A novel state of health estimation method for hybrid electric vehicle lithium battery using sliding mode observer has been presented. A simple R-C circuit method has been used for the lithium battery modeling for the reduced calculation time and system resources due to the simple matrix operations. The modeling errors of simple model are compensated by the sliding mode observer. The design methodology for state of health estimation using dual sliding mode observer has been presented in step by step. The structure of the proposed system is simple and easy to implement, but it shows robust control property against modeling errors and temperature variations. The convergence of proposed observer system has been proved by the Lyapunov inequality equation and the performance of system has been verified by the sequence of urban dynamometer driving schedule test. The test results show the proposed observer system has superior tracking performance with reduced calculation time under the real driving environments.