Sri Lanka - Income Tax

Sri Lanka - Income Tax

Taxation of international executives

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Tax returns and compliance

When are tax returns due? That is, what is the tax return due date?

Tax returns should be filed by 30 November following the relevant year of assessment.

What is the tax year-end?

31 March.

What are the compliance requirements for tax returns in Sri Lanka?


All taxpayers are required to pay their taxes on self-assessment basis in quarterly installments on 15 August, 15 November, and 15 February during the relevant year of assessment and 15 May in the next year of assessment. The due date for final payment is 30 September following the end of the year of assessment (Commencing from Y/A 2006/07 a 10 percent discount is available on the quarterly taxes due if tax is settled 30 days prior to the statutory due date). A Pay-As-You-Earn (PAYE) tax scheme applies to employees on their employment income. The employer makes deductions of tax at source. 

PAYE tax withholdings are calculated according to tables provided by the Revenue Authorities. If any individual’s only source of income consists of employment income, the PAYE tax so deducted will be the final tax, effective from Y/A 2011/12. Provision for application of refunds is not available. 

Currently there is no requirement to file an income tax return or open a tax file if the taxpayer’s sources of income are confined to one or more of the following.

  • Profits from only one employment and subject to PAYE.
  • Dividend or interest income subject to withholding tax.

Spouses are taxed separately and are required to file separate tax returns. Income received by one spouse for services rendered in any trade, business, profession, or vocation carried on or exercised by the other spouse or by a partnership of which that spouse is a partner is deemed to be income of that other spouse.

The total statutory income of a child (under 18 years of age and unmarried) of a resident individual is aggregated with the total statutory income of the father if the marriage of his parents subsists in that year of assessment. Otherwise,, such income is aggregated with the parent who maintains him and with whom he lives in that year of assessment.


With effect from 1 April 2008, expatriate employee are taxed at the tax rates applicable to residents in Sri Lanka but, they will be taxed only on their Sri Lankan-sourced income.

Tax rates

What are the current income tax rates for residents and non-residents in Sri Lanka?


Income tax is calculated by applying a progressive tax rate schedule to taxable income as follows.

Income tax slabs from the Year of Assessment 2011/2012 are as follows:

Income tax table for 2011/2012, 2012/13 & 2013/14

Taxable income bracket Total tax on income below bracket Tax rate on income in bracket
From LKR To LKR LKR Percent
0 500,000 0 4
500,001 1,000,000 20,000 8
1,000,001 1,500,000 60,000 12
1,500,001 2,000,000 120,000 16
2,000,001 3,000,000 200,000 20
3,000,001 Over 400,000 24

Income tax table for 2014/15 

-Employment income received by a professional -(Citizens)

The income tax table for 2011/12 continued to apply until the taxable income from the above source reached the threshold parallel to the 16% tax rate. Taxable income from employment of a “professional” exceeding this threshold remained to be taxed at 16%.The definition of a “professional” has been prescribed by law.

-Other sources of income

The income tax table for 2011/12 remained to be the same.

Income tax table for 2015/16

-Employment income 

The tax treatment of employment income of a professional was extended to all employees. The application of the income tax table 2011/12 continues to apply on employment income up to a maximum of 16%. This is awaiting legal enactment.

-Other sources of income 

The income tax table for 2011/12 remains to be the same.

Income tax table for 2015/16

-Total Income including employment income

Profits and income exceeding LKR 2.4 Mn. per annum is to be taxed at a flat rate of 15%.This amendment is however pending legal enactment.


With effect from 1 April 2008 all expatriate employees (other than certain experts with effect from 1 April 2008) will be taxed at the same tax rates applicable to resident employees of Sri Lanka.

Residence rules

For the purposes of taxation, how is an individual defined as a resident of Sri Lanka?

A resident is a person who is physically present in Sri Lanka for 183 days or more during a year of assessment.

Is there, a de minimus number of days rule when it comes to residency start and end date? For example, a taxpayer can’t come back to the host country for more than 10 days after their assignment is over and they repatriate.

An individual will be considered as a resident if he stays in Sri Lanka for 183 days in a year of assessment. 

What if the assignee enters the country before their assignment begins?

