Port City salary is exempt only if your employer is licensed by the Colombo Port City Economic Commission and you're paid in a designated foreign currency. The 2026 amendment (Act No. 1 of 2026) keeps the exemption for staff of employers approved before it took effect, for a three-year transition reported as 1 February 2026 to 31 January 2029. Staff of employers approved later are taxed from day one. Salary paid in LKR is never exempt. For example, LKR 450,000 a month in taxable salary costs about LKR 816,000 a year in tax at 2025/2026 rates, while the same pay exempt in USD costs nothing.
If you work for a company in the Colombo Port City, there's a good chance you've been told your salary is tax free. For many people it has been. But the exemption comes with conditions, and a 2026 law change put an end date on it. This guide explains who's exempt, what changed, what happens if you're paid in rupees, and whether you need to file a return. There are worked examples with real numbers so you can check your own situation.
Where the Port City exemption comes from
Two laws work together here.
The Inland Revenue Act No. 24 of 2017 lists exempt amounts in its Third Schedule. Item (x), added in 2023 with effect from 27 May 2021, exempts "the employment income of an employee employed in terms of section 35" of the Colombo Port City Economic Commission Act, "upto the extent provided for in that Act".
So the Inland Revenue Act points to the Port City law, and the Port City law sets the limits.
Section 35 of the Colombo Port City Economic Commission Act No. 11 of 2021 lets any authorised person in the Port City employ residents or non-residents, and says those employees "shall be remunerated in a designated foreign currency, other than in Sri Lanka Rupees". Employment income "so received" is exempt from income tax, for residents and non-residents alike.
That gives you two conditions in the original law:
| Condition | What it means for you |
|---|---|
| Your employer is a Port City authorised person | The company is licensed or approved by the Colombo Port City Economic Commission. It doesn't have to be a Business of Strategic Importance. |
| You're paid in a designated foreign currency | Your salary arrives in USD, EUR or another designated currency, not in Sri Lanka Rupees. |
A lot of people assume only staff of big strategic projects qualify. The law doesn't say that. The employee exemption applies to the staff of any authorised person, as long as the pay is in foreign currency.
What changed in 2026
The Colombo Port City Economic Commission (Amendment) Act, No. 1 of 2026 was certified on 20 January 2026. It replaced section 35 and split employers into two groups.
| Your employer was approved | What happens to your salary |
|---|---|
| Before the amendment came into force | Exempt for a three-year transition period, as long as you're still paid in foreign currency |
| On or after the amendment came into force | Taxable from day one, like any other salary in Sri Lanka |
Published summaries of the Act report the transition window as 1 February 2026 to 31 January 2029. Foreign currency payments must also comply with the Foreign Exchange Act No. 12 of 2017.
One honest caveat. The window dates above come from professional commentary on the Act (Varners and TaxAdvisor.lk), and the sources don't fully agree on how the start date is counted. Before you rely on the exact dates for a large decision, check the gazetted text of Act No. 1 of 2026 or ask your employer's HR or payroll team which date they're using.
What if you're paid in rupees?
Then the exemption doesn't apply to that money.
Section 35 only exempts employment income received in a designated foreign currency. Anything your employer pays you in LKR is taxed in the normal way, with APIT deducted through payroll. This was true under the original law and it's still true after the 2026 change.
Here's how the common situations work out:
| Your situation | Tax treatment |
|---|---|
| Whole salary paid in LKR | Taxable |
| Contract says USD, but the employer pays you the LKR equivalent | Taxable. What counts is the currency you were paid in, not the currency in your contract. |
| Paid in USD into your foreign currency account, and you convert some to LKR later | Exempt. You received it in foreign currency, and converting it afterwards doesn't change that. |
| Basic salary in USD, allowances (transport, meals) in LKR | Split. The USD part is exempt and the LKR allowances are taxable. |
| USD credited straight into an LKR account | Unclear. The law treats the payment as a credit to a personal foreign currency account, so get advice before assuming it's exempt. |
Worked examples
All three examples use the Year of Assessment 2025/2026 rates: a personal relief of LKR 1,800,000, then 6% on the next LKR 1,000,000, 18%, 24% and 30% on the next three LKR 500,000 slices, and 36% above LKR 4,300,000. If you want the full rate table, see how much tax you pay on your salary, and for everything else that changed this year, see the 2025/2026 changes.
