Employer guide
Employee loans in Sri Lanka: what employers need to know
Yes, a Sri Lankan company can lend money to an employee or give a salary advance. Put the amount, instalments and any interest in a signed agreement, keep total deductions within the 60% cap in section 19 of the Shop and Office Employees Act, charge no more than 6% interest if you charge any, and record each advance as the Regulations require. Track every loan and its balance in payroll, not a spreadsheet.
Can a company give a loan to an employee in Sri Lanka?
Nothing in Sri Lankan law prohibits it. The Companies Act restricts loans to directors (section 217: not above LKR 25,000 in aggregate without an exception), and says nothing against loans to other employees. The only regime that applies is the wage-deduction law: the Shop and Office Employees Act and its Regulations treat an advance and a loan from an employer-managed fund as authorised deductions, set a 60% cap on total deductions, limit interest to 6% a year, and require a record of every advance. A company is not a licensed lender and should not lend to the public, but lending to its own staff is ordinary.
| Arrangement | What it is | Typical repayment | Paperwork |
|---|---|---|---|
| Salary advance | Part of this month’s pay, paid early | Deducted from the same month’s salary | Signed advance record (Reg. 21(1)(d)) |
| Festival advance | An advance before Sinhala and Tamil New Year, Vesak or Christmas | One to three instalments | Same record; policy sets the amount |
| Staff loan | A sum beyond one month’s pay, repaid over months | Fixed monthly instalments, interest none or up to 6% | Signed loan agreement plus the advance record |
Put it in writing: the loan agreement
- Principal, the instalment amount and count, and the month the first deduction starts.
- Interest: none, or a rate no higher than 6% a year of the principal (Regulation 18, proviso (c)).
- The employee’s consent to the deduction from remuneration, which section 19(1)(a) requires.
- What happens on resignation or termination: the balance is deducted from the final salary and leave encashment within the 60% cap, and any remainder is repaid by the employee on agreed terms.
- Signatures of the employee and the employer, and the date.
Keep the Regulation 21 advance record too: name, amount, date, recovery dates and the employee’s signature acknowledging receipt. A staff loan agreement is a natural addition to the HR letter templates.
Do this automatically
Humanised records each loan and salary advance against the employee, deducts the instalment every pay run within the 60% cap, shows the balance on the payslip and settles the remainder in the final pay. From LKR 10,000/month for up to 15 employees.
See payroll softwareHow much can be deducted from salary each month?
Section 19(1)(a) of the Shop and Office Employees Act allows only authorised deductions made with the employee’s consent, and says the total deducted at any one time may not exceed 60% of the remuneration due; income tax and court orders sit outside that cap. Regulation 18 lists advances and loans from an employer-managed fund among the authorised deductions, and Regulation 20 says an advance is recovered first, before other deductions. Most employers keep instalments far below the cap so the employee can live on the balance:
| Gross | Typical net (after EPF 8% and APIT) | Instalment at 20% of net | At 25% | At 33% |
|---|---|---|---|---|
| LKR 60,000 | LKR 55,200 | LKR 11,040 | LKR 13,800 | LKR 18,216 |
| LKR 100,000 | LKR 92,000 | LKR 18,400 | LKR 23,000 | LKR 30,360 |
| LKR 175,000 | LKR 159,500 | LKR 31,900 | LKR 39,875 | LKR 52,635 |
EPF, ETF and APIT: does a loan change them?
| Item | EPF / ETF | APIT | Source |
|---|---|---|---|
| Loan instalment deducted from pay | No effect: EPF is on earnings as defined in s.47 (wages, allowances, holiday pay), not on net pay | No effect | EPF Act s.47 |
| Salary advance | Not separate earnings; the month’s earnings are contributable as usual | Taxed as the month’s remuneration | EPF Act s.47 |
| Interest-free or concessionary loan | Not earnings | The interest benefit is quantified at 0% of cost under IRD circular SEC/2022/E/05 (Rev) from 1 January 2023 (earlier it was 50% of the difference from the CGIR market rate); confirm the current circular with the IRD | IRA s.5(2)(h); SEC/2022/E/05 (Rev) |
| Loan written off by the employer | Not earnings | A decrease of a liability is a “payment” under s.195 and employment income under s.5(2); include it in that month’s APIT | IRA ss.5(2), 195; IRD manual example 2.3 |
The EPF guide and APIT guide cover the bases in full.
