Foreign Currency Income Tax Rules – 2025/26 (Sri Lanka)

If you are a freelancer or independent service provider earning in foreign currency, it's important to understand how your income is taxed in Sri Lanka for the assessment year 2025/26 (covering April 1, 2025 to March 31, 2026).

What Part of Your Income Is Tax-Free?

The first LKR 1,800,000 of your total assessable income (local + foreign) is completely tax-exempt. This exemption applies regardless of whether the income is earned locally or from abroad.

How Is the Remaining Foreign Income Taxed?

First LKR 1,000,000 after exemption – Taxed at 6%
Balance – Taxed at a flat rate of 15%

Example: If your total foreign income is LKR 3,000,000:

LKR 1,800,000 – Exempt
Next LKR 1,000,000 – 6% = LKR 60,000
Remaining LKR 200,000 – 15% = LKR 30,000
Total Tax Payable: LKR 90,000

Can You Deduct Expenses?

Yes, if you're a freelancer or service provider, you can deduct business-related expenses from your foreign income before calculating tax. Eligible deductions include:

Internet and phone bills
Software subscriptions
Marketing and advertising
Professional services (e.g., design, legal)
Home office expenses (partial)

Maintain proper documentation and receipts for all claimed deductions.

When Do You Need to Pay?

If your annual tax liability exceeds LKR 1,800,000, you must make quarterly installment payments as follows:

1st Installment: 15th August 2025
2nd Installment: 15th November 2025
3rd Installment: 15th February 2026
4th Installment: 15th May 2026

If there's any balance tax payable after these installments, it must be paid on or before 30th September 2026.