Interest paid by banks and financial institutions to resident individuals is withheld at 10% for Y/A 2025/2026, up from 5% previously. This withholding is an advance, not a final tax — it is credited against your overall liability when you file. If your total assessable income for the year is LKR 1,800,000 or less, file a Declaration of Non-Taxable Status with your bank so the 10% is never deducted, or claim it back as a refund if it already was.
If you hold a savings account or a fixed deposit, the interest it earns is taxable income, and your bank now deducts tax on it before it reaches you. For the Year of Assessment 2025/2026, resident individuals face a 10% withholding tax (WHT) on bank interest — up from 5% — deducted at source.
What counts as interest income
Interest income is what your money earns while it sits with a bank or financial institution. The common forms are:
- Savings account interest
- Fixed deposit (FD) interest
- Interest on call deposits and money-market accounts
- Interest paid by licensed finance companies on deposits
All of this is assessable income for a resident individual. It is added to your other income for the year — salary, rent, business profits — and the personal relief of LKR 1,800,000 and the progressive tax bands are applied to the combined total. Interest is not taxed in its own silo at final assessment; it forms part of one combined figure.
What changes the day-to-day experience is that the bank deducts tax at source, before you ever see the money, so most savers feel the tax before they file anything.
The rate went from 5% to 10%
The headline change for Y/A 2025/2026 is the rate. With effect from 1 April 2025, withholding tax on interest paid by banks and financial institutions to residents rose from 5% to 10%.
This deduction is sometimes called Withholding Tax (WHT) and sometimes Advance Income Tax (AIT) — on interest, both terms refer to the same charge. The word "advance" carries the key idea: the 10% is not necessarily your final tax on that interest. It is tax collected early, and it is set against your actual liability when you file your annual return.
| Who receives the interest | Rate from 1 April 2025 |
|---|---|
| Resident individual | 10% |
| Non-resident | 15% (a tax treaty may reduce this) |
For most people with ordinary savings, the bank takes 10% and that is the end of it in practice. Two groups need to look closer: savers whose total income is low enough that they should not be paying this tax at all, and savers whose overall income is high enough that 10% at source does not cover their full liability.
How banks deduct it
You do not file anything to make the deduction happen. The bank calculates interest on your account, withholds 10%, remits it to the Inland Revenue Department (IRD), and credits you the net amount. On a fixed deposit, the deduction usually happens when interest is paid or credited — monthly, at maturity, or on the schedule your FD follows.
The bank issues a withholding certificate (often called an interest certificate) showing the gross interest and the tax deducted. Keep these. They are your proof for claiming credit at the annual return. If you hold deposits at several banks, you need a certificate from each to put the right total on your return.
A worked figure:
| Item | Amount (LKR) |
|---|---|
| Gross fixed deposit interest for the year | 200,000 |
| Less: 10% WHT deducted by the bank | (20,000) |
| Net interest credited to your account | 180,000 |
Your interest certificate shows gross LKR 200,000 and tax of LKR 20,000. That LKR 20,000 is a credit you carry into your annual return.
Check your interest tax with the bank interest AIT calculator
The Declaration of Non-Taxable Status
This is the part that matters most for retirees, students, and anyone living on modest savings. If your total assessable income for the year is LKR 1,800,000 or less, you fall at or below the personal relief, meaning your final income tax is nil. Without action, the bank would still deduct 10% on your interest, leaving you to chase a refund.
To prevent that, a resident can file a Declaration of Non-Taxable Status with the bank — a self-declaration stating that your total assessable income is at or below the threshold, so tax should not be withheld on your interest.
Two practical points matter here:
- The declaration is your responsibility and your statement of fact. If your income later turns out to be above the threshold, the tax is still due and you would need to settle it. Make the declaration honestly, on the basis of what you reasonably expect your total income for the year to be.
- The declaration goes to each bank that pays you interest, not to the IRD — the bank relies on it to stop withholding. If you hold deposits at three banks, file the declaration with all three.
If you only realise after the fact that you were below the threshold, you have not lost the money. The deducted tax can be reclaimed by filing your annual return and showing that your final liability is nil, at which point the withheld amount becomes a refund.
For the full mechanics of the LKR 1,800,000 threshold, see our personal relief guide.
When 10% is not the end of it
The opposite situation applies to higher earners. The bank deducts a flat 10% on interest regardless of which tax band you actually sit in. But interest is added to your other income, and the combined total runs through the progressive bands, where the top rate reaches 36%.
So if your overall income puts your interest into a band above 10%, the 10% withheld is only a down payment. When you file, the interest is taxed at your marginal rate, the 10% already deducted is credited, and you settle the difference. You are not taxed twice on the same interest — you simply pay the gap between what was withheld and what is actually due.
Y/A 2025/2026 tax bands (taxable income after relief)
| Taxable income after relief (LKR) | Rate |
|---|---|
| First 1,000,000 | 6% |
| Next 500,000 | 18% |
| Next 500,000 | 24% |
| Next 500,000 | 30% |
| Balance | 36% |
These bands and the LKR 1,800,000 personal relief are set by the Inland Revenue (Amendment) Act, No. 02 of 2025, as published by the Inland Revenue Department (IRD).
Worked examples
Example 1 — Interest tops up a salary, into a higher band
Scenario: Nimal earns a salary of LKR 3,600,000 a year and holds fixed deposits earning LKR 500,000 in interest for the year. No other income.
