What changed in Sri Lankan income tax for 2025/2026?
Six things changed for Y/A 2025/2026. The tax-free personal relief rose from LKR 1,200,000 to LKR 1,800,000. The 12% tax band was removed, so the bands now run 6 / 18 / 24 / 30 / 36%. Withholding tax on bank interest for residents doubled from 5% to 10%. Capital Gains Tax on individuals rose from 10% to 15%. The Statement of Estimated Tax was abolished. Foreign-currency service income remitted through a Sri Lankan bank is now capped at 15%.
The Year of Assessment 2025/2026 brings the biggest set of personal income tax changes Sri Lanka has seen in several years. Under the Inland Revenue (Amendment) Act, No. 02 of 2025, the tax-free threshold has risen, one band has been removed, withholding tax on savings interest has doubled, and the capital gains rate has increased — all effective from 1 April 2025.
What changed, in one view
The changes affect employees, savers, investors, and anyone earning in foreign currency. The table below shows each change at a glance.
| Item | Before (Y/A 2024/2025) | From 1 April 2025 (Y/A 2025/2026) |
|---|---|---|
| Personal relief (tax-free threshold) | LKR 1,200,000 | LKR 1,800,000 |
| Income tax bands | 6 / 12 / 18 / 24 / 30 / 36% | 6 / 18 / 24 / 30 / 36% |
| Bank interest WHT — residents | 5% | 10% |
| Capital Gains Tax — individuals | 10% | 15% |
| Statement of Estimated Tax (SET) | Required | Abolished |
| Foreign-currency service income | Various rates | Capped at 15% |
The authority for all of these is the Inland Revenue (Amendment) Act, No. 02 of 2025, which amended the Inland Revenue Act No. 24 of 2017. The full text of the amendment is published by the Inland Revenue Department (IRD). The changes apply to income earned from 1 April 2025 onwards; income earned before that date is assessed under the old rules.
The personal relief rises to LKR 1,800,000
The personal relief is the amount of income every resident individual can earn before any income tax applies. For Y/A 2025/2026 it is LKR 1,800,000 a year, up from LKR 1,200,000 — a rise of LKR 600,000.
In monthly terms, this works out to LKR 150,000 a month. A resident individual whose total assessable income for the year does not exceed LKR 1,800,000 owes nil income tax for Y/A 2025/2026.
Two things to notice:
- The relief applies to your total assessable income from all sources combined — salary, rental income, interest, and anything else — not to each source separately.
- Only resident individuals qualify. Residency means being present in Sri Lanka for 183 days or more in the year, or having a permanent place of abode here. Non-residents are assessed differently.
The relief is applied first, and only the balance — your taxable income — is then run through the bands. For a deep explanation of the mechanics with worked examples at multiple income levels, see our personal relief guide.
New tax bands: the 12% band is gone
Once the personal relief is subtracted, the balance is taxed through progressive bands. The old 12% band has been removed entirely, so the step from 6% to the next rate is now wider.
Y/A 2025/2026 tax bands (taxable income after relief)
| Taxable income after relief (LKR) | Equivalent total income band (LKR) | Rate |
|---|---|---|
| First 1,000,000 | 1,800,001 – 2,800,000 | 6% |
| Next 500,000 | 2,800,001 – 3,300,000 | 18% |
| Next 500,000 | 3,300,001 – 3,800,000 | 24% |
| Next 500,000 | 3,800,001 – 4,300,000 | 30% |
| Balance | Above 4,300,000 | 36% |
Each band only taxes the slice of income that falls inside it. Earning more never increases the tax on income already taxed at a lower rate.
Comparison with the old bands (Y/A 2024/2025)
| Taxable income after relief (LKR) | Old rate | New rate |
|---|---|---|
| First 1,200,000 | 6% | 6% |
| Next 1,800,000 (old 12% band) | 12% | removed |
| Next 1,000,000 | 18% | now starts at taxable income LKR 1,000,001 |
| … | … | … |
The practical consequence: income that previously fell in the 12% band now falls partly in the 6% band and partly in the 18% band, depending on the income level. For someone in the middle of the old 12% range, the shift can go either way.
