How is foreign income taxed in Sri Lanka? (2025/2026)

If money reaches you from outside Sri Lanka — a foreign salary, an overseas dividend, rent on a property abroad, or fees from international clients — it is generally taxable in Sri Lanka if you are tax-resident here. This guide explains how foreign income is taxed for the Year of Assessment 2025/2026 (1 April 2025 to 31 March 2026): the concessionary cap on service income, how to convert foreign currency, and how a double-tax treaty stops you from being taxed twice.

Is foreign income taxable in Sri Lanka?

For a resident individual, yes — Sri Lanka taxes worldwide income, so foreign-sourced amounts are brought into your assessable income alongside local income. You are generally resident if you are present in Sri Lanka for 183 days or more in the year of assessment.

The headline figure that applies to everyone is the personal relief of LKR 1,800,000 a year. Foreign and local income are totalled, the relief is applied, and the balance is taxed.

The 15% cap on foreign-currency service income

The most important rule for freelancers, consultants, and exporters of services: service income earned in foreign currency and remitted to Sri Lanka through a bank is taxed at a maximum rate of 15%, with effect from 1 April 2025.

Two things to hold onto:

• It is a cap, not a flat tax. Your liability on that income is computed through the normal progressive bands and then limited to 15% — so you never pay more than 15% on qualifying foreign-service income, and you may pay less if your overall income is low.
• It is conditional. The income must be for services, and it must be received in foreign currency through the Sri Lankan banking system. The old blanket exemption for foreign services was withdrawn and replaced by this 15% concession.

Not all foreign income is "service income." A foreign dividend, interest, or rent follows its own treatment rather than the 15% service cap, so it is worth identifying what kind of foreign income you have before you compute anything. If you earn this income from freelance or remote work, the freelancer and remote worker tax guide covers installments and expenses too.

Converting foreign currency

Foreign receipts must be declared in Sri Lankan rupees. Convert each receipt at the exchange rate applicable on the date it was received — the Central Bank of Sri Lanka (CBSL) rates are the standard reference. Because rates move daily, USD 1,000 received in May and USD 1,000 received in November can translate to different rupee amounts. Convert receipt by receipt rather than using a single year-end rate.

Double taxation: how the treaty credit works

If a foreign country has already taxed the same income — say a US client withheld tax, or a foreign dividend arrived net of tax — you may be entitled to relief so you are not taxed twice. Sri Lanka has Double Taxation Avoidance Agreements (DTAs) with many countries, including the United Kingdom, the United States, and Singapore.

The mechanism is a foreign tax credit: the foreign tax you paid is credited against your Sri Lankan tax on the same income. The credit is capped — it cannot exceed the Sri Lankan tax attributable to that foreign income. In other words, the treaty relieves double taxation; it does not refund foreign tax beyond what Sri Lanka would have charged.

Foreign tax credit = the lower of (foreign tax paid) and (Sri Lankan tax on that income). Keep the withholding certificate or proof of foreign tax — without it, the credit can be denied.

How to declare foreign income

1. Identify the type of each foreign amount — service fee, salary, dividend, interest, or rent.
2. Convert each receipt to rupees at the rate on the date received.
3. Apply the right treatment — the 15% cap for qualifying foreign-currency service income, or the normal rules for other types.
4. Claim the foreign tax credit where a DTA applies, capped at the Sri Lankan tax on that income, with documentation.
5. Report it on your return by 30 November 2026 and settle any balance.

A note on the figures

The personal relief of LKR 1,800,000, the 15% foreign-service cap, and the treaty-credit mechanism described here are for the Year of Assessment 2025/2026 under the Inland Revenue (Amendment) Act, No. 02 of 2025. Treaty terms differ country by country and individual facts matter — confirm against current IRD guidance, the relevant DTA, or your live TaxWise computation before relying on these figures. TaxWise prepares IRD-ready schedules; you submit the return yourself.