Everything you need to know about Income Tax in Sri Lanka

Updated 2024

Income tax is one of the main sources of revenue for any government around the world including Sri Lanka.

Due to the complexity of the income tax regulations and the frequency of changes, you may find it challenging to calculate income tax, know the process to file an income tax return or to stay up to date on the income tax rates and exemptions. Whether you are an individual income taxpayer or a company, this article will provide a comprehensive guide to Income Tax in Sri Lanka in 2024.

What is an Income Tax? 

Income Tax, introduced in 1932, is governed by the Inland Revenue Department with the authority to charge, levy, and collect income tax on individuals, partnerships, sole proprietorships, or companies.

Governments use income tax in Sri Lanka as a way to collect earnings from your business or personal profits, which is used to cover various government costs, including infrastructure development and public services such as health and education.

Income Tax Rate for Individuals

Depending on how much you earn, the total income tax you pay varies. This is categorized under different tiers, known as ‘Tax Slabs’. If your monthly earnings surpass 100,000 LKR, or 1,200,000 LKR annually, you are liable to pay income tax.

The following sources of income will be considered as part of your taxable income:

• Employment Income
• Business Income
• Investment Income
• Other Income

Income Tax Qualifying Payments and Reliefs for Individuals 

According to the present tax regulations, certain types of payments qualify for deductions.

For the below qualifying payments, an individual can deduct whichever is the lowest out of either  ⅓ of the taxable income for that year of assessment, or Rs. 75,000.

1. Donations to Approved Charity, 
2. Donations to Government or other specified institutions, 
3. Profits remitted to President’s Fund
4. A contribution made by a resident individual to establish a shop for a female individual who is from the Samurdhi beneficiary family
5. Expenditure incurred by any person
   – in the production of a film at a cost not less than five million rupees
   – in the construction and equipping of a new cinema at the cost of not exceeding twenty-five million rupees
   – in the upgrading of a cinema at a cost of not exceeding ten million Rupees
   – The deduction of this expenditure is restricted to one-third of the taxable income

Tax Reliefs

• Personal Relief

Individuals are eligible for a personal relief of Rs. 1,200,000 annually. However, this will not apply to individuals when they are acting as a trustee, executor, or a liquidator. The relief may be deducted from the assessable income of an individual except to the extent that the assessable income comprises gains from the realization of investment assets.

• Rent Relief

Individuals who are residents are entitled to deduct 25% of the total rental income from an investment asset for the year of assessment unless it is intended to be claimed for any actual expenditures incurred by the taxpayer for the repair, maintenance, and depreciation of the investment asset.

• Solar Panel Relief

Resident individuals who have acquired solar panels to fix on their premises and connected to the national grid are entitled to deduct Rs. 600,000 for each year of assessment, up to the total expenditure made on such solar panels or up to the amounts paid to a bank in respect of any loan obtained to acquire such solar panels.

Dr. Wasumathi is a General surgeon at the Karapitiya Teaching Hospital. Also, she maintains
her own medical center. In addition, she engages in private practice but her monthly income
from private practice never exceeds Rs.100,000 per month. Her expected income for the year of
assessment 2023/2024 is as follows;

• Employment income is Rs. 9,200,000
• Business (Professional) income is Rs. 31,000,000 from her own medical center
• Gross Interest income received on 01.06.2023 amounting to Rs, 5,000,000 (AIT has been deducted at the rate of 5%. amounting to Rs. 250,000)
• Income from private practices Rs. 500,000 (WHT is not deducted at 5% as her income does not exceed Rs.100,000/- per month).
• Rent income is Rs. 900,000

Employment income includes estimated cash and non-cash benefits. Also, she expected to
donate Rs. 200,000 to an approved charity. Tax payment made prior to first instalments is Rs.
250,000

Calculation of Estimated Tax Payable

		Rs.
Employment Income		9,200,000
Business Income	31,000,000 + 500,000	31,500,000
Investment Income
Interest Income		5,000,000
Rent Income		900,000
Estimated Assessable Income		46,600,000
Less – Reliefs
Rent Relief	900,000*25%	(225,000)
Personal Relief		(1,200,000)
Less – Qualifying payments
Donation to approved charity (Deductible subject to 1/3rd of the Taxable Income or Rs. 75,000 whichever is less		(75,000)
Estimated Taxable Income		45,100,000
Gross Estimated Tax Liability	500,000 x 6% = 30,000
	500,000 x 12% = 60,000
	500,000 x 18% = 90,000
	500,000 x 24% = 120,000
	500,000 x 30% = 150,000
	42,600,000 x 36% = 15,336,000	15,786,000
Less: Estimated APIT		(2,430,000)
Estimated Tax Payable		13,356,000

 Income Tax Rate for Companies

The income tax rate in Sri Lanka applicable to a company is different to the rates charged to individuals. Tax rates for individuals start at 6% and the highest rate is set at 30%, whereas for companies the corporate Income Tax rate is 30% of net profit. The amount of tax payable by a company changes based on the industry and the revenue generated.

Income Tax Qualifying Payments And Exemptions for Companies

For the below qualifying payments, a company can deduct whichever is the lowest out of either 20% aggregate taxable income for that year of assessment, or Rs. 500,000.

