Withholding Tax Sri Lanka? Here’s Everything You Need to Know

The Withholding tax was introduced in Sri Lanka as a tax charge on interest payments in 1986. In recent times, withholding tax has been the subject of many changes, including periods where it was completely removed and then re-introduced.
Due to the complexity and the frequency of changes it may be challenging to understand what is considered as WHT, how it is calculated, what are the applicable WHT rates, and stay up to date with the latest developments. This article is designed to help you easily understand your responsibilities regarding WHT and the steps you need to take in accordance with the present

What is a Withholding tax?

a type of income tax that is charged from an individual based on their income level.   The person or the entity, who is in charge of paying the withholding tax is called a ‘withholding agent’.It is the responsibility of the withholding agent to retain the payable amount under WHT from any type of withholding tax payments, that are described as per IRD notice, and credit the retained amount to the government.

Withholding Tax (WHT) and Advance Income Tax (AIT) are two distinct methods used by the Sri Lankan government to collect income tax at the source. WHT is deducted from specific payments—such as interest, rent, service fees, and dividends—before they are paid to the recipient. AIT, on the other hand, is an advance tax primarily applied to recurring income like dividends, interest, and rent, often treated as a final tax.

The entity responsible for deducting and remitting the tax is known as a withholding agent. It is the legal duty of the withholding agent to withhold the applicable tax amount at the time of payment and remit it to the Commissioner General of Inland Revenue within the stipulated time frame, as defined by the Inland Revenue Act and relevant circulars.The Sri Lankan government implemented significant tax reforms starting from April 1, 2025, introducing updated rules and rates for Withholding Tax (WHT) and Advance Income Tax (AIT). Here are the key updates

Withholding Tax on Interest and Discounts

• The WHT rate has increased from 5% to 10% on interest and discount income (applies to both residents and non-residents unless exempted).
  

Personal Income Tax Relief

• The annual tax-free threshold for individuals has been increased to Rs. 1,800,000.
  
• This means individuals earning up to this threshold from all sources can qualify for specific exemptions.
  

Exemption via Self-Declaration

• Resident individuals with total assessable income not exceeding Rs. 1.8 million per year can submit a self-declaration to financial institutions to be exempted from withholding tax on interest income
  
• This is governed under the “Declaration of Non-Taxable Status” provisions introduced in 2025.
  

 Non-Residents and DTAA Benefits

• Non-residents may enjoy reduced WHT rates under applicable Double Tax Avoidance Agreements (DTAAs).
  
• They must obtain a tax clearance certificate from the Commissioner General of Inland Revenue to benefit from treaty rates.
  

Adjustments to Other WHT Categories

• WHT rates have been revised for several payment types, including:
  
  • Dividends – now 10%
    
  • Rent – remains at 10% (if above Rs. 100,000/month)
    
  • Lottery winnings – 10% (thresholds may still apply)
    

Service fees, royalties, natural resource payments, and insurance premiums – updated per category

Types of WHT applicable payments and rates

According to the Inland Revenue Department (IRD), Withholding Tax (WHT) is applicable to the following types of payments that have a source in Sri Lanka. These apply to both residents and non-residents, with specific thresholds and exemptions as prescribed.

WHT will be applicable to both resident and non residents. However, WHT will not be applicable when,

• Payments made by the Sri Lanka Government including any local authority and Government Departments (other than Public Corporations, Universities and Government owned entities and businesses)
• Payments made by individuals, unless payment made in conducting a business
• Interest paid to a financial institution on the ordinary loans and advances provided by such financial institution
• Interest or discount paid to any person on Security or Treasury Bond under the Registered Stocks and Securities Ordinance (Chapter 420) or Treasury Bill under the Local Treasury Bills Ordinance (Chapter 417)

What payments are exempted from Withholding tax?