Example 1: Paid in USD by an existing Port City employer
Nimali works for a software firm that was approved by the Port City Commission in 2023. She's paid USD 2,000 a month into her foreign currency account. At an assumed rate of LKR 300 to the dollar, that's LKR 600,000 a month, or LKR 7,200,000 for the year.
| LKR | |
|---|---|
| Annual salary (USD, LKR equivalent) | 7,200,000 |
| Exempt under section 35 | 7,200,000 |
| Taxable employment income | 0 |
| Income tax | 0 |
Her employer shouldn't deduct APIT from this salary. If the same salary were taxable, the bill would be LKR 1,464,000 for the year using the same bands as Example 2, so the exemption is worth a lot while it lasts.
Example 2: Paid in LKR, or working for a new entrant
Kasun joins a Port City company that was approved after the 2026 amendment came into force. Or he works for an older employer but is paid in rupees. Either way, his salary is taxable. He earns LKR 450,000 a month, which is LKR 5,400,000 a year.
| Step | Amount (LKR) | Tax (LKR) |
|---|---|---|
| Annual salary | 5,400,000 | |
| Less personal relief | 1,800,000 | |
| Taxable income | 3,600,000 | |
| First 1,000,000 at 6% | 1,000,000 | 60,000 |
| Next 500,000 at 18% | 500,000 | 90,000 |
| Next 500,000 at 24% | 500,000 | 120,000 |
| Next 500,000 at 30% | 500,000 | 150,000 |
| Balance at 36% | 1,100,000 | 396,000 |
| Total income tax | 816,000 | |
| Less APIT deducted by employer | 816,000 | |
| Balance payable | 0 |
That's about LKR 68,000 a month through APIT. You can check a monthly figure with the PAYE / APIT calculator, and our APIT guide explains how the deductions work. If his employer deducted the right amount every month, there's nothing left to pay at year end.
Example 3: USD salary with LKR allowances
Ruwan is paid a basic salary of USD 1,500 a month (LKR 450,000 at LKR 300 to the dollar) by an existing Port City employer. On top of that he gets LKR 200,000 a month in rupee allowances.
| LKR | |
|---|---|
| USD salary, annual (exempt) | 5,400,000 |
| LKR allowances, annual (taxable) | 2,400,000 |
| Taxable employment income | 2,400,000 |
| Less personal relief | 1,800,000 |
| Taxed at 6% | 600,000 |
| Income tax | 36,000 |
The personal relief is set against the taxable part only. The exempt USD salary doesn't use any of it up, and it doesn't push the allowances into a higher band.
What happens when the transition ends
If the window does end on 31 January 2029, the Year of Assessment 2028/2029 (1 April 2028 to 31 March 2029) will be split in two:
| Months | Treatment |
|---|---|
| April 2028 to January 2029 (10 months) | Exempt, if you're still paid in foreign currency |
| February 2029 to March 2029 (2 months) | Taxable |
From 1 April 2029, all Port City salary is taxed like any other employment income, which is covered in our guide for salaried employees. If you're on a USD salary now, it's worth checking with your employer how they plan to start APIT deductions, and budgeting for the drop in take-home pay.
Do you need to file a tax return?
Usually not, if the exempt salary is your only income.
Under section 94 of the Inland Revenue Act, a resident individual with no tax payable for the year doesn't have to file a return. If all your salary is exempt and you have no other taxable income, that's you.
If your salary is taxable, you generally don't need to file either, as long as your employer deducted APIT correctly and your only other income is small. The Inland Revenue (Amendment) Act, No. 11 of 2026 made this explicit for people whose interest income for the year is LKR 5,000 or less.
You'll need to file if:
- you have other income with tax still to pay, like rent, a side business or foreign income
- your employer didn't deduct APIT on taxable salary
- the IRD sends you a notice asking for a return
You might want to file anyway if too much APIT was deducted and you want a refund. That includes APIT taken from salary that should have been exempt.