What happens when the employee leaves
Recover the balance from the final salary and any leave encashment, within the 60% cap and under the agreement. Gratuity is different: the Payment of Gratuity Act allows a reduction only under section 13, forfeiture for fraud, misappropriation, wilful damage or loss of the employer’s property, and only to the extent of the loss; it contains no set-off for loans. Treat any deduction from gratuity as something to agree in writing with the employee and to expect the Labour Department to question. If a balance cannot be recovered, the write-off is employment income for APIT (above) and the debt is a civil claim. Final remuneration is due within two working days of termination (s.19(1)(c)); see the gratuity calculator.
Tracking loans and instalments
A spreadsheet misses a month when someone is on no-pay, loses the balance after a second advance, and has no audit trail when the employee disputes it. Payroll-integrated tracking keeps one loan record per employee, deducts the instalment automatically each run, shows the balance on the payslip (the payslip format requires each deduction and advance shown separately), allows early settlement, and reports outstanding balances for the accounts. Employees see their own balance in the app.
Should you offer staff loans at all?
- For: staff stay longer, emergencies are handled without informal lenders, and festival advances are expected in many trades.
- For: an interest-free loan costs the company only the cash-flow timing and, since 2023, carries no APIT benefit.
- Against: cash flow, if several loans coincide.
- Against: favouritism, unless a written policy sets who qualifies and for how much.
- Against: collection on exit, when the balance exceeds the final pay.
- Against: administration, if the loans live in a spreadsheet.
A simple employee loan policy
| Clause | Suggested rule |
|---|---|
| Eligibility | Confirmed employees after 12 months of service |
| Maximum | Two months’ basic salary |
| Instalment cap | 25% of net pay, and total deductions within the statutory 60% |
| Concurrency | One loan at a time; a festival advance in addition |
| Interest | None, or a fixed rate not above 6% a year |
| Approval and record | Owner or finance head; signed agreement and advance record kept with payroll |
Do this automatically
Humanised records each loan and salary advance against the employee, deducts the instalment every pay run within the 60% cap, shows the balance on the payslip and settles the remainder in the final pay. From LKR 10,000/month for up to 15 employees.
See payroll softwareFrequently asked questions
Can a company give a loan to an employee in Sri Lanka?
Yes. The Companies Act restricts loans only to directors (s.217); loans and advances to other employees are ordinary, governed by the wage-deduction rules in the Shop and Office Employees Act.
Is there a limit on how much can be deducted from an employee’s salary for a loan?
All deductions together may not exceed 60% of the remuneration due at any one time (s.19(1)(a)); income tax and court orders are outside the cap. Most employers keep instalments at 20–25% of net pay.
Is an interest-free staff loan a taxable benefit under APIT?
Since 1 January 2023 the IRD quantifies the benefit of a concessionary loan at 0% of cost (circular SEC/2022/E/05 (Rev)), so no APIT arises; before that it was 50% of the difference from the CGIR market rate. Confirm the current circular with the IRD.
Does a loan deduction reduce EPF contributions?
No. EPF is on earnings as defined in section 47 of the EPF Act (wages, allowances, holiday pay), not on net pay after deductions.
What is the difference between a salary advance and an employee loan?
An advance is part of the current month’s pay paid early and recovered from the same month; a loan exceeds a month’s pay and is repaid by instalments under a signed agreement, with interest capped at 6% a year if charged.
Can the company recover the balance from gratuity or final salary when the employee resigns?
From final salary and leave encashment, yes, within the 60% cap and under the agreement. Gratuity can be reduced only under section 13 of the Payment of Gratuity Act (fraud, misappropriation, wilful damage or loss); the Act has no set-off for loans, so any deduction from gratuity needs the employee’s written agreement and may be questioned.
Do I need a written agreement for a staff loan?
Yes: the Act requires the employee’s consent to the deduction, and Regulation 21 requires a signed record of each advance with amount, date and recovery dates.
How should a loan instalment appear on the payslip?
As its own deduction line with the remaining balance; Regulation 17 requires each deduction and each advance shown separately.
Can an employee have two loans at the same time?
The law does not prohibit it as long as total deductions stay within 60%; most policies allow one loan plus a festival advance.
How do I track employee loans without a spreadsheet?
In payroll software that keeps a loan record per employee, deducts the instalment each run, shows the balance on the payslip and settles the remainder in the final pay.
Related guides and tools
Sources. Shop and Office Employees Act and Regulations, consolidated (NIOSH); Inland Revenue Act No. 24 of 2017 (IRD); IRD circulars, including SEC/2022/E/05 (Rev) on quantification of benefits; Employees’ Provident Fund Act (Central Bank), s.47; Payment of Gratuity Act No. 12 of 1983 (Department of Labour); Companies Act No. 7 of 2007 (Parliament), s.217. This guide is general information for employers, not legal or tax advice; figures are checked against the sources on the review date shown above and again every 1 January and 1 April. See our editorial approach.