Sri Lanka

Individual - Income determination

Last reviewed - 17 February 2020

Employment income

Employment income is computed on a gross basis and is comprised of all items of remuneration received in the course of employment; the value of any benefits to the employee and to the employee's spouse, child, or parent; and payments to third parties for the benefit of the employee, spouse, child, or parent. Also included in gross employment income are payments made upon termination of employment, such as retirement gratuities, monies accumulated to the credit of the employee in an unapproved provident fund, any sum paid from the funds in the Employees Trust Fund, and compensation for loss of employment, as well as the rental value of a residence provided rent free by the employer, benefit from use of an employer-provided automobile, and other prescribed benefits.

The assessable income of a person for a year of assessment includes assessable income from employment, business, investment, or other sources. The rules for determining the assessable income from a business are the same as those described for a company. See the Income determination section in the Corporate tax summary for more information.

Capital gains

The gains from the realisation of investment assets is taxed at the rate of 10%.

Dividend, interest, annuity, and royalty income

Dividends, interest, annuities, and royalties are computed after deducting the expenses incurred during the year.

Interest or royalties payable to a non-resident are taxed at the rates of 14 %. However, this rate would be lower if the taxpayer is a resident in a country with which a double tax treaty (DTT) is in force.

Rental income

Rental income of a resident individual, from land and improvements is computed on the gross rent received or receivable. Deduction is allowed only for 25% of the total rental income for the year of assessment being a relief for the repair, maintenance, and depreciation relating to that investment asset if actual expenses are not claimed. 

For applicable WHT rates, for non resident see Withholding tax rates in the Taxes on personal income section.

Exempt income

The following items of income are exempt in the hands of an individual:

  • Capital sums paid to a person as compensation or a gratuity in relation to:
    • personal injuries suffered by the person, or
    • the death of another person.
  • The pension of a person where the pension income is paid by the government of Sri Lanka or a department of the government of Sri Lanka.
  • An amount paid to an employee at the time of retirement from any provident or pension fund or the Employees Trust Fund established by the Employees Trust Fund Act, No.46 of 1980, as represents income derived by that fund, for any period commencing on or after 1 April 1987, from investments made by it.
  • The income of an individual entitled to privileges to the extent provided for by:
    1. a diplomatic immunities law or a similar law
    2. an Act giving effect to the Convention on the Privileges and Immunities of the United Nations and the Convention on the Privileges and Immunities of the Specialised Agencies of the United Nations, or
    3. regulations made under this Act relating to an international organisation, or a law or Act referred to in sub paragraph (i) or (ii).
  • A gain made by a resident individual from the realisation of an investment asset that does not exceed LKR 50,000 and where the total gains made by the resident individual from the realisation of investment assets in the year of assessment do not exceed LKR 600,000, except:
    • where the Commissioner-General is satisfied that an investment asset has been realised in two or more parts for the purpose of taking advantage of this paragraph, any gain arising from the realisations shall be exempt under this paragraph only if the total gain from the realisation of all parts does not exceed LKR 50,000 and the total gains made by the resident individual from the realisation of investment assets in the year of assessment do not exceed LKR 600,000, or
    • in the case of the realisation of an investment asset that is jointly owned, this paragraph applies only if the total gain made by all owners of the investment asset on realisation of the asset does not exceed LKR 50,000 and the total gains made by the resident individual in the year of assessment do not exceed LKR 600,000.
  • A gain made by a resident individual on the realisation of the individual's principal place of residence, provided it has been owned by the individual continuously for the three years before being realised and lived in by the individual for at least two of those three years (calculated on a daily basis).
  • A gain made on realisation of an investment asset consisting of shares quoted in any official list published by any stock exchange licensed by the Securities and Exchange Commission of Sri Lanka.
  • Any prize received by a person as an award made by the President of the Republic of Sri Lanka or by the government in recognition of an invention created, or any research undertaken, by such person.
  • Any sum received by a person from the President’s Fund established by the President’s Fund Act, No. 7 of 1978 or National Defence Fund established by the National Defence Fund Act, No. 9 of 1985.
  • An amount equal to the interest or the discount paid or allowed, as the case may be, to any non-resident individual by the issuer of any sovereign bond denominated in foreign currency, issued on or after 21 October 2008, by or on behalf of the government of Sri Lanka.
  • Any amount derived by a senior citizen from an annuity for life for a period of not less than ten years purchased from a bank or an insurance company registered under the Regulation of Insurance Industry Act, No. 43 of 2000.
  • Any winning from a lottery, the gross amount of which does not exceed LKR 500,000.
  • A dividend paid by a resident company to a member to the extent that dividend payment is attributable to, or derived from, another dividend received by that resident company or another resident company that was subject to WHT Prior to 1 January 2020 
  • Benefits received or derived by an employee of the government of Sri Lanka from a road vehicle permit issued to that employee.
  • Any amount derived by a person from the sale of any gem on which tax has been deducted.