Number of days present in Sri Lanka will be considered in counting the 183 days in a year of assessment, in considering the residency status. 

Termination of residence

Are there any tax compliance requirements when leaving Sri Lanka?

There are no special requirements.

What if the assignee comes back for a trip after residency has terminated?

As explained earlier, when a person returns to Sri Lanka,the 183-day rule would reapply, in order to determine the tax residency status. 

Communication between immigration and taxation authorities

Do the immigration authorities in Sri Lanka provide information to the local taxation authorities regarding when a person enters or leaves Sri Lanka?

Revenue Authorities could call for copies of relevant pages of the passport to verify. 

Filing requirements

Will an assignee have a filing requirement in the host country after they leave the country and repatriate?

The ideal situation would be to file all returns before leaving the country.

Economic employer approach

Do the taxation authorities in Sri Lanka adopt the economic employer approach1 to interpreting Article 15 of the OECD treaty? If no, are the taxation authorities in Sri Lanka considering the adoption of this interpretation of economic employer in the future?

No.There is no intimation from the Revenue Authorities.

De minimus number of days

Are there a de minimus number of days2 before the local taxation authorities will apply the economic employer approach? If yes, what is the de minimus number of days?


Types of taxable compensation

What categories are subject to income tax in general situations?

In general, all remuneration and benefits received by an employee who is resident in Sri Lanka or for services rendered in Sri Lanka are taxable. Types of compensation included as taxable income are as follows:

  • salary
  • bonuses
  • commission
  • leave pay
  • cost-of-living allowances
  • accommodation allowances
  • value of accommodation provided
  • provision of household furnishings
  • company car
  • traveling allowances
  • education allowance for children
  • employer provided domestic assistance
  • contributions to medical, dental sickness, and disability plans
  • employee share options
  • compensation for loss of office.

Tax-exempt income

Are there any areas of income that are exempt from taxation in Sri Lanka? If so, please provide a general definition of these areas.

The following are not taxed in Sri Lanka as per the prevailing law:

  • use of a chauffeur
  • home leave
  • reimbursement of substantiated moving expenses
  • pensions contributions, if approved by the inland revenue department
  • services rendered outside Sri Lanka
  • excess of regular remuneration over LKR500,000/- subject to a maximum of LKR250,000 per annum for non-citizen tax residents and citizen non-resident taxpayers
  • official emoluments up to LKR250,000 per annum arising in Sri Lanka to any non-citizen nonresident individual
  • official emoluments of non-citizens participating in international events
  • Value of benefit from private use of one vehicle provided by the employer or an allowance paid in lieu thereof up to a maximum of LKR50,000/- per month (valuation of the above benefit will vary on the engine capacity and the other benefits attached thereto)
  • release of approved or regulated provident fund balance on retirement (except to a superannuation fund)
  • profits from employment of Noncitizen sports trainer brought to Sri Lanka is tax exempt effective 1 April 2012
  • commencing 1 April 2013, profits from employment arising in Sri Lanka to any non-citizen individual who is an expert and brought to Sri Lanka by a BOI registered company enjoying a tax holiday will be exempt on meeting the following preconditions:
    • the total investment should be out of foreign direct investment exceeding USD50 million
    • the number of experts does not exceed five 
    • services of the experts are essential to carry out the activities of the company and such services are not obtainable in Sri Lanka
  • commencing 1 April 2008, profits from employment arising in Sri Lanka to any non-citizen individual who is an expert and brought to Sri Lanka by a BOI registered company enjoying a tax holiday under the Strategic Development Projects Act, provided,
    • the individual has expertise in a field as determined by the CGIR
    • Such expertise is not available among citizens of Sri Lanka.

Use of a chauffeur

Reimbursement of wages of a chauffeur on production of bills is tax-exempt. 

Home leave

The value of travel warrant or passage granted to an expatriate and his/her family to visit his/her home abroad is tax-exempt.

Reimbursement of substantiated moving expenses

Moving expenses that form part of relocation expenses are tax-exempt.

Pensions contributions

Employer’s contributions to local funds approved by the Revenue Authorities are tax-exempt.

