in one case only. That is when the employee is on no-pay leave in the exact month gratuity is worked out. Confirm the calculation month with a payroll adviser.
Does unauthorised absence count the same as approved no-pay leave?
No. Unauthorised absence carries disciplinary risk on top of the pay effect. A long unauthorised absence is more likely to be treated as a break in service than approved leave of the same length. Get this confirmed case by case.
Does no-pay leave reduce ETF too?
Yes, in the same way as EPF. ETF is 3% of the same earnings base, so lower monthly earnings from no-pay days give a lower ETF contribution that month.
What about unpaid study leave?
It is treated as no-pay leave for EPF, ETF and APIT, the same as any other unpaid absence. Contributions run on the earnings actually paid in the month. Agree and document its effect on continuous service for gratuity before the leave starts, since it is often planned and can run for months.
Do this automatically in Humanised
No-pay days approved in leave management flow straight into the pay run, so the contribution base is right automatically. A leave management system that talks to payroll means five no-pay days show up in that month’s EPF, ETF and APIT without a manual recalculation.
Was this article helpful?
Your feedback helps us improve these guides.