Dec Sat 2022

Team Simplebooks

Capital Gains Tax in Sri Lanka: How to Calculate, Pay and More

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Capital Gains Tax (CGT) in Sri Lanka is a fancy term the Inland Revenue Department (IRD) uses to describe the tax they charge you whenever you earn a profit from selling one of your assets.

Now, this leaves a lot of questions to be answered. What is the Capital Gains Tax percentage? Are all of your assets affected by this tax? Are there any exemptions? How does one actually calculate this tax?

These are all very fair and valid questions, and we’ve written this blog to answer every single one of them.

So, if you’re looking for an in-depth, easy to digest guide on Capital Gains Tax in Sri Lanka – this is the blog for you. 

What is capital gains tax?

Whenever you sell and make a profit off your assets, you have to pay 10% of the profit you’ve made as Capital Gain Tax in Sri Lanka.

Like most types of tax, CGT is easier to wrap your mind around when you see its practical use. Here’s an example that should help you understand it a little further:

Meet Chandaka 👋🏽

Chandaka has been doing well for himself over the past few years. Thanks to his fortune, he has managed to buy himself a nice little house in Colombo + two other houses in Unawatuna and Nuwaraeliya. Aside from his houses, he also holds a bunch of stock in the Colombo Stock Exchange (CSE), owns a bit of cultivation land in Anuradhapura, and is a partner in a Partnership company in Sri Lanka.

It’s safe to say that Chandaka has a few nice assets to his name. But, let’s say that, for whatever reason, Chandaka wants to sell and transfer some of the things he owns. You know – shed a bit of asset weight and up his liquidity. This is when Capital Gains tax comes into play.

Aside from his main residence (his nice little house in Colombo), and the CSE stock (we’ll talk about this later), whatever he sells or transfers to other people will be subjected to Capital Gains Tax in Sri Lanka. Here, the selling or transferring of Chandaka’s assets is what’s called a ‘transfer of ownership’.

The last thing you need to know about Capital Gains Tax basics is that CGT is only applicable when the sale is made (at or after the point of transaction). In accounting lingo, this is when we consider the asset as ‘realised’.

Now that we’ve established the basics of CGT, let’s get into the specifics of it.

What is the Capital Gains Tax rate in Sri Lanka?

As of 2022, the Capital Gains Tax rate in Sri Lanka is 10%. So however much profit you make off your assets, you will have to pay 10% of that amount as tax.

When should you pay Capital Gains Tax?

You need to submit a CGT return within 01 month of the taking place. Then, you must pay the CGT amount within 01 month of the transaction.

How is Capital Gain Tax in Sri Lanka calculated?

Before we jump into the math, quick note: you need to consider the costs that were incurred on buying, improving, and selling your asset(s). Basically, you need to reduce this amount from the overall selling price of whatever you’re selling.

You can use this equation to calculate the ‘capital gain’ from the transfer of ownership of an asset:

Capital Gain = Selling Price – Total Cost of Asset

The Capital Gain Tax is 10% of the Total Capital Gain

Let’s see how this would apply to Chandaka.

Say hi to Chandaka again 👋🏽

Chandaka has just sold his Unawatuna property for LKR 75,000,000.

Chandaka originally bought a plot of land at Unawatuna for LKR 10,000,000 and spent 03 years building the house. The cost of building the house was LKR 20,000,000.

Let’s take a look at how his ‘Capital Gain’ on the transaction and the ‘Capital Gain Tax’ is calculated.

Cost of landLKR 10,000,000
Cost of buildingLKR 20,000,000
Recent house renovationLKR 1,500,000
Furnishing LKR 1,000,000
Advertising and legal costsLKR 500,000
Sale value of the house as of 2022LKR 75,000,000
Cost of land + building + renovation + furnishing + advertising and legal costs(LKR 10,000,000 + LKR 20,000,000 + LKR 1,500,000 + LKR 1,000,000 + LKR 500,000) = LKR 33,000,000
Capital Gains from the assetSelling Price – Total Cost of Asset
LKR 75,000,000 – LKR 33,000,000 = LKR 42,000,000
Capital Gains Tax %LKR 42,000,000 x 10% = LKR 4,200,000

Now, what if at some point you had incurred a loss from the asset you’re selling off? Can you deduct that loss from the Capital Gains Tax amount?

Let’s take a look.

Can you deduct capital losses from Capital Gains Tax in Sri Lanka?

A capital loss is any type of monetary loss you’ve incurred while buying, maintaining, renovating or attempting to sell your assets.

It would make sense for you to wonder if you could deduct or offset that loss from the Capital Gains Tax % you have to pay to the IRD.

Technically, if you make a capital loss – there will be no Capital Gains Tax to be paid.

However, you can’t offset a  capital loss of one asset from a capital gain of another.

Let’s take a look at this as an example:

Here’s Chandika again 👋🏾

By now, we’re all aware of Chandika selling his Unawatuna property for a cool LKR 75,000,000.

But, for the sake of this example – let’s imagine this scenario differently.

Let’s imagine Chandika bought the house from someone else in 2015 for LKR 50,000,000.

However, the property happened to be in not-so-great condition. This meant that Chandika had to renovate the house which eventually cost him LKR 15,000,000. Thanks to a few external factors, the renovations took 5 years, and by the end of it in 2020- Chandika desperately wanted to sell the property off. 

Thanks to the global pandemic, the housing market was a mess; and Chandika was only able to sell the house for LKR 55,000,000.