Services rendered outside Sri Lanka

Non-resident individuals rendering services outside Sri Lanka are tax-exempt.

Effective 1 April 2013 offshore income of any tax resident and citizen of Sri Lanka is exempt from income tax provided such income is remitted to Sri Lanka through a bank account.

It has been proposed to limit the exemption to the following effective from 1 April 2016.However same is pending legal enactment.

  • Retiring benefits and pension paid to Government employees out of the Consolidated Fund.
  • Profits from employment earned in foreign currency outside Sri Lanka, provided such earnings are remitted to Sri Lanka.
  • Profits from employment accruing to personnel of diplomatic missions.
  • Compensation for loss of office subject to certain limitations.
  • Provident Fund balance due at a time of retirement.

All other cash or non cash benefits will be taxed, if the aggregate exceeds the tax free threshold of LKR 2.4 million.

Expatriate concessions

Are there any concessions made for expatriates in Sri Lanka?

  • Off shore income of non-citizen employees is exempt from tax.
  • Commencing 1 April 2013, profits from employment arising in Sri Lanka to any non-citizen individual who is an expert and brought to Sri Lanka by a BOI registered company enjoying a tax holiday will be exempt on meeting the following preconditions:
    • the total investment should be out of foreign direct investment exceeding USD50 million
    • the number of experts does not exceed five
    • Services of the experts are essential to carry out the activities of the company.
    • The Company qualifies for the tax holiday under section 16D of 17A of the Inland Revenue Act.

Salary earned from working abroad

Is salary earned from working abroad taxed in Sri Lanka? If so, how?

Residents are taxed on overseas earnings while non-residents are liable to tax on income arising in or derived from Sri Lanka. However as per the statutory provisions non-citizens irrespective of whether or not tax resident, are exempt from any income earned outside Sri Lanka. 

Offshore income of a citizen of Sri Lanka who holds a permanent residency status in a foreign country, is exempt from tax effective from 1 April 2013.

Taxation of investment income and capital gains

Are investment income and capital gains taxed in Sri Lanka? If so, how?

From the year of assessment 2002/03, capital gains have not been taxed.

Non citizens are liable to tax on investment income if same is derived from Sri Lanka.

Dividends, Interest, and Rental Income


If 10 percent taxes have been withheld, that is considered final tax to an individual. Certain tax treaties provide for lower withholding rates.

Off shore dividend received by a resident of Sri Lanka is exempt from income tax provided such dividend is remitted through a bank account.



From 1 April 2011 to 31 March 2015, the amended withholding tax rates on interest from moneys deposited by individuals in banks or financial institutions are as follows: 

Taxable Income Rate of WHT
From LKR To LKR Percent
0 500,000 0.0
500,001 1,500,000 2.5
1,500,001 Over 8.0

With effect from 1 April 2015, interest income accruing to senior citizens is to be exempt from tax, and interest income accruing to any other individual is subject to a withholding of 2.5%.This withholding will serve as a final tax.

It has been proposed that with effect from 1 April 2016,the prevailing withholding tax rate of 2.5% on interest income accruing to an individual be removed and such income will be considered as part of the taxable income of an individual. This amendment is pending legal enactment.

With effect from 1 April 2016 interest income accruing to senior citizens will continue to be exempt from tax.

Corporate debt instruments

Interest payable on investments in Sri Lanka corporate debt instruments and government securities are is subject to a 10 percent withholding tax which is a final tax. Withholding will be made at time of issue of such instrument. Withholding of tax on corporate debt securities that carry a floating interest rate will be made at the point interest is paid. 

In the case of an individual, the tax so deducted will be the final tax.

Commencing from 1 April 2013 interest income on investments in bonds, debentures and corporate debt securities (investment made after January 1, 2013) listed in the Sri Lanka Stock Exchange, is exempt from income tax.

Other Interest Income /Royalty Income

The following exemptions are available in relation to interest/royalty income.

Commencing 1 April 2012, interest on foreign loans granted to persons in Sri Lanka by a person outside Sri Lanka is exempt from income tax in Sri Lanka. 

Commencing 1 April 2013, interest income on municipal bonds issued with the approval of the General Treasury will also be exempt from Income tax in Sri Lanka. 