Run the numbers in the income tax calculator to see the old and new figures side by side for your income.
Bank interest WHT doubled to 10%
Interest paid by licensed banks and financial institutions to resident individuals is now subject to Withholding Tax (WHT) at 10%, up from 5%. WHT is a tax the bank deducts at source before crediting interest to your account. You see the net amount in your statement; the 10% goes directly to the Inland Revenue Department (IRD).
The Declaration of Non-Taxable Status
A few conditions matter: if your total assessable income for Y/A 2025/2026 is LKR 1,800,000 or less, you are below the tax-free threshold and should not owe tax on your savings interest. In that situation, you may file a Declaration of Non-Taxable Status with your bank — a self-declaration instructing the bank not to deduct the 10%. If the 10% has already been deducted from interest earned this year before you filed the declaration, you can claim it back through your annual income tax return.
This relief is most relevant for:
- Retirees living on fixed deposit income
- Students or dependants with minimal other income
- Anyone whose total annual income (salary + interest + all other sources) stays below LKR 1,800,000
If your income sits above the threshold, the 10% WHT counts as Advance Income Tax (AIT) paid on your behalf. It reduces your final tax bill for the year; you settle the difference (or claim a refund if over-withheld) through the annual return.
For a full explanation of how bank interest is assessed and how WHT is reconciled, see our bank interest tax guide.
Capital Gains Tax rose to 15%
Capital Gains Tax (CGT) on the realisation of investment assets by individuals and partnerships is now 15%, up from 10%, under the Inland Revenue (Amendment) Act, No. 02 of 2025.
CGT applies to gains on:
- Land and buildings
- Shares and other securities (outside the Colombo Stock Exchange exemptions)
- Other investment assets as defined in the Inland Revenue Act
The taxable gain is the consideration received minus the cost of acquisition, adjusted for any improvements. If you sold land, a property, or off-market shares during Y/A 2025/2026, the gain is taxed at 15%.
A few conditions matter:
- Gains on listed shares traded on the Colombo Stock Exchange are exempt from CGT under the current rules — check the current exemption conditions before relying on this.
- CGT is a final withholding tax for individuals in most cases, meaning it does not add to your income for band purposes.
- Losses on one investment asset cannot be set off against gains on another in the same year under current rules.
For the full rules on how CGT is computed, see our capital gains tax guide.
The Statement of Estimated Tax is abolished
From Y/A 2025/2026, the Statement of Estimated Tax (SET) is abolished. Under the previous system, taxpayers with income other than employment income were required to estimate their income for the year and submit that estimate to the IRD — then reconcile the estimate against actual income when filing the annual return.
The SET is gone. Your tax liability is now based entirely on your actual income as reported in the annual return. There is no requirement to estimate or pre-file anything other than the return itself.
This simplifies compliance for:
- Sole proprietors and self-employed individuals
- Landlords receiving rental income
- Investors receiving dividends and interest
- Anyone with multiple or variable income sources
You still keep full records and file the annual return by the deadline, but the intermediate estimate step has been removed.
Foreign-currency service income capped at 15%
If you earn income from providing services in foreign currency and remit it to Sri Lanka through the Sri Lankan banking system, that income is taxed at a maximum effective rate of 15% for Y/A 2025/2026.
Two things to notice:
- This is a cap, not a flat rate. Income is first computed through the normal bands and personal relief, and then the effective rate is capped at 15% on the foreign-service portion.
- The cap applies only to service income received in foreign currency through a licensed Sri Lankan bank. Foreign dividends, interest, rental income, and employment income from overseas do not qualify for this cap — they follow their respective rules.
This is the rule that affects freelancers, digital consultants, software developers, and exporters of professional services who invoice foreign clients. To qualify, route payment through your Sri Lankan bank account rather than retaining it offshore or using informal channels.
For the detailed treatment of foreign income, see our foreign income tax guide.