Let’s do the math:

Cost of houseLKR 55,000,000
Cost of renovationLKR 15,000,000
Total cost of the houseLKR 55,000,000 + 15,000,000 = LKR 65,000,000
Sale value of house as of 2022LKR 55,000,000
(Capital) LossLKR 65,000,000 – 55,000,000 = (10,000,000)

As you can see, Chandika’s loss on the property was LKR 10,000,000. Let’s imagine he sold one of his other properties for a capital gain of LKR 20,000,000.

It’d be great if he could deduct his Unawatuna property’s loss of LR 10,000,000 from the LKR 20,000,000 gain and only pay CGT of LKR 10,000,000. But, alas, he cannot do this.

How to file Capital Gains Tax in Sri Lanka

Step 1: Collect your CGT returns form and pay slip

All you need to do is visit the ‘Capital Gain Tax’ department at the IRD and inform them of your pending CGT payment. Once you do this, they will provide the Capital Gains Tax return form + the payment slip to you.

Also, a quick note: there is no online payment process for CGT in Sri Lanka as of yet (December 2022).

Step 2: Fill in the CGT returns form + payment slip

Your CGT payment slip should look like this:

If in case you’ve misplaced the slip, you can use a bank pay-in slip as an alternative. However, the IRD recommends you use the pre-printed pay-in slip whenever possible.

Step 3: Pay your CGT at a Bank of Ceylon (BOC)

All Capital Gains Tax payments must be made through the BOC.

Make sure you’ve filled in all the details in your pay-in slip. Take a look at the Inland Revenue Department’s guide on filling up each box here:

When is an asset ‘realised’?

  • You receive the payment when the asset has been sold. 
  • If a non-monetary exchange is made for an asset (eg. you exchange land for land).
  • Grant of an Option (when you purchase shares of a company at a set price).
  • Transfer of ownership of the asset (eg. Sale, exchange, distribute, transfer, cancel, loss, destroy)
  • If the owner of the asset dies. 
  • Realisation with retention of assets (lease, write-off, change of residence).

What assets are affected by Capital Gains Tax in Sri Lanka?

Both residents and non-residents in Sri Lanka need to pay CGT in Sri Lanka. Here are a list of assets that are affected by CGT:

  1. Land;
  2. Buildings;
  3. A membership interest in a company, partnership or trust;
  4. A security or financial asset;
  5. An option, right, or other interest in the land, buildings, companies, and security or financial assets.

Exemptions from Capital Gains Tax Sri Lanka

Whatever asset you sell will be exempt from Capital Gains Tax in Sri Lanka if:

  1. The realised gains from the asset ownership transfer does not exceed LKR 50,000 – LKR 600,000; 
  2. The asset is your primary place of residence (you need to have owned your primary residence for at least 3 years and lived in it for at least 2 of the 3 years);
  3. The asset is in the form of shares listed in the Colombo Stock Exchange;
  4. The property or land that was gifted to you by blood relations; 
  5. The investment asset is jointly owned and is being realised in two or more parts;
  6. Depreciable assets.

What is an investment asset?

According to Sec.195 of the Inland Revenue Act, an investment asset is a capital asset that is held by the owner as a part of an investment such as land or building; a membership interest in a company, partnership, or trust; security or other financial assets and an option, right, or other interest in an asset.

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Are there penalties for not paying Capital Gains Tax in Sri Lanka?

As with any tax, CGT comes with a few of its own penalties.  The penalties for CGT come in two variations:

  1. Penalty for the first 14 days of missing the payment;
  2. Penalty after 14 days of missing the payment.

Let’s take a look at both of these penalties in detail.

Penalty for the first 14 days of missing CGT payments

When you ‘realise’ a Capital Gain, you need to pay Capital Gains Tax on the profit you’ve made within 1 month of the profits being realised. However, if you miss the one month mark, you’re given 14 days to catch up on your payments.

However, you will be required to pay a penalty of 1.5% of the CGT for that 14 day extension.

Penalty after 14 days of missing CGT payments

Once you’re past 14 days of missing your CGT payments, you will have to pay 20% of your CGT as penalty.

File your Capital Gains Tax in Sri Lanka with Simplebooks

As always, filing for and paying any form of tax in Sri Lanka isn’t always as straightforward as we’d like it to be. It can, at times, prove to be unnecessarily complicated.

If you’re as busy as Chandaka is; managing multiple asset classes or, if you’re looking for someone to take the complicated tax process out of your hands – Simplebooks is the perfect place for you.

Our in-house consultants are happy to take the tax burden off your hands and manage everything for you – all the way from estimating and calculating your taxes to filing it on your behalf to the IRD.

FAQs

What is the capital gains tax in Sri Lanka?

The Capital Gains Tax in Sri Lanka is a tax you have to pay when you transfer ownership or sell specific assets. Take a look at our blog here for a very simple explanation on this.

What is the 2022 capital gains tax rate?

The Capital Gains Tax rate is currently 10%.

How is tax calculated on capital gains?

Capital Gains Tax is calculated from this formulae: Capital Gain = Selling Price – Total Cost of Asset. Read Simplebook’s in-depth blog about CGT Sri Lanka here to understand how these calculations are made.

What is the capital gain tax on sale of property?

The Capital Gains Tax on sale of property is 10%.

Who pays Capital Gains?

Either the individual or company that ‘realised a profit’ from sale of an asset has to pay Capital Gains Tax.

Do I have to pay capital gains tax immediately?

You have to pay Capital Gains Tax in Sri Lanka within a month of making the Capital sale. Read Simplebook’s guide here on how you can calculate your CGT and make the payments.

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