Commencing 1 April 2012, offshore royalty received by a resident and remitted to Sri Lanka through a bank is exempt from income tax in Sri Lanka. 

Rental income

The profits and income derived from renting of property would be determined by reference to gross rent less rates and less 25% of cost of repairs. 

Rental on residential property is exempt for five years from date of construction (subject to pre-conditions).

Gains from stock option exercises

Residency status Taxable at:
  Grant Vest Exercise
Resident N N Y*
Non-resident N N Y*
Other (if applicable) N N Y*

* With effect from 1 April 2011 and thereafter the benefit value assessed would be the excess of market value over option price. The benefit will be taxed at the time such employee exercise the option. 

Foreign exchange gains and losses

Not taxed.

Principal residence gains and losses

Not taxed - no tax on capital gains.

Capital losses

Since capital gains is out of scope, no availability for offset.

Personal use items

Not taxed. However, if provided by employer then taxed at a nominal rate.


No gifts tax.

Additional capital gains tax (CGT) issues and exceptions

Are there additional capital gains tax (CGT) issues in Sri Lanka? If so, please discuss?

No additional CGT.

Are there capital gains tax exceptions in Sri Lanka? If so, please discuss?

As capital gains are out of scope, question of exceptions does not arise.

Pre-CGT assets

Capital gains are out of scope

Deemed disposal and acquisition

Capital gains are out of scope.

General deductions from income

What are the general deductions from income allowed in Sri Lanka?

For the years commencing prior to 1 April 2011, the following items of expenditure may be collectively deducted from assessable income and are limited to either one-third of the assessable income of the individual or LKR75,000, whichever is lower. This relief has been withdrawn effective 1 April 2011.

  • Contributions to approved provident or pension funds
  • Donations to approved charities.

However on or after 1 April 2011 deductions are allowed against the following.

  • Premia paid on special health insurance policy covering incurable disease. This is fully claimable no carry forward provision.
  • Donation to a charity which is established for the provision of institutionalized care for the sick or the needy.
  • A deduction of not less than LKR1 million in respect of expenditure on a community development project carried on in areas identified by the Government of Sri Lanka. Effective 1 April 2012.

Furthermore, Sri Lanka citizens and /or resident taxpayers are entitled to a personal allowance. Upto 2010/11 the tax free allowance was LKR300,000, and for 2011/12 and thereafter the allowance is LKR500,000.

Tax reimbursement methods

What are the tax reimbursement methods generally used by employers in Sri Lanka?

Employer bears tax on employee income subject to gross up (tax on tax).

Calculation of estimates/ prepayments/ withholding

How are estimates/prepayments/withholding of tax handled in Sri Lanka? For example, Pay-As-You-Earn (PAYE), Pay-As-You-Go (PAYG), and so on.

Pay-As-You-Earn (PAYE)

The employer makes deduction of taxes at source based on tables provided by the revenue authorities.


If not within the PAYE scheme, tax for a given year of assessment is payable direct to the Inland Revenue in quarterly instalments.

Pay-As-You-Go (PAYG) withholding

Withholding requirement under the PAYE scheme apply on terminal benefits such as, gratuity, ETF, and so on.

PAYG installments

There is no instalment mechanism for payment of terminal benefits tax in Sri Lanka.

When are estimates/prepayments/withholding of tax due in Sri Lanka? For example, monthly, annually, both, and so on.

  • PAYE: monthly
  • Self-assessment: quarterly

Relief for foreign taxes

Is there any Relief for Foreign Taxes in Sri Lanka? For example, a foreign tax credit (FTC) system, double taxation treaties, and so on?

A foreign tax credit is available where Sri Lanka taxes foreign-source income if it is provided for in the relevant double tax treaty. In the absence of a treaty, income net of tax is subject to Sri Lankan tax.

General tax credits

What are the general tax credits that may be claimed in Sri Lanka? Please list below.

There are no general tax credits available. However the following specific tax credits may be claimed against the taxpayer’s regular (or alternative minimum) tax liability:

  • pay-as-you-earn (PAYE)
  • withholding tax (WHT) on specified fees prior to 1 April 2011. The tax was rescinded effective 1 April 2011.
  • income tax paid on a self-assessment basis
  • relief under double tax treaties (DTA).