1. Donations to Approved Charity, 
2. Donations to Government or other specified institutions, 
3. Profits remitted to President’s Fund

Gains and profits earned or derived by any person from any of the following are exempted from being subject to tax:

• any service rendered in or outside Sri Lanka to any person to be utilized outside Sri Lanka, where the payment for such services is received in foreign currency and remitted through a bank to Sri Lanka
• any foreign source [other than gains and profits referred to in item (iii)] where such gains and profits earned or derived in foreign currency and remitted through a bank to Sri Lanka

As you read through the above exemptions you may notice companies earning in foreign currency revenue are mostly exempt from paying income tax. This is to incentivize companies to bring in more foreign currency to Sri Lanka.

When Should You Pay Your Income Tax?

In Sri Lanka, you are responsible (self-assessment basis) for calculating how much Income tax you are liable to pay. These are payable in quarterly installments in advance

Shown below are the dates for the SET payment basis for Financial Year 2023/2024

Installment	Time Period	Day of payment	Payment period code
1st Installment	April 2023 to June 2023	On or before the 15th of August 2023	23241
2nd Installment	July 2023 to September 2023	On or before the 15th of November 2023	23242
3rd Installment	October 2023 to December 2023	On or before the 15th of February 2024	23243
4th Installment	January 2024 to March 2024	On or before the 15th of May 2024	23244

In the case of companies or partnerships, after making the quarterly payments, you are required to conduct an audit at the end of the financial year. This audit should be conducted by an independent and certified auditor. This helps assess if you have estimated and met your Sri Lanka tax obligations correctly.

Following the audit, you should make the final payment by the below dates:

• 2023/24 Assessment Year – 30th September 2024 

Please note that if you are an individual or a sole proprietorship, audited financial statements are not applicable to you.

How to Pay Your Income Tax?

Once you register as a taxpayer you have two options when paying your income taxes

 Online

• Login to e-services
• Fill in payment details 
• Get payment voucher number
• Make payment online through either Bank of Ceylon or Peoples Bank e-payment services

When you are making the online payment through your bank, you can follow the below steps.

1. Log-in to the e-banking facility and select the Fund Transfer option.
2. Enter the “2026529” as the beneficiary account number
3. Beneficiary name should be added as  “Commissioner General of Inland Revenue” or “CGIR” 
4. Set the beneficiary bank to  “Bank of Ceylon, Taprobane Branch” 
5. Enter your Payment Reference Code (PRC) without any space in the Reference Cage/Field in the interface of online fund transfer. (PRC Format TIN 9 Digits + Tax Type Code 2 digits + Payment Period Code 5 Digits)

*The applicable tax type code for companies is ‘02’ and ‘05’ for individual Income tax

You can use our free tax calculator to calculate the APIT tax (Advance Personal Income Tax) you have to pay. Click here to check out our tax calculator.

Filing Your Tax Returns

Once you make the final payment of taxes, you are required to provide your tax returns by the following dates.

• The tax filing for 2022/23 should be made by the 30th November 2023
• The tax filing for 2023/24 should be made by the 30th November 2024

Make sure to provide your return of income with highest authenticity to avoid exposing yourself to pay penalties or legal action. 

You can either file your tax returns to the department directly or through http://www.ird.gov.lk.

Here is a step by step process on how to file your tax return:

Through the department (Only for individuals)

1. Receive return form via post.
2. Manually fill return form
3. Attach supporting documents
4. Submit return to Taxpayer Services Unit at the Inland Revenue Department

Through the Inland revenue department website (Individuals and corporates)

1. Log in to e-services of the website
2. Fill the return forms
3. Upload the supporting documents

Penalties For Evading And Making False Tax Returns

If you do end up having complications with the tax regulations either due to non-payment of taxes or providing inaccurate information keep in mind there will be penalties. The applicable penalty differs based on the seriousness of the offense and is imposed by the Commissioner General of the Inland Revenue Department.

1. Penalties for late filing and incorrect tax returns

Penalty for late filing of return of income is equal to the greater of –

• 5% of the amount of the tax owing, plus a further 1% of the amount of tax owing for each month or part of a month during which the failure to file continues:

and

• Rs.50, 000/- plus a further Rs.10, 000 for each month or part of a month during which the failure to file continues (Maximum penalty shall be limited to Rs.400, 000)

2. Penalties for delay or non payment

If there is a delay or non payment in your payment, you will be responsible for the penalties mentioned below; 

Self estimated basis

• Penalty for non payment or late payment – 10% of the tax amount due if not paid within 14 days from the due date
• Interest in the event of default – 1.5% interest of the tax amount due months or part of the month will be applied on default of the installment or part payment

Audited income tax

• 20% payment on tax if not paid within 14 days
• 1.5% interest of the tax amount due months or part of the month will be applied on default of the installment or part payment

3. Penalties for understating amount of payable tax

• If the understated amount is less than Rs. 10 million or 25% of the total tax liability a penalty of 25%
• If the understated amount is more than Rs. 10 million, the penalty would be 75%

How to Provide a Revised Tax Statement?

If you have made an error in submitting a tax return, you can submit a revised statement by following the below steps.

1. Take a copy of the previously submitted tax return
2. Attach the revised return
3. Submit to the Inland Revenue Department directly or through http://www.ird.gov.lk.

How to Appeal for Late Filing of Income Tax Returns?

If you have a valid reason to file a late return, you can draft a letter of appeal explaining the grounds of the late submission to the Commissioner General of Inland Revenue Department.

Need Help?

Even though this guide covers everything that you need to know about income taxes, you may still have doubts or need clarifications about how it may affect your exact situation. 

Contact us to schedule a free personal tax consultation with one of our taxation experts.