Worked examples
The two changes that affect the most people — the higher relief and the removal of the 12% band — pull in opposite directions. Whether you pay more or less than last year depends entirely on where your income sits. Two examples show the contrast.
Example 1: Lower income — the relief is the dominant effect
Scenario: Kasun earns a salary of LKR 2,200,000 a year (LKR 183,333 a month). He has no other income.
Under Y/A 2024/2025 (old rules)
| Step | Item | Amount (LKR) |
|---|---|---|
| 1 | Assessable income | 2,200,000 |
| 2 | Less: personal relief | (1,200,000) |
| 3 | Taxable income | 1,000,000 |
| 4 | Tax on 1,000,000 @ 6% | 60,000 |
| 5 | Total tax | 60,000 |
Under Y/A 2025/2026 (new rules)
| Step | Item | Amount (LKR) |
|---|---|---|
| 1 | Assessable income | 2,200,000 |
| 2 | Less: personal relief | (1,800,000) |
| 3 | Taxable income | 400,000 |
| 4 | Tax on 400,000 @ 6% | 24,000 |
| 5 | Total tax | 24,000 |
Kasun saves LKR 36,000 a year — a 60% reduction. The higher relief pulls LKR 600,000 out of taxable income, and at his income level, that saving at the 6% rate is not offset by the band change above.
Example 2: Higher income — the band removal matters more
Scenario: Nimali is a salaried employee. Her total assessable income for the year is LKR 3,600,000 — LKR 300,000 a month. She has no other income.
Under Y/A 2024/2025 (old rules)
| Step | Item | Amount (LKR) |
|---|---|---|
| 1 | Assessable income | 3,600,000 |
| 2 | Less: personal relief | (1,200,000) |
| 3 | Taxable income | 2,400,000 |
| 4 | Tax on first 1,200,000 @ 6% | 72,000 |
| 5 | Tax on next 1,200,000 @ 12% | 144,000 |
| 6 | Total tax | 216,000 |
Under Y/A 2025/2026 (new rules)
| Step | Item | Amount (LKR) |
|---|---|---|
| 1 | Assessable income | 3,600,000 |
| 2 | Less: personal relief | (1,800,000) |
| 3 | Taxable income | 1,800,000 |
| 4 | Tax on first 1,000,000 @ 6% | 60,000 |
| 5 | Tax on next 500,000 @ 18% | 90,000 |
| 6 | Tax on remaining 300,000 @ 24% | 72,000 |
| 7 | Total tax | 222,000 |
Nimali pays LKR 222,000 under the new rules — LKR 6,000 more than the old LKR 216,000, despite the higher relief. The income that used to be taxed in the 12% band now falls in the 18% and 24% bands, and that extra cost outweighs the saving from the higher relief at her income level.
Who is better off and who is worse off?
The break-even point — where the new rules produce the same tax as the old — sits at approximately LKR 3,300,000 to 3,500,000 of total annual income. Below that, most employees pay less. Above that, most pay more.
| Annual income (LKR) | Direction | Why |
|---|---|---|
| Up to 1,800,000 | Significantly better off | Now fully below the relief; paid some tax before |
| 1,800,001 – 2,800,000 | Better off | Higher relief shelters more; still in the 6% band only |
| 2,800,001 – 3,400,000 | Roughly neutral to slightly better | Relief gain and band-removal cost roughly offset |
| Above 3,400,000 | Worse off | Band removal pushes income previously at 12% into 18%+ |
These figures are approximations — the exact cross-over depends on your income mix (employment, interest, rental, etc.). Run the numbers in the income tax calculator to find your own figure.
What these changes mean in practice
Employees
Your employer adjusts the monthly Advance Personal Income Tax (APIT) deduction using the new relief and bands from April 2025. Check your payslip from April 2025 onwards to confirm the correct amount is being deducted. If APIT looks wrong, notify your employer's payroll team in writing — they use the IRD's updated APIT Table 02 to compute the monthly deduction.
Check your monthly APIT deduction in the APIT calculator
Savers and retirees
If your total income for the year stays at or below LKR 1,800,000, file a Declaration of Non-Taxable Status with your bank to prevent the 10% WHT on interest being deducted. If the deduction has already been made, reclaim it through the annual return.