Sample tax calculation

This calculation3 assumes a married taxpayer resident in Sri Lanka with two children whose three-year assignment begins 1 April 2012 and ends 31 December 2014. The taxpayer’s annual base salary is USD100,000 and the calculation covers three years.




Salary 100,000 100,000 100,000
Bonus 20,000 20,000 20,000
Cost-of-living allowance 10,000 10,000 10,000
Rented accommodation 12,000 12,000 12,000
Company car (engine capacity above 1,500 c.c.) 6,000 6,000 6,000
Moving expense reimbursement 20,000 20,000 20,000
Home leave 0 0 0
Education allowance 3,000 3,000 3,000
Interest income from non-local sources 6,000 6,000 6,000

Exchange rate used for calculation: USD1.00 = LKR110.00.

Other assumptions

  • All earned income is attributable to local sources. All information is based on an annual basis.
  • Bonuses are paid at the end of each tax year, and accrue evenly throughout the year.
  • Interest income is not remitted to Sri Lanka.
  • The company car is used for business and private purposes and originally cost USD50,000. The vehicle was provided with fuel and a chauffeur.
  • The employer has provided rented accommodation to the employee, and the rent agreement is between the employer and the landlord.
  • All taxes are borne by the employee. The employee is deemed resident throughout the assignment.
  • Tax treaties and totalization agreements are ignored for the purpose of this calculation.

Calculation of taxable income




Days in Sri Lanka during year 365 365 275
Earned income subject to income tax      
Salary 11,000000 11,000000 11,000000
Bonus 2,200000 2,200000 2,200000
Cost-of-living allowance 1,100000 1,100000 1,100000
Rented accommodation 180000 180000 135000
Company car (over 1,500 c.c.) 0 0 0
Moving expense reimbursement 0 0 0
Home leave 0 0 0
Education allowance 330,000 330,000 330,000
Total earned income 14,810,000 14,810,000 14,765,000
Add: Other income 0 0 0
Total income 14,810,000 14,810,000 14,765,000
Tax free allowance 500,000* 500,000* 500,000*
Special exemption** 100,000 100,000 100,000
Total taxable income 14,210,000 14,210,000 14,165,000


Calculation of tax liability




Total income as above 14,210,000 14,210,000 14,165,000
Sri Lankan tax thereon 3,090,400 3,090,400 3,079,600
Domestic tax rebates (dependent spouse rebate) 0 0 0
Foreign tax credits 0 0 0
Social responsibility levy*** 0 0 0
Total Sri Lankan tax 3,090,400 3,090,400 3,079,600



* The expatriate employee is physically present in Sri Lanka for more than 183 days in each of the years, and is therefore treated in the same way as a resident. Hence that employee is entitled to a tax-free allowance of LKR500,000.

** Every resident non-citizen employee is additionally given a special exemption of LKR100,000 per annum upto 31 March 2013. Effective 1 April 2013, this will be allowed as a deduction from assessable income. It is proposed to be increased to LKR 250,000 effective from 1 April 2015.

*** Social Responsibility Levy of 1 percent was rescinded with effect from 1 April 2008.


1Certain tax authorities adopt an ‘economic employer’ approach to interpreting Article 15 of the OECD model treaty which deals with the Dependent Services Article. In summary, this means that if an employee is assigned to work for an entity in the host country for a period of less than 183 days in the fiscal year (or, a calendar year of a 12-month period), the employee remains employed by the home country employer but the employee’s salary and costs are recharged to the host entity, then the host country tax authority will treat the host entity as being the "economic employer" and therefore the employer for the purposes of interpreting Article 15. In this case, Article 15 relief would be denied and the employee would be subject to tax in the host country.

2For example, an employee can be physically present in the country for up to 60 days before the tax authorities will apply the ‘economic employer’ approach.

3Sample calculation generated by KPMG, the Sri Lankan member firm of KPMG International, based on the Inland Revenue Statute.

© 2016 KPMG Ford, Rhodes, Thornton & Co., a Sri Lanka partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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