• Amounts from lottery winnings below the amount of 500,000 LKR
• Amounts received on or after April 1, 2018, by any non-resident person as any payment for aircraft, software licences or as for other related services from the Sri Lankan Airlines Limited.
• Amounts received on or after January 1, 2020, by any non-resident person from laboratory services or standards certification services.
• Interest that has been gathered or obtained from any loan provided  by a non-resident person to any person in Sri Lanka or the government of Sri Lanka
• Any dividends paid by a resident company to a member if such dividend was obtained or attributable to another dividend received by the same company or another company
• Any dividends that are paid by a resident company to a member, in the event if such dividends has been subject to withholding under section 84 of the Inland Revenue Act
• Dividends paid by a resident company to a non-resident member
• Dividends paid by a company which conducts any of the following business activities and is registered in accordance with the provisions of PART IV of the Finance Act. No 12 of 2012 and falls within the meaning of an agreement entered into with the board of investment of Sri Lanka established Under the Board of Investment of Sri Lanka Law, No. 4 of 1978;
  • Companies that conduct re-exporting activities 
  • Offshore businesses which procure or manufacture goods in one country and sells to another country without the goods entering Sri lanka
  • Companies that provide front-end services to clients that are outside Sri Lanka
  • Headquarter operations leading buyers for management of financial supply chain and billing operations
  • Logistic services which provide bonded warehousing or multi-country consolidation in Sri Lanka
  • Amounts derived from foreign governments subject to provisions of diplomatic immunity or similar laws
  • Amounts derived by international organizations subject to provisions of diplomatic immunity, similar laws or any agreements between the organization and the government of Sri Lanka, in the event such agreement provides a broader exemption than other laws

How to calculate Withholding tax?

When calculating WHT, you can follow the below guidelines.

1. WHT calculations should be made on the gross amount payable excluding any VAT payments. Once you calculate the gross amount, you need to then apply the tax rate for the relevant category of payments.
2. In the event where a person wants to transfer the total amount of an invoice to a non-resident person, this will be treated as the net amount. The relevant tax rate should be calculated on the grossed-up amount.
3. The person making the payment is required to apply the currency exchange rate (selling rate) which is published in the Central Bank Website on the date of remittance, to convert the foreign currency into rupees.
4. In the event, where an investment is jointly owned, the appropriate payments shall be made according to the percentage held by each party. If the share cannot be ascertained, they will be treated as having equal percentages.

When should you deduct and pay WHT?

The withholding agent must deduct the taxes at the time an amount is paid, credited, re-invested, accumulated, capitalized, or made available to a person.

The agent must pay the collected WHT amount to the Commissioner General of Inland Revenue within 15 days after the end of each calendar month.  Each of these time periods are identified with a period code as below. This will change for every payment period.

How to pay the WHT?

The payments must be paid out to the Commissioner General of Inland Revenue (CGIR), – (*Peoples Bank Account No: 014-1002-6-9026620) by using the paying slip issued by the IRD.

(Payment Slip – www.ird.gov.lk)

For the ‘Tax Type Code’ field, you can use the relevant code from below.

• WHT on interest (43)
• WHT on other payments (44)

Certificate of deduction 

Every withholding agent is required to issue a certificate of deduction to each person in the specified format. This certificate shall cover a calendar month and must be served within 30 days of the end of the month.

The certificate needs to comply with the formats as belows.

How to register as a withholding agent?

Every withholding agent is required to register under the Commissioner General of Inland Revenue, no later than 30 days prior to deducting the WHT.

The registration as a withholding agent, can be done either manually or electronically. There is no difference between the outcome of either of these, and it is completely up to you to choose a method that you prefer.

Manual Registration

Step 1 – You must obtain a Tax Identification Number (TIN number) from any of these government agencies.

– Primary Registration Unit (Located at the 2nd Floor of the Department of Inland Revenue) 

– Relevant regional office (You can find the relevant information from this list)

– Taxpayer Service Unit (TPSU) of the Department of Inland Revenue

Step 2  – Once you obtain a TIN, you must complete the withholding tax registration form with all the necessary documentation (available at any of the above mentioned locations and from the IRD website)

Step 3 – Present all the documentations to the Tax Type Registration Unit of the Department of Inland Revenue. Alternatively, you can also send the documentation on postal service to the TPSU.

Step 4 – Provided you meet all the requirements, you will receive the tax certificate by mail or you can collect it in person at Inland Revenue Department offices.

Online Registration 

The process to register online changes based on the type of registration you require. 

Next steps

This article provides a detailed guide on everything you need to know about withholding tax, including how to register, how to calculate, deduct and pay withholding tax according to the present regulations. If however, you need further information or guidance, get in touch with us for a free personal consultation.