The 2026 amendment also added section 94(2A), which requires a return from anyone carrying on a Business of Strategic Importance. That rule is for the business, not its employees.
If you do file, exempt salary goes in Part II of Schedule 1 (Cage 115, which flows to Cage 210 on the main return). Taxable salary goes in Part I as usual. Our guide on how to file your income tax return walks through the rest.
A quick checklist
- Check your employer is licensed or approved by the Colombo Port City Economic Commission.
- Find out when your employer was approved. Before the 2026 amendment means you're in the transition. On or after means your salary is taxable.
- Check the currency each payment actually arrives in. Foreign currency can be exempt; rupees are taxable.
- Work out the taxable part, if any, and confirm your employer is deducting APIT on it.
- Decide whether you need to file, using the section above.
Sources
- Inland Revenue Act No. 24 of 2017, consolidated text published by the Inland Revenue Department, Third Schedule item (x) and section 94
- Colombo Port City Economic Commission Act No. 11 of 2021, section 35 (Colombo Port City Economic Commission)
- Colombo Port City Economic Commission (Amendment) Act, No. 1 of 2026 (Department of Government Printing)
- Inland Revenue (Amendment) Act, No. 11 of 2026, section 19 (certified 3 June 2026)
- Businesses of Strategic Importance under the Colombo Port City regime (Varners)
- Colombo Port City Economic Commission (Amendment) Act, No. 1 of 2026: key changes (TaxAdvisor.lk)
- Income tax exemptions for employees of authorised persons limited (Parliament of Sri Lanka, 6 January 2026)
Not sure where you stand?
The rules turn on your employer's approval date and the currency you're paid in, and getting either wrong can mean an unexpected tax bill. You can work out your position and prepare your return on TaxWise, or book a consultation if you'd like someone to look at your payslips with you.
This guide reflects the law as we understand it on 2 October 2026. It isn't legal advice. The transition dates come from published summaries of Act No. 1 of 2026, so confirm them against the gazetted Act or with a tax professional before relying on them.
Frequently asked questions
Is Colombo Port City salary tax free in Sri Lanka?+−
It can be. Under section 35 of the Colombo Port City Economic Commission Act No. 11 of 2021 and Third Schedule item (x) of the Inland Revenue Act, salary paid in a designated foreign currency by a Port City authorised person is exempt. After the 2026 amendment, that exemption only continues for staff of employers approved before the amendment, for a three-year transition.
Do I have to work for a Business of Strategic Importance to get the exemption?+−
No. The employee exemption in section 35 applies to staff of any Port City authorised person, as long as they're paid in a designated foreign currency. Business of Strategic Importance status matters for the company's own tax incentives, not for the employee exemption.
When does the Port City salary exemption end?+−
Published summaries of the Colombo Port City Economic Commission (Amendment) Act, No. 1 of 2026 report a three-year transition from 1 February 2026 to 31 January 2029 for employers approved before the amendment. From then on, Port City salary is taxed like any other employment income. Confirm the exact dates against the gazetted Act.
Is my Port City salary exempt if I'm paid in rupees?+−
No. Section 35 only exempts employment income received in a designated foreign currency. Salary or allowances paid in Sri Lanka Rupees are taxable and should have APIT deducted, even if your contract is denominated in USD.
I joined a Port City company in 2026. Is my salary exempt?+−
It depends on when your employer was approved, not when you joined. If the company was approved before the 2026 amendment came into force, your foreign currency salary is exempt during the transition. If the company was approved on or after that date, your salary is taxable from day one.
Do Port City employees need to file an income tax return?+−
Usually not, if exempt salary is your only income, because a resident with no tax payable isn't required to file under section 94 of the Inland Revenue Act. You'll need to file if you have other taxable income, if APIT wasn't deducted on taxable salary, or if the IRD sends you a notice. The new section 94(2A) filing rule applies to Business of Strategic Importance companies, not their employees.
My employer deducted APIT from my exempt USD salary. Can I get it back?+−
Yes. APIT deducted from salary that should have been exempt is a credit on your annual return, so filing a return lets you claim it back as a refund. Ask your employer to stop the deductions going forward.