Investors and property owners
Factor the 15% CGT rate into any decision to sell land, buildings, or shares this year. The extra 5 percentage points versus last year can be material on large gains.
Freelancers and service exporters
Route foreign-currency service income through a licensed Sri Lankan bank account to qualify for the 15% effective rate cap. Keep records of the foreign invoices, the remittance advice from the bank, and the foreign-currency amounts for the return.
Everyone with a filing obligation
The annual return for Y/A 2025/2026 is due on or before 30 November 2026. E-filing through the IRD e-Services portal (RAMIS) is mandatory. Gather your income records, APIT certificates from your employer, bank interest certificates, dividend statements, and any CGT disposal records early — ideally before September 2026.
For the step-by-step filing process, see our income tax return guide.
Why the changes happened
Sri Lanka's tax-to-GDP ratio fell below 8% during the 2022 economic crisis — one of the lowest ratios in the world at the time. The government needed to raise revenue to fund public services and service the external debt restructured under the IMF-supported programme agreed in March 2023.
The income tax changes form part of a multi-year fiscal consolidation strategy designed to lift the tax-to-GDP ratio back toward 13–15% of GDP. The higher personal relief cushions lower earners. The higher withholding rates, the higher CGT rate, and the broader bands extract more from savings, investments, and higher incomes. The removal of the SET reduces compliance friction for individuals while keeping the base intact.
Understanding the policy rationale matters because it signals the direction of travel: further adjustments are possible in future years, and the system is being redesigned for a higher revenue yield over time.
Quick reference
- Personal relief: LKR 1,800,000 a year (LKR 150,000 a month) — income up to this amount is tax-free for resident individuals.
- Tax bands: 6% / 18% / 24% / 30% / 36% on taxable income after relief. The 12% band is gone.
- Bank interest WHT: 10% for residents, deducted at source by the bank.
- CGT rate: 15% on gains from land, buildings, and investment assets.
- SET abolished: No estimated tax filing required for Y/A 2025/2026 onwards.
- Foreign-service cap: Effective rate capped at 15% on foreign-currency service income remitted through a Sri Lankan bank.
- Return deadline: 30 November 2026 for Y/A 2025/2026. E-filing mandatory.
- Authority: Inland Revenue (Amendment) Act, No. 02 of 2025.
A note on the figures
All figures and rates on this page apply to the 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 against the 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
What is the tax-free income amount in Sri Lanka for 2025/2026?
The personal relief — the amount of income exempt from income tax — is LKR 1,800,000 a year for resident individuals under Y/A 2025/2026. This is equivalent to LKR 150,000 a month. If your total assessable income from all sources for the year is LKR 1,800,000 or less, your income tax is nil.
What are the income tax rates in Sri Lanka for 2025/2026?
After subtracting the LKR 1,800,000 personal relief, taxable income is taxed at progressive rates: 6% on the first LKR 1,000,000, 18% on the next LKR 500,000, 24% on the next LKR 500,000, 30% on the next LKR 500,000, and 36% on the balance. The previous 12% band no longer exists.
Do the Y/A 2025/2026 changes apply to income earned before 1 April 2025?
No. The Inland Revenue (Amendment) Act, No. 02 of 2025 applies from 1 April 2025. Income earned between 1 April 2024 and 31 March 2025 (Y/A 2024/2025) is assessed under the old rules — the LKR 1,200,000 relief and the 6/12/18/24/30/36% bands. If you are preparing a return for Y/A 2024/2025, use the previous rates.
Do I need to file an income tax return for Y/A 2025/2026?
You are required to file if your assessable income from any source exceeds LKR 1,800,000 for the year, or if you have income that has not been fully taxed at source (e.g. rental income, business income, foreign income, or CGT). Employees whose only income is salary fully covered by APIT may not need to file a separate return — but if you have any other income, or if APIT was under-deducted, file to settle the balance. The deadline is 30 November 2026 via the IRD e-Services portal (RAMIS).
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