Step 1 — Note the WHT already deducted on interest
| Item | Amount (LKR) |
|---|---|
| Gross interest | 500,000 |
| WHT deducted by bank (10%) | 50,000 |
| Net interest received | 450,000 |
Step 2 — Combine all income and apply relief
| Step | Item | Amount (LKR) |
|---|---|---|
| 1 | Salary | 3,600,000 |
| 2 | Gross interest | 500,000 |
| 3 | Total assessable income | 4,100,000 |
| 4 | Less: personal relief | (1,800,000) |
| 5 | Taxable income | 2,300,000 |
Step 3 — Run the bands
| Band | Amount (LKR) | Rate | Tax (LKR) |
|---|---|---|---|
| First | 1,000,000 | 6% | 60,000 |
| Second | 500,000 | 18% | 90,000 |
| Third | 500,000 | 24% | 120,000 |
| Fourth | 300,000 | 30% | 90,000 |
| Total | 2,300,000 | 360,000 |
Step 4 — Credit WHT and APIT
| Item | Amount (LKR) |
|---|---|
| Gross tax liability | 360,000 |
| Less: WHT on interest already deducted | (50,000) |
| Less: APIT on salary (approx. LKR 222,000 on taxable salary component) | (222,000) |
| Balance payable on annual return | 88,000 |
Nimal's interest was taxed at 10% at source, but because his combined income puts the interest into higher bands, he owes a further balance on the return — the 10% was only a down payment on that portion of income.
Example 2 — Interest is the only income, below the threshold
Scenario: Malini is retired. Her only income is LKR 1,500,000 in fixed deposit interest for the year, spread across two banks.
Step 1 — Check against the personal relief
| Item | Amount (LKR) |
|---|---|
| Gross interest | 1,500,000 |
| Personal relief | 1,800,000 |
| Taxable income (floored at zero) | 0 |
Malini's total assessable income of LKR 1,500,000 is below the LKR 1,800,000 relief, so her final tax liability is nil.
Step 2 — What Malini should do
She should file a Declaration of Non-Taxable Status with both banks so they stop deducting the 10% WHT going forward. If either bank had already deducted tax before she filed the declaration — say LKR 150,000 in total — she can claim that back as a refund by filing her annual return.
Check your interest tax with the bank interest AIT calculator
How interest fits into the annual return
When you prepare your Year of Assessment 2025/2026 return, interest income flows through these steps:
- Total your gross interest across all banks and finance companies, using the interest certificates. Use the gross figure, not the net amount that landed in your account.
- Add it to your other income for the year so it forms part of one combined assessable income.
- Apply the personal relief and the bands to the combined total to find your gross tax.
- Claim the WHT credit. The 10% the banks deducted is set against your tax liability, the same way WHT credits work for other income types.
- Settle the balance or claim the refund. If too little was withheld, you pay the difference; if your final liability is below what was withheld, the excess comes back as a refund.
The annual return for Y/A 2025/2026 is due on or before 30 November 2026, and e-filing is mandatory. If you are filing for the first time, see our how to file an income tax return guide. Note also that the Statement of Estimated Tax has been abolished from this year, so your liability is based on actual income reported in the annual return rather than an upfront estimate.
Practical steps for savers
- Collect an interest certificate from every bank and finance company that paid you interest during the year.
- Check your total assessable income against LKR 1,800,000. If you are at or below it, file a Declaration of Non-Taxable Status with each bank.
- If tax was already deducted and your final liability is nil, file a return to claim it back as a refund — the IRD will not issue it automatically.
- If your income is higher, expect the 10% withheld to be only a partial payment; budget for the difference at filing.
- Keep every certificate with your records for at least five years in case the IRD reviews your assessment.
Quick reference
- WHT rate on resident interest: 10% for Y/A 2025/2026, up from 5% previously.
- Non-resident rate: 15%, subject to treaty relief.
- Interest is an advance, not final: the 10% withheld is credited against your total liability, computed through the progressive bands.
- Declaration of Non-Taxable Status: file with each bank if total assessable income is LKR 1,800,000 or less, to stop withholding at source.
- Refund route: if tax was already withheld and your final liability is nil, claim it back through your annual return.
- Personal relief: LKR 1,800,000, applied once across all income, including interest.
- Filing deadline: 30 November 2026.
- Authority: Inland Revenue (Amendment) Act, No. 02 of 2025.
A note on the figures
All figures and rates on this page apply to Year of Assessment 2025/2026 (1 April 2025 to 31 March 2026) under the Inland Revenue (Amendment) Act, No. 02 of 2025. Tax law can change; confirm critical figures — including the 10% WHT rate and the LKR 1,800,000 threshold — against current IRD guidance before filing. TaxWise prepares IRD-ready schedules and calculations — you submit the return yourself. This page is educational and does not constitute legal or financial advice.
Frequently asked questions
How much tax is deducted from bank interest in Sri Lanka?+−
Banks and financial institutions deduct 10% withholding tax on interest paid to resident individuals for Y/A 2025/2026, up from 5% in the prior year. This is deducted automatically before the interest reaches your account — you do not need to do anything for the deduction itself to happen.
Can I avoid tax on my fixed deposit interest?+−
If your total assessable income for the year is LKR 1,800,000 or less, you can file a Declaration of Non-Taxable Status with your bank so the 10% is not deducted at all. This applies only to interest income; it does not extend to other income types such as dividends. If your income is above the threshold, the tax is genuinely due and cannot be avoided.
What happens if my income is below the threshold but tax was already deducted?+−
You can claim the deducted tax back as a refund by filing your annual income tax return and showing that your final liability, after the personal relief, is nil. The IRD does not issue automatic refunds — filing the return is the only way to recover the withheld amount.
Do I need to file a return if my only income is bank interest?+−
If your gross interest income exceeds LKR 1,800,000, you have a filing obligation and must file by 30 November 2026 via the IRD e-Services portal (RAMIS). If it is below that threshold, you technically owe no tax, but you should still file if WHT was deducted at source — filing is the only